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Old School, New School

HAVING TROUBLE PRINTING?
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If asked to identify market gurus seemingly poles apart in their approaches, I'd know whom to name: Tom Williams, chairman of TraderGuider Systems Ltd. and former U.S. Syndicate Trader, and Richard Olsen, chairman and CEO of Zurich-based Olsen Group and co-founder of online forex brokerage and market maker OANDA.

Olsen asserts his intention to re-engineer finance. In an interview republished in December's ACTIVE TRADER, he peppers his comments with terms such as "fractals," "high-frequency tick data," and "seasonality of volatility." He warns that the role of the small investor will change, and that the indicators they use must evolve from the primitive overbought and oversold indicators now employed into increasingly sophisticated indicators calculated on a high-frequency tick basis. Moving averages, for example, would be rescaled according to the seasonality of the volatility. Traders would calculate the seasonality of the volatility through data amassed from studying high-frequency tick data, using statistical analysis. Olsen believes that low-frequency data, that obtained by studying daily and weekly data, can miss important market dynamics. That seasonality of volatility occurs on intraday time periods, for example. Volatility on the forex markets peaks between the hours of 12 and 18 GMT (7:00 am - 1:00 pm EST), he contends.

Reading Olsen's comments, I wonder if my physics and mathematics background will be sufficient to keep up with the new demands on the ordinary retail trader. Olsen's emphasis on quantitative, statistical analysis of high-frequency tick price data sounds as if it requires a few more hours of statistics than I took during college.

Listening to Tom Williams lecture or reading something he's written calms the anxiety. Williams created a strategy called Volume Spread Analysis. In free seminars offered occasionally through the CBOT and other sources, Williams explains his strategy of combining studies of volume with the price spread to determine accumulation or distribution, signs of strength and weakness. Charts are simple, requiring only price bars with the closing value indicated, volume and a maybe few trendlines. Williams uses no "mathematical formulas," by which he means stochastics or other formulas derived from mathematical computations on the price movements.

In a highly liquid security, Williams claims that high volume indicates that professionals were active during that period, and Williams says you want to know what they were doing. Olsen would probably suggest the same, but Williams' method remains relatively simple. If prices have been marked down on high volume but the period closed well off its low, professionals have been accumulating, for example, although that's probably an oversimplification of Williams' methodology. News will have been terrible, and the herd has been shorting as a result, but the accumulation is obvious to anyone who understands the correlation of volume and price spreads, Williams declares. Other just-as-obvious and easy-to-spot patterns can mark distribution at the top of a climb. His proprietary software identifies certain patterns, but he points out that the descriptions of these patterns haven't changed in a decade because "the herd does the same thing all the time, and professionals take full advantage."

So which market guru has it right? Both, I suspect. Herd mentality will always play a part in the behavior of the markets and probably contributes to the seasonality of volatility that Olsen mentions. Volatility expands or contracts depending on times when professionals and retail traders might be more active in the markets. Williams insists on the importance of studying varying time frames, as does Olsen, and, although Williams doesn't advise concentrating solely on short-term intraday charts, he agrees that fractals of daily charts show the same patterns as do those daily charts. He illustrated his CBOT webinar with intraday charts, for example. And Williams certainly takes full advantage of the ability to write software that capitalizes on the logic behind his assertions, just as Olsen does.

The month in which Olsen's republished interview appeared, market-related magazines included articles on incorporating the speed of movements into one's study of the markets or on the need for traders to quickly assess masses of information being thrown their direction, comparing the traders' occupation to that of a fighter pilot. It's true that traders must now assess much more information than whether they like the way Jack Welch runs a company, and assess it quickly. However, beginning in March, 2000, many traders found that the "this time it's different" paradigm fell apart. It's never different. The waxing and waning psychology that drives many market moves hasn't been different since the development of the Japanese rice futures market in the 1600s led to candlestick charting, and probably since before that.

While it's true that we traders must assimilate more data than ever before, don't despair when you spot an article on neural net software, singular spectrum analysis, or even my or Jonathan's comments on nested Keltner channels, and realize that the terms don't even make sense to you. There will always be a place for retail traders in the markets, and, I suspect, for rather simple methodologies. I've heard that pit traders don't use those "mathematical formulas" that Williams so disdains, and I bet they don't use neural net software, singular spectrum analysis or even nested Keltner channels, either. Don't overcomplicate trading. Find a methodology that makes sense to you and get to know it well.
 

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