Nothing Can Stop This Market - Except?

While there may be certain segments of time that seem to work, they often leave people scratching their heads when the market changes cycles without warning. Well, markets don't warn when they change their timing, do they? And, in fact, I have seen cycles analysts blow up many of their followers' accounts.

Now, as I went through my own search of analysis methodologies early in my investment career, I always attempted to maintain an open mind and heavily contemplated any methodology which seemed to have a following. And, clearly, timing cycles have a strong following. But, intellectual honesty in the market is what will maintain your account on the correct side of the market, and anything that is unable to pass the test of intellectual honesty should be viewed quite skeptically.

Along those lines, when I contemplated these timing cycles, I had an open question which no timing cycles analyst was ever able to answer:

"If markets are non-linear in nature, how can a finite, linear timing window accurately prognosticate the market more than 50% of the time?"

You see, when you assume price and time are linear, you're overlooking the clear nonlinear nature of price movement. Traditional cycle analysis assumes linear and angular movement of price through time. But, if you understand that sentiment drives asset prices and is non-linear in nature, then does it make sense that the timing of sentiment is linear?

Do the ebbs and flows of human emotion track neatly like the hands of a clock? Of course not. Humans' fears and greed are not set to sixty second and sixty-minute increments anymore so than rainstorms.

So, there must be a tool available that can see around linear corners of time. There must be a tool that quantifies human subjectivity as crisply as it analyzes data. I would argue such a tool has existed for over 100 years and is presently used in all areas of science and forecasting. That tool is Bayesian analysis and its specialty is decision making with nonlinear data in an uncertain world.

So how does the application of Bayesian analysis improve investment timing decisions? Bayesian is, at its best, working with nonlinear data and "learning" the underlying process of the variable of interest.

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Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net ( more

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