Sep

7

John BollingerJohn Bollinger and I recently had a very enlightening and far-ranging breakfast discussion in Seattle. He was in town to deliver a talk at the Charles Schwab presentation during lunch that day. If you ever get a chance to hear him speak I would encourage it. He is very good.

During our conversation John said he had been trying to convince Vic and Laurel that what they did was really Technical Analysis. As John defines it, TA is using prices (and other market data) to predict future price moves. That definition is data domain oriented. Vic and Laurel do use prices in their work, so by definition they fall under the TA rubric.

However, their definition of what they call counting is really more process oriented. It is more a question of how one analyzes data and tests one's hypotheses that drives their counting definition. It is the application of the scientific method to finance. Counting is a methodology which applies to anything which can be quantified or classified.

Perhaps most importantly, counting looks to repeatable observations and analyses. What one observer sees and analyzes looks the same to another counter. Observations are objectively repeatable. By contrast, TA allows chart interpretations. A pattern which one trained analyst sees on a chart may not be interpreted the same way by another. TA allows subjective non-repeatable interpretation whereas counting does not.

Counting requires some sort of significance testing. To my knowledge there is no TA testing software which includes any sort of significance testing. In fact the only time a standard deviation is normally used in TA is in the calculation of John's own Bollinger Bands.

Another difference between John's TA definition and counting is that counting does not restrict itself to the price, volume and open interest domain. It could include data on corporate fundamentals, politics, volcanos, earthquakes and anything else. Thus a data domain definition of counting does not apply. Only a methodology driven specification accurately defines what counting is all about.

John Bollinger is correct in many ways. There is much overlap between his definition and what many counters practice. Most counters do look at price data because it is high-frequency and thus offers more profit potential. But the essential difference remains. TA is defined by its data domain and counting by its methodology. That is the quintessential distinction.

Steve Ellison responds:

John Bollinger's book has many concepts that are countable and testable, including an innovative point and figure method and a taxonomy of price patterns. Bollinger Bands themselves are relative definitions of high and low at points in time based on a defined lookback period. They rigorously use only data that would have been known at the time, which is very important in counting correctly.

The concept of a relative definition is very powerful. I have used it to develop other prospective relative measures. For example, I calculate percentiles of price changes using defined lookback periods.  Yesterday's 2% increase in gold was in the 97th percentile of the past year's daily changes.

The adaptive box sizing of the Bollinger Box point and figure method is another potent concept that opens many avenues of analysis. I have experimented with variations on box sizing. For example, one might, using logarithms, define a series of price points such that each successive point is 1.01 times the previous point. A tabulation of the moves between price points appears as a series of logarithmically equal jumps, which allows one to use the binomial distribution to look for non-randomness.

Steve Leslie extends:

After 29 years of investing in stocks, bonds, futures, commodities, real estate and collectibles I have come to this distinction between Technical Analysis and counting: counting is more science than art, and TA is more art than science.

I only trade stocks now and I use TA to confirm before establishing a position in a stock. I find it far easier to have an accomodative Federal Reserve with respect to interest rates, and invest during a bull market than to try and outwit the market and swim against the stream like a salmon returning to its breeding ground. People forget that most salmon never reach their hallowed spawning grounds, becoming victims to fishermen, bears and heart attacks from exhaustion.

I choose to have the wind at my back rather than in my face when I sail. Therefore the first thing I do when considering investing in a stock is to perform due diligence and conduct basic fundamental analysis.
 
I consider elements such as EPS growth, sales growth, and rely upon the excellent services of IBD and Zacks filters for such information.

Then when I look at a chart I am looking for an entry point for a stock. I use a variety of methods such as moving averages, relative strength volume breakouts, island formations gap ups, flags and pennants, Elliott Wave, point and figure.

The third leg of the stool is money management. Building a position in a stock, often called pyramiding, is a wonderful technique to use and also to use trailing stops to shave off a position to insure profits along the way.

The likelihood for success increases dramatically when one finds a company that has good financial strength, good EPS growth, is in the right industry group and is in the midst of a bullish stock market.

The techniques I mentioned are entirely useless in trading commodities and futures. Counting is the weapon of choice here and one which I have zero knowledge. Vic and Laurel are world class experts in this arena, and in my mind most excellent mentors, with a magnificent wealth of wisdom and insight.

To make money, one does not need to know everything about the markets to be successful but rather the goal is to become proficient in one area and focus on this. To be the Master and Commander. Look at it this way, physicians are very highly compensated professionals, and the highest are the specialists such as cardiologists, thoracic surgeons, and neurosurgeons. And in law, specialists reign supreme, from tax law, M&A, civil and criminal litigators and the like. The general practitioners are the lowest on this food chain. 


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2 Comments so far

  1. Todd Young on September 8, 2007 3:45 am

    I enjoy visiting this website and the article on technical analysis vs. counting. Can you refer to me a good source of information on counting as it relates to financial markets (currencies, commodities etc.)? Are their any published books or paers on the subject.

    Regards

    Todd Young

  2. Curmudgeon 2312 on September 8, 2007 9:10 am

    “John said he had been trying to convince Vic and Laurel that what they did was really Technical Analysis.”

    Yes, Vic and Laurel have developed their own private form of Technical Analysis. The only difference with the Technical Analysis described in popular books is that theirs works.

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