Technical Analysis Of Stocks And Commodities PDF

Technical Analysis Of Stocks And Commodities PDF: Read and Learn

Updated April 29, 2024

We will analyze this topic within a historical context because those who do not learn from history are destined to repeat it. Moreover, it demonstrates the position we took, illustrating that we not only talk the talk but also walk the walk.

We have been led to believe that mastering mechanical systems and fundamental analysis is crucial for market success. However, let’s take a step back and consider that fundamental analysis is a disguised mechanical system. It presents standardised data, making it easily understandable for anyone with minimal effort. Similarly, automated trading systems provide a set of rules that, when followed, turn traders into robotic followers of a routine.

Here comes the paradox theory, which states that we often get the opposite of what we chase. In the financial markets, it’s evident that the majority must lose for the big players to profit. This is why the 90/10 ratio remains relatively unchanged, with 90% representing the percentage of losers and 10% representing the percentage of winners.

Exploring why mechanical trading systems are destined to fail could delve into intricate details that might lull you to sleep. Let’s briefly focus on the term “mechanical” itself to keep things engaging. According to Merriam-Webster’s online dictionary, one definition of mechanical is “done as if by a machine: seemingly uninfluenced by the mind or emotions.”

In essence, relying solely on mechanical trading systems overlooks the critical role of human judgment, intuition, and emotional intelligence in navigating the markets successfully.

Notice the keywords here are uninfluenced by the mind or emotions. First of all, the market is nothing but a composition of a million reasons, so using a system based on the rules set forth by one man’s mind and, worse still, devoid of any mental influence is a recipe for disaster. Secondly, the marketplace is nothing but a sweat pool of emotions; lust, greed, power, hate, fear, etc., swirling through the markets like a hurricane descending on the village of huts, ready to decimate everything in sight. The above definition of mechanical makes you want to run from any such system.

Technical analysis of stocks and commodities pdf: Ignoring the Power of Human Mind and Emotions

Exploring why mechanical trading systems are destined to fail can become quite intricate and potentially dull. Let’s focus on the term “mechanical” to keep things engaging. According to Merriam-Webster’s online dictionary, one definition of mechanical is “done as if by a machine: seemingly uninfluenced by the mind or emotions.”

Consider the keywords “uninfluenced by the mind or emotions.” Firstly, the market consists of countless individuals, each with their own thoughts and emotions. Relying on a system created by a single individual’s mind, detached from any mental influence, can lead to disastrous outcomes. Secondly, the market is a whirlwind of emotions, including lust, greed, power, hate, and fear. These emotions permeate the market like a hurricane approaching a vulnerable village, ready to wreak havoc on everything in its path. The definition of “mechanical” alone is enough to make one want to steer clear of such systems.

It’s essential to recognize that the market is not solely driven by numbers and rules but also by the complex interplay of human psychology and emotions. Ignoring the power of human judgment, intuition, and emotional intelligence in navigating the markets successfully can be a significant oversight.

The Curious Language of the Markets: Examining the Psychological Impact

It’s fascinating how the language we choose to represent the market and our positions within it reveals underlying psychological tendencies. Terms like bullish and bearish, expressing market optimism and pessimism, respectively, seem to involve selecting some of the most irrational and easily provoked animals. It’s almost as if we harbour a subconscious desire to embrace a syndrome of programmed loss.

Furthermore, we use terms like bugs, such as Internet bugs or gold bugs, when it comes to specific sectors. Intriguingly, we associate ourselves with a creature as disgusting as bugs to represent our positions and views. Most humans react negatively to bugs, often instinctively wanting to crush them.

Even the language used in market discussions reflects psychological nuances. Terms like scalp, plunge, upthrust, perfect bottom, down thrust, flip, and climactic sell-off carry emotional connotations and depict intense market movements. It highlights how our language is interwoven with the psychological impact of market experiences.

By recognizing the underlying psychological elements in the language of the markets, we can gain insight into the intricate dynamics at play. It reminds us to approach the markets with a level-headed mindset, considering the psychological biases and influences that can shape our decisions.

Repeating the Mistakes: A Cycle of Neanderthal Views and Grandiose Errors

The worst part is that we pass nothing new to the next generation. We reinforce these Neanderthal views, branding them into the next generation’s memory more aptly describing the process. Is it any wonder then, that we keep repeating the previous generation’s mistakes but do so in a much more glorious manner? Just look at the speculative phase we have entered now (credit bubble, real estate bubble, and so on).

