My approach to trading, embodied in my ’s book, The Art and Science of Technical Analysis, and illustrated through my daily research reports for Waverly Advisors, rests on a few fundamental principles:
- Markets are very close to efficient. It is exceedingly difficult to make money trading. To do so, it is essential to have an edge in the market, and to apply that edge with discipline.
- Any analytical approach can only give a probabilistic tilt to the future direction of prices and/or volatility. Fundamental analysis, macro analysis, economics, models, technical analysis, and any other analytical tools only work within the framework of probability. We deal in probabilities, not certainties.
- Whatever edges exist are very small. It is possible to make money in the market, but these edges must be applied consistently and with perfect discipline.
- Risk is the ever-present companion of opportunity in the marketplace; there is no opportunity without risk. The first job of any trading methodology must be effective risk management.
- Behavioral factors are very important in the market. On a large scale, investors have had similar reactions to risk, opportunity, and volatility in markets since, literally, the beginning of recorded market history. On a smaller level, individual traders, asset managers, and even firms are vulnerable to emotionally-driven errors. The important of discipline and psychological balance cannot be underestimated.
- Though there are many paths to investment profits, our approach is a blend of quantitative analysis and discretion supported by a rigorous statistical framework extending back to commodity prices in Europe in the Middle Ages. We face modern markets fully aware of their capacity to innovate and evolve, but we also understand what elements of human behavior in markets have not changed for hundreds of years. We tie the core concepts of our methodology to those enduring elements of price behavior, and have no reason to believe our methodology will cease to be effective anytime in the next hundred years.
- We believe that intuition and discretion have a place in the investment process, but they must be tempered and informed by a rigid statistical framework.
- Most things that most people believe work in the market simply do not work. It is vitally important to have a disciplined process that has a verifiable edge.