Template the Past. Fit It to the Future.
Making a template of the past and attempting to fit that template onto the future is the fundamental basis behind technical analysis. The paradox in this instance though is that the better something worked in the past, the higher the probability it isn’t going to work in the future. Why? Because the future is NOT like the past, so therefore it is worth questioning the validity or value of technical based analysis.

To understand this from a market approach perspective, you can take the exact same data, same prices, same setup and same time of day and logically quantify that data. This data, to a less experienced trader, will result in the conclusion that the outcome on future days will be identical. Why? Because on a technical analysis basis, there should be no reason why a different outcome should be expected – because it worked in the past. The thing is, every moment in the market is a unique moment. We do not know if the same participants will be there and will do the same thing as last time.

Random Effect
If you look at this logically, each participant in the market is a variable. The outcome of your next trade is unknown apart from two results; the trade is a winner, or the trade is a loser. You do not know from any of your setups where the next winning trade will be. You do not know from any of your setups where the next losing trade will be.

Therefore, the only conclusion we can derive from this is that every trade has a random effect working on it. So, if there is a random effect working on the market, can technical analysis be considered a viable method of predicting probabilities and outcomes? You have an expectation of how each outcome should be. You believe that if you take a certain number of steps, you will achieve your expectation and be rewarded. What you perceive is possible but what you expect out of the market is not what you are getting.

This has nothing to do with the market. Your disappointment is the result of your attitude and false beliefs of the market. The false belief that technical analysis consistently works, and the past can be templated and applied to the future.


CFTC Rules 4.41 -  / It should be assumed that these results are hypothetical and simulated. Hypothetical or Simulated performance results have certain limitations, unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

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History Doesn’t Repeat Itself, But It Does Rhyme.
The above quote is often credited to Mark Twain. Although he may not have been the earliest published source, the quote really summarizes human nature and most certainly summarizes political history, of which sometimes it feels like humans have learned nothing. It is up for debate whether Mark Twain wrote that quote, but he did write the following;

“It is not worthwhile to try to keep history from repeating itself, for man’s character will always make the preventing of the repetitions impossible.” (Mark Twain in Eruption: Hitherto Unpublished Pages About Men and Events (1940), ed. Bernard DeVoto.)

If the takeaway here is that history rhymes, does that mean the stock market rhymes too? Let’s sharpen the pencil on that question and look at a Jesse Livermore quote, whom of course was arguably one of the greatest traders of all time

He is quoted as saying;

“Patterns repeat, because human nature hasn’t changed for thousands of years”

Jesse Livermore knew that markets and market patterns repeat themselves and investors act out the same behaviors year in year out, but no two days in the history of the stock market have every been the same.​

Part III - Index

Part III - History Only Rhymes