It makes all the mistakes our ancestors made pale in comparison. We leverage ourselves to our necks with debt to buy goods we don’t need and use the money we don’t have to pay for them. The real estate bubble is one classic example of madness and history repeating itself on a gigantic scale. Individuals take home equity loans against the rising values of their homes and use this to finance their extravagant lifestyles. Is there anything more insane than taking credit to buy something more on credit?

Unveiling the Game: Mastering the Art of Technical Analysis in the Stock Market

A crucial aspect often goes unnoticed in stock market analysis — viewing the markets as a game and delving into the intricacies of the mass mind and individual behaviour. Additionally, proficiency in a few subjective Technical Analysis (TA) tools becomes paramount. It’s important to acknowledge that these tools should never be standardized; instead, they should embrace the concept of “beauty lies in the eye of the beholder.”

Every individual should perceive something unique when utilizing these indicators, allowing for diverse interpretations. Mastering this flexible approach can achieve long-term success in the market, as it defies the limitations of standardization.

Ultimately, the effectiveness of Technical Analysis of Stocks hinges on its alignment with our lifestyle and collective mindset. It reflects the patterns of the 9-5 rat race and the conformity that pervades our society, where individuality takes a backseat. A mechanical system epitomizes our inclination to avoid critical thinking, yearning for easy answers.

However, suppose we continue to accept handed-down solutions and lament when faced with adversity passively. In that case, we remain trapped in a cycle of repeating historical mistakes in a striking manner—the key to breaking free lies in the courageous act of thinking independently and engaging our minds. Mistakes, when embraced as opportunities for learning, can foster growth, whereas perpetuating someone else’s errors only leads to self-destruction.

Technical Analysis Of Stocks And Commodities: Customization is key

At the very least, some customization should be attempted to adapt the system to one’s needs. It amazes me that the world’s most accessible and effective technique is not widely studied or followed. The method I am referring to is trend analysis; all you do is spot a new trend and stay on board until the direction ends. Trend analysis involves drawing simple lines; it takes a little practice but is worth its weight in platinum.

So, let’s look at what type of system can and will work in the markets. First, one must understand the difference between contrarian investing and investing based on Mass psychology. Contrarian investing is straightforward as it involves taking a position against the masses. Mass psychology measures the frenzy periods or periods of extreme hate or disgust towards a specific sector or sectors, and then a position is taken during these extreme times.

Furthermore, it measures the level of euphoria in the camps of those who believe in the investment. In other words, it will calculate how many of the so-called contrarians are now extremely bullish and euphoric about a given sector. In most cases, when a contrarian takes a position in a specific sector he is doing so as a countermove to what the masses are doing.

Unveiling the Phases: Contrarians, Mass Psychology, and Trading Success

Returning to the main topic, most contrarians still feel nervous and frequently check their positions to ensure that the market has reached its bottom, at the very least. Once the sector shows positive returns, their nervousness subsides, and they become highly bullish, entering a phase of euphoria. This is where mass psychology becomes significant. At this stage, intelligent investors should consider exiting the market, as they may not sell at the absolute peak but will be close to it.

Understanding mass psychology is a crucial and integral part of a trading system.

Secondly, it is vital to master various technical analysis (TA) tools and avoid using them in a standardized manner.

Thirdly, patience and discipline are key. Recognizing that there might be extended waiting periods before taking a position is essential, but the rewards can be reaped in weeks for those who exercise patience.

As irrigators lead water where they want, as archers make their arrows straight,
as carpenters carve wood, the wise shape their minds
Buddha 568-488 BC, Founder of Buddhism

Alan Lunt
Contributor
www.tacticalinvestor.com

Technical Analysis Of Stocks And Commodities: Alan Lunt’s Views

Any system is good for the time in which it was developed. We had Dow theory, Elliot Wave and Fibonacci in the early part of the last century. They still have a place but need revising to account for the new rule. The new rule is that money has no set value, unlike under the gold standard, where money was defined as a base. Sure, human emotion does follow set patterns; to some extent, median averages can follow those patterns. I am putting up a chart; you can interpret it using your favourite system. There is only one interpretation I have. The Dow has already crashed and burned.

In 1990, the Dow hit a high of 7065 in terms of constant dollars. It lost about half of its value to hit 3669. Since then, it has broken out of its down channel and is holding. In terms of constant dollars, the Dow is valued today at 1.7 times its 1990 value, hardly a bull market. I read as many commentators as possible; many seek to find the correct count or ratio, the proper historical model. But until everything is based on a constant, nothing will work properly for them. That is the joy of a fiat system; everything is hidden in plain view. When inflation, an increase in the money supply, is factored in, we can see the evil of it. “Smoke and mirrors.”

But this rant is about mechanical systems and whether they work. I have tested nearly every indicator man has developed. Some come close to perfect but cannot be relied on 100%. Man’s emotions come in floods and extreme mood swings in short periods. Significantly few systems can predict those mood changes, and technical analysis is about prediction, not history. I predict that the Fed will keep pumping the money supply at 56 billion a month because M3 is dropping. Until money is lost to the system, there will be no effect on the market. The fear is not there.

Wayne Krautkramer on Technical Analysis Of Stocks And Commodities

Proprietor
Zarathrusta

WHAT IS A MECHANICAL TRADING SYSTEM?

Mechanical trading systems are techniques that make trading decisions for you! You input the trading data, and the system generates a response that indicates the appropriate action. Depending on the system’s formulas, you buy, sell, or do nothing. The latest computer versions of these mechanical systems are complete “black box” operations. Turn the computer on, start the system, and it updates your database, generates trading recommendations, and places your orders directly to the brokers. Speed is of the essence in these hectic times. Every nanosecond counts when you are trading using five-minute charts.

HOW DO MECHANICAL TRADING SYSTEMS WORK?

The most basic systems rely on moving averages. The more “sophisticated” systems use combinations of moving averages of both price and volume. The most “expensive” plans incorporate stochastics, the mathematical techniques for non-linear science. These systems are reactive by design. If a stock or a commodity acts in a certain way, the system assumes that the stock or an item will continue to act that way. It generates this conclusion based on the formulas programmed into the system. Some” Black Boxes” also compute a large array of indicators to increase “confidence” of an action recommendation.

Most mechanical trading systems buy or sell “breakouts“. The stock market calls these traders “momentum players.” Their formulas assume a continuation of that movement. If that movement fails to continue, the system will generate a loss and the commission cost. We must also recognize that most mechanical trading systems always require you to invest in the market, either long or short! Their primary assumption is that the movement that created the breakout will continue. Therefore, you must take each trade to increase the chance of profits.

Mechanical trading systems also require trading in many markets. This is an attempt to reduce total portfolio risk. Simultaneous long and short positions in many markets can reduce total risk, but it dramatically reduces profitability—the ultimate hedge results in no change. The trend following is the mission of mechanical trading systems. There have been many attempts to accomplish this goal. Defining the trend is the biggest hurdle. There is no universally accepted definition of a trend. Therefore, there is little agreement on how to follow the trend.

CURVE FITTING or DATA MINING is used to develop almost all mechanical trading systems.

Christian Schaer of Agora Capital Services SA calls Curve Fitting a pernicious illusion!

“Curve fitting, or data mining, is the “art” of concluding based on past information. When applied to an investment scheme or trading strategy, history shows that (too) often, such conclusions do not hold true once they are implemented. The result is an unpredictable performance, often coming short of expectations. In people’s minds, the issue of curve fitting is mostly limited to systematic traders such as commodity trading advisors- who are perceived to build models by optimizing simulated past performance based on given assumptions.”

“This article argues that the trap of curve fitting occurs across a wide spectrum of investment activities and that most investors engage in curve fitting without knowing it”

WHAT RESULTS DO MECHANICAL TRADING SYSTEMS ACHIEVE?

We will first look at the daily charts for the last six months. This will give us some insight as to the actual profitability of momentum trading (acting on breakouts). We will use Mar Soybeans as one example for this discussion. We can assume that some mechanical trading systems bought Beans at 596 or higher in August. We may safely assume that these same systems sold Beans in September at anywhere from a small to a large loss.

Jan Crude Oil is our next example. We may assume that some systems gave a buy signal at $51 or better in Sept. They probably gave a sell signal at break even, or at a loss in Oct.

Jan OJ is interesting. We must assume that many systems gave a buy signal on 10/01. We can assume a loss on this trade.

Dec Cotton is revealing. Many systems were bought at 48 or higher in August. Many sold at 47 or lower in September. Furthermore, many systems would have gone short at 47 or lower in September. This trade would have been covered, and you would have gone long at 47 or better in November. A look at the monthly March Wheat chart is more revealing. The latest CRB factbook discusses the much-heralded ” breakout ” to the upside after many years of consolidation. A quick look at the monthly March wheat contract ( Use March to March basis! Not nearest month continuation charts!) reveals that the “breakout” was a fake.

You would have bought March Wheat at 334 or better during July 2002. By April of 2003, March Wheat was selling at 279 ½. That is a loss of 54 ½ cents per contract, or $2700 plus commissions per contract! Of course you were using the margins recommended by your broker ($400 to $600), so you were forced out of the market by the margin calls. This assumes that you did not encounter “limit” moves, which lock you in until the market actually trades!

Fortunately, other observers have described their experiences. Therefore, we are not dependant on any one person’s experience or biases.

Bruce Babcock offers these observations:

Mathematical analysis of commodity price data has shown that these price changes are primarily random with a small trend component. This scientific fact is crucial to those desiring to pursue commodity trading rationally and scientifically. It means that any attempt to trade short-term patterns and methods not based on trend is doomed to failure. A good example of such a doomed method is Japanese Candlestick patterns.

This theoretical conclusion is consistent with my previous research. Many years ago, just as Candlesticks came into vogue, I attempted to create a profitable trading system incorporating Candlesticks. I tried many patterns and many types of systems, all without success. I have never seen anyone else demonstrate the effectiveness of Candlesticks using objective rules, either. Successful traders use a method that gives them a statistical edge. This edge must come from the tendency of commodity prices to trend. In the long term, you can make money only by trading in synch with these trends. Thus, when prices are trending up, you should only buy. When prices are trending down, you should only sell.

Turtle trader offers us this observation on breakouts:

You are dead wrong if you believe Trend Following is simply buying or selling a 20-day breakout. If you focus on breakouts as a Holy Grail, you’ve missed the point and are probably already on your way to losing your capital and, ultimately, your shirt. A trader who focuses only on market entry is in big trouble. Good trading is mostly money management or risk management. Keep in mind, though, that once you have the money management down, trading is 100% your personal discipline and psychology. For a discussion for on the effectiveness of STOP loss orders in money management, see DO STOP LOSS ORDERS LIMIT RISK? ABSOLUTELY, POSITIVELY, MAYBE! This article may be found at http://onlypill.tripod.com/factsthebrokersandfinancialreporterswonttellyou/id16.html.

Victor Niederhoffer claims that trend following is an illusion:

Although Niederhoffer peruses the National Enquirer for insights into investor sentiment, he also uses less provocative trading methods. Niederhoffer makes money by finding small anomalies in the day-to-day ripples of markets for everything from currencies to coffee. He uses a statistical model to reveal how movement in one market might influence another, such as sugar affecting the price of soybeans. Most important, Niederhoffer is an inveterate contrarian. He feeds off panic, making short-term bets when prices get frothy.

He condemns the common strategy of trend-following, which helped make his buddy George Soros super-rich. ” It’s a delusion, ” he declares. Trying to read the future in chart patterns doesn’t work, either. ” It’s deception, ” he insists. And when forces outside the natural order intervene in the markets, watch out. ”I think of governments as if they’re run by a professional criminal class, taking from one set of pockets and putting into another,” he says.

The 53-year-old trader came by his unusual theories via a blue-chip education: squash champ at Harvard, finance doctorate at the University of Chicago, and an assistant professorship at the University of California at Berkeley. His transition to full-time trader is chronicled in a new autobiography, The Education of a Speculator. ”By paying attention to the little things, the nitty-gritty, the humdrum things in life,” he says, ”you become a great speculator.”

Striker Trade Systems was candid enough to share this observation:

Catscan was released in 1994. It used the same rules to trade 23 different commodity markets. It was a very unique natural trading system. 99% of the current commodity trading systems are the following systems. There is absolutely nothing wrong with that except for the fact that 70% of the time, markets are not trending. Instead, they are in a Choppy mode. Trend-following systems tend to get whipsawed to death in these Choppy periods.

Anthony W. Warren, Ph.D reports:

Trend-following methods typically utilize moving averages of closing price data for buy and sell signals. Often, the signals turn out to be false due to short-term market fluctuations. Here, longtime STOCKS and commodities contributor Anthony W. Warren, correcting one of the major drawbacks of moving averages, introduces a trend-following method that smoothes the data for trend identification and measures short-term price fluctuations to establish statistical boundaries.

A final statement by Victor Niederhoffer and Laurel Kenner on the trend following:

Rule No. 1, carved in stone for all technical analysts, is that the trend is your friend. If ever there were a time that we could, along with the Cabot Market Letter, report the beauty of using a simple trend-following indicator that makes it “virtually impossible to miss a major market move,” this would surely be that time. No wonder that 830 aspiring chart-readers, the most ever, registered for the Market Technicians Association’s annual competency exams on April 26 in Jupiter Beach, Fla. Granted that some users of trend following have achieved success. Doubtless, their intelligence and insights are quite superior to our own. But it’s at times like this, when everything seems to be coming up roses for the trend followers’ theories and reputations, that it’s worthwhile to step back and consider some fundamental questions:

Is their central rule, “The trend is your friend,” valid?

Might their reported results, good or bad, be best explained as due to chance?

But first, a warning: We do not believe in trend-following. We are not members of the Market Technicians Association, the International Federation of Technical Analysts or the TurtleTrader Trend Followers Hall of Fame. We are on the enemies list of such organizations. Another observation by Bruce Babcock. He gives a general warning to individuals searching for winning trading techniques.

One of the few real secrets in commodity trading is that most of what you read in books about trading does not work in the real world. Even books by respected authors are full of trading methods that lose money when tested. You may find this shocking, but almost no commodity authors demonstrate how they advocate effectively. The best you can hope for is some well-chosen examples or a few cursory tests.

Futures Truth Reports…Do the FT Rankings Constantly Change
Because the Systems Tested Are Curve-Fitted? – Vern Nord

Have you ever tried to pass up a rope? I have spent the last two days trying to analyze the February/March issue of Futures Truth. I want to share my conclusions with your readers to start a discussion.

We are all looking for the perfect system that works on all commodities with similar rules and parameters, but are we looking for the impossible?

The very best systems in Futures Truth were only good on a maximum of four commodities, and if you exclude things like Pork Belly, Live Cattle, Soybeans, and Eurodollars, then no system was any good on more than three commodities. The best systems had three or fewer unrelated commodities at the top of their lists. I thought a good trend-following system would test well on all the Currencies because they are excellent trending markets. None of the systems tested well on more than one currency.

No system worked well on any two commodities in the same group except for Gold and Copper. They both tested very well under Welles Wilder’s Volatility Movement System.

No system tested both T-Bonds and T-Notes, but they should test similarly on a system.

As I expected, the few systems that tested well on the S&P 500 were inferior on all other commodities. On non-trending markets like the S&P 500, Wheat, Lumber, Silver, Gold, etc., there probably is no perfect system to handle the random nature of these markets.

So, I am trying to say that there can never be only one perfect system for all markets. You need one type of system for trending markets, one for random walk markets and one for commodities that trend for a few months and then go into a trading range.

In all three systems, you would need an indicator like the ADX from Wilder’s Directional Movement to tell when to shift gears from trending to trading range or to random markets when you should stop trading for now.

Another surprise from my analysis is that pattern recognition systems don’t test well in related markets.

Arnold’s Pattern Probability System (PPS) tested well on the Jap Yen, Lumber & T-Bonds – all unrelated markets. This reminds me of something that Hulbert said about his one-year ratings on stock market newsletters and their track record.

After over ten years of tracking all the best timers, he finally realized that his six-month and one-year rankings were almost totally worthless. It seems last year’s Guru is this year’s goat. There’s no consistency from one year to the next, and you can’t make money following last year’s expert. This leads to one last conclusion – Futures Truth rankings continually change, and I think this happens because all these systems are curve-fitted. Test any one system across 36 commodities and stock indexes.

You should get the traditional bell-shaped curve results, meaning that 10% or three commodities would try very well, 10% would test very poorly, and the balance of 80% would fall inside the bell curve. This might explain why only 3 or 4 commodities test well on any one system and why they are totally unrelated. They probably found an algorithm and then curve-fitted it until they got good results in 10% of the commodities.

These price histories will never repeat the same way, and systems will fail. Look at an old Futures Truth and see how many systems are still around, or even compare the “Top 10 since Release Date” with the “Top 10 for the past 12 Months”. Only 4 out of 10 in the “Top 10 since Release” are in the current list of “Top 10 for past 12 months.”

Louis Mendelsohn made the following points about curve fitting while giving a speech at a Harvard Business School Alumni Club Dinner:

“Of course, the underlying assumption is that history repeats itself, that by looking at past data, doing some work on the past information, modelling a market in that respect, you’ll be able to make money in the future. That assumption hasn’t fully proven itself in the real world. Nevertheless, that’s all that analysts and traders have to go by. Unfortunately, there’s not much new in the mass-marketed trading software area.

Most of the technical indicators in software today are rehashes of technical indicators that have existed for many years, for decades in fact, since the 70s at least, and early 80’s.” “Examples are things like moving averages. While they are very good at identifying trends, they lag the market. Of course, there’s been a great effort over the years by technical analysts in the futures markets to try to tweak the moving averages to try to reduce the lag in their response to the market. They’ve done that with various efforts like weighted and exponential moving averages.”

“There’s been a tremendous effort by technical analysts trying to tweak out these various technical indicators that have been used for decades. Even displaced moving averages, which I find interesting because basically, it is taking like a 5-day moving average and computing its value as of tonight’s close and then just displacing it out, maybe two days or 4 days, into the future and making the assumption that the value four days from today is always going to be what today’s value is”. “It is an extremely primitive forecast that’s being made.

But at least I saw an effort towards forecasting rather than always looking at trend following. We’re at least beginning to look at some form of trend anticipation or being able to look at price anticipation, looking forward rather than just backward. I felt, of course, that there had to be better solutions to the problem than just using things like displaced moving averages.”

“And, of course, other limitations exist in technical analysis software today. You may or may not be familiar with the whole problem of curve fitting with system testing. It relates to the fact that you can take a trading system, whatever that system may be, it could be as simple as a 5 day moving average crossing a 10-day moving average, and you’re long when the short average is above the long, and vice-versa. You might tweak out the sizes of moving averages to optimize them to a specific market.”

The CFTC has declared war on fraudulent mechanical trading systems:

Commodity Futures Trading Commission Office of External Affairs (202) 418-5080 Three Lafayette Centre 1155 21st Street, NW Washington, DC 20581
Release: 5023-04 For Release: December 2, 2004, U.S. COMMODITY FUTURES TRADING COMMISSION CHARGES NORTH CAROLINA RESIDENT ROGER OWEN AND HIS COMPANIES WITH DEFRAUDING CUSTOMERS IN SALES OF A COMMODITY TRADING SYSTEM WASHINGTON, D.C. – The U.S. Commodity Futures Trading Commission (CFTC) announced today the filing of a complaint in the U.S. District Court for the Middle District of North Carolina against Roger Owen, Longhorn Financial Advisors, LLC (Longhorn), Phoenix Financial Group (Phoenix), all of Greensboro, North Carolina, and Daniel Belbeck of Nashville, Tennessee, alleging that Owen, Longhorn, and Phoenix used fraudulent advertising and promotional materials to solicit customers to purchase their computerized commodity trading system.

According to the complaint, Owen and Longhorn, as part of their estate planning services, and Phoenix fraudulently solicited customers to purchase a computerized trading system by falsely representing that their system had generated huge customer profits. The complaint charges that, in reality, no customer who bought and used the commodity trading system ever profited from its use. In addition, the complaint alleges that customers who purchased the trading system lost funds totalling more than $200,000 in trading futures, in addition to paying Longhorn and Phoenix an aggregate of $120,000 for the computer trading system.

The complaint further alleges that Longhorn and Phoenix held themselves out to the public as commodity trading advisors (CTAs) and should have been registered with the CFTC. Similarly, the complaint alleges that Owen and Belbeck, the individuals who solicited customers, should have been registered as associated persons of a CTA. Finally, the complaint alleges that Longhorn and Phoenix failed to provide disclosure documents to customers, as CFTC regulations require. In its continuing action, the CFTC seeks full restitution and disgorgement, civil monetary penalties, a permanent injunction, trading prohibitions, and other remedial ancillary relief as the court may deem appropriate. The following CFTC Division of Enforcement staff members are responsible for this case: Frank Rangoussis, Jan Folena, and Richard Glaser. # # # Media Contacts Alan Sobba (202) 418-5080 Dennis Holden (202) 418-5088 Office of External Affairs Staff Contact Richard Glaser Associate Director CFTC Division of Enforcement (202) 418-5358 Related Documents Complaint.

Summary

We must stay with what we “KNOW ” to succeed in business. Thankfully, we do know the following:

90 per cent of all traders lose.
5 per cent of all traders make no money.
5 per cent of all traders make all the money/
Markets are in a trading range 70 to 85 per cent of the time (called ON THE SIDE before 1948).
Markets only trend 15 to 30 per cent of the time.
The real profits from markets come from trending markets.
Trend-following systems are wrong 60 to 80 per cent of the time.
Mechanical trading systems generate a lot of trades. (Most of these trades will lose money.)
Trend-following traders experience “huge” equity drawdowns.
More trading generates bigger commission bills.
Brokers prefer accounts that generate big commission bills.
Only you can determine whether a mechanical trading system is for you! After all, it’s your money!

FORGET THE DRAMA! TRADE WITH THE TREND AND PROSPER!

John Tytler on Technical Analysis Of Stocks And Commodities

In this essay, I’ll try to answer a few questions:

Do any, in my own experience, work?

Why many don’t work

What is their role?

John Tyler
CEO
www.Trader007.com
“Fortune Favors the Informed”

Technical Analysis of Stocks Systems: better than guess?

Mechanical trading systems (MTSs) sound like a good idea: a winning formula is incorporated into a set of rules or a piece of software, and all you have to do is follow it to make money. That’s what the promoters would like us to believe: an endless cascade of cash generated by their system.

Do any, in my own experience, work?

A most definite YES. Some are computer programs, and others are knowledge and rule-based, like our Nifty 50 Trading System. There is no such thing as a foolproof system. A fool can find unique ways to misuse a system that has taken decades to develop. Greed can make fools of us all!

I can only speak with the authority of personal experience on The Nifty 50 System. It has been back-tested to 1920, and I’m working on a set of tutorials starting with the Dow Industrials from 1900. In real-time, it has been profitable since 1998, and system owners are sent an update each year.

It is not the Holy Grail, however, for several reasons-

Why many don’t work

There are MTMs that use incorrect methodology or were optimized for a market dominated by a specific characteristic, such as high volatility. When this market characteristic changes, the system no longer produces profits.

The most common reason is that the system doesn’t suit the trader:

There are too many trades. Some generate 200 trades a week. Great for the brokers and automatons, but not for humans.

There are not enough trades to occupy the trader. Traders like to occupy themselves and think that the harder they work, the more money they’ll make. In my experience, the majority of traders will benefit from slowing down. This means waiting longer before entering a trade and being prepared to sit it out – at least as far as stocks are concerned. Time should be our friend and not foe.

Systems may only be appropriate for specific markets and specific stocks. I emphasize to our traders that the technical signals may not be accurate in illiquid stocks as they rely on precise sampling.

It takes discipline and nerves to stay within a system. Many don’t want to take the time required to learn a plan; some find it difficult because of undeveloped computer skills and atrophied mental capacity. These can be overcome, new skills learnt, and the brain sharpened again, but that’s hard in a world of instant-fix answers.

What is the role of an MTS?

For many traders, an MTS has no role if they want an instant fix and an effortless stream of riches. If such a system existed, the market would soon discount it. Nature abhors excess and deals with it in her own way, even if it means destroying the user with their success.

They are ideal for many who are either starting or have lost their way.

An MTS can be like a set of training wheels.
It may teach you to think in new ways.
A system will be your mentor in uncharted territory.
It may teach you money management and portfolio rules.
It may even start bringing you profits that you’ve never had before!

www.Trader007.com
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Ole Bear, AKA Gale Bullock
Proprietor, www.pgtigercat.com
Editor, Realty Reality

I Believe in Santa Claus

It has amazed me that Mr Greenspan has been able to re-inflate the DOW Jones Averages, including Transports, Utilities, and Industrials. He has failed, however, to get the NASDAQ Bubble back over 5,000. Some magic wand Mr Greenspan has. Through the world of repurchase agreements, the Working Group on Financial Markets, and the Big Boys diddling with future markets, “all that money on the side” appears to have been put to good use in a Great Secular Bear Market. Of course, Bob Bernanke has been busy in the back room printing all that money on the side they so eloquently talk about on CNBC Bubble Vision, while that McTeer at the Dallas FED urges folks to hold hands and buy a brand spanking new SUV that eats gasoline. Greenspan says real estate cannot be a market bubble because all real estate markets are local.

In a similar vein to Fool’s Gold, he urges folks to commit Hari Kari