Belief in the Law of Ever-Changing Cycles: The Best Way to Insure You Will Never be able to Accurately Predict Anything Ever Again.

Few players take into consideration the principle of ever-changing cycles of results. The would-be professional player must always understand that the form moves away from the public's knowledge. The principle of ever-changing trends works to force quick and drastic changes of results sequences when the public happens to get wise to a winning idea. — Robert L. Bacon, Secrets of Professional Turf Betting

When I first came across this idea, as presented to me by Vic in Education of a Speculator, I thought I had come across a huge revelation, an epiphany in the thinking of speculation. I came to find out rather quickly that this theory, while sound on some levels, can be one of the most ruinous patterns of thought one who must make predictions could ever fall into.

I have always been more than a bit intuitive. I learn by doing, and what I do I base on what I feel. Though raised by a highly analytical mechanical engineer, I have usually found that my initial thoughts on matters are often the most clear, and usually, the most sound. It is only after I really start to study and think things through over and over and start considering other people's opinions that I run into trouble. I am not the only person to believe in and notice the phenomenon of "beginner's luck." This is not to say I am faultless in my knowledge and anticipation of the world. I have made many mistakes, often ones that are obvious. I have held on to profits while watching them turn into losses, all the while thinking a bigger wave of profit was on the way that was never to come. At the same time I have refused to let go of losing positions until they reached enormous 70-80% losses, suffering badly from "get-even-itis." However, in doing so, I have gained knowledge of how to precede in my market career. I would never assume that because these actions cost me so dearly yesterday, that today they must certainly bring me vast profits.

The problem with the law of ever-changing cycles is that it destroys any sense of intuition, either God-given or hard earned, as well as evaporating any sense of confidence in one's self. I do not believe in the pure random walk, and neither do I believe that the market can be accurately predicted 100% of the time. What I do believe is that speculation is a skill that can be learned, and as with any other skill, through hard work and dedication, with time, it can be mastered (or close enough). This, combined with good money management, making sure you cut your losses short and never take on a position of such size that you can't get out of quickly, makes for relatively safe investing. However, belief in said Law, ruins all of this.

Take any investment strategy you might like, say even something as simple as checking which side of the level II book has the most inside participants at the open and then positioning yourself in accordance. I have used this strategy myself to good results in the past. Now apply The Law to it — since I have been using this strategy successfully for a while, it must surely be ripe to turn against me. "Nothing recedes like success." It is true, all empires eventually crumble, but the vital question, as it always has been concerning the market, is one of timing.

The safest time to invest is when everyone is selling. When the Buffalo are running themselves off the cliffs. Some random catalyst has arisen and everybody rushes to sell. The price charts obtain their most vertical angles and the volume bars spike massively. Eventually, the market will recover, it will reverse its course. This is a guarantee. It may not get back to its previous levels, and the reversal my be very short lived, perhaps lasting only an hour or so, but as sure as water is wet, there will come a point when the market will head back up for a period. Does this mean that every time a market has a particularly bad day that I should place a market order for the following day's open? Of course not. While one red day may be immediately met with a green day of equal force, it is just as probable that one bad day will turn into a string of bad days, perhaps a few bad weeks, or even months.

So, when should I begin to avoid my level II strategy, then? Or should I avoid it at all? Surely if The Law exists, it must itself be subject to the ever-changing. If the cycles are always changing, then eventually they are due to no longer change at some point. "Everything in moderation, even moderation itself." How long will it be until everyone catches on to The Law and it itself becomes useless? It is rather easy to see how this concept can slip one into a never ending downward spiral of self contradiction and doubt.

The only caveat here is that the definition does not call for all cycles to reverse all of the time, but only the ones that the public has caught on to. Of course, how does one track "the public?" It has been well documented that when any successful investment strategy becomes published, usually by academics; sooner, rather than later, it will cease to be effective. But again we have to deal with defining what signals declare that the public has caught on, and at what time it will pay to fade the strategy. An interesting study could be conducted here based on when strategies or new indicators are published, and how long on average it takes for them to become futile. But then again, The Law states if a relatively tight range of results is found, the average is due at a moment's notice to become of no use at all.

The only way out of all of this mess is to rely on century old market logic. The practice of waiting for confirmation. We must believe once we have found a strategy that is successful, that it will continue to be so until confirmation proves otherwise. Discussion of what this confirmation may be could take up another whole letter, but a decent signal may be the breaking of trendlines or ranges. If we were to chart the success of our system daily, and establish a lower range or trendline for our results; if that line were to be broken, and a subsequent short upswing were to occur which failed to take our results back in to the previous range, and then if another lower downswing were to ensue, it would be wise to start thinking about modifying or abandoning our set up. Eventually when the chart of our results reaches a drastically low level, perhaps only 10% of our previous success rate, the system may be prove useful again, but this time to go against.

Of course, The Law states, that as this idea has now been published, even if only a relatively small scale, it must be, at any moment, due to prove useless. I for one however, find it more useful to believe in systems until they prove consistently faulty, rather than spending so much time empirically studying the market, only then to believe that our findings are of no use whatsoever. Indeed, Bacon himself seems to back up this claim in his own work:

The beginner plunges ahead on a favorite that loses, then bets lightly on a fair-priced horse that wins. He keeps switching amounts and positions, so that he never has a worthwhile bet on a winner at a worthwhile price. He is always one race behind the form of a horse and several races behind the rhythm of the results sequences.

It would seem here that the cycles are not external, but internal, and that the best way to guard against the ever changing would be to remain steadfast to one's own system.


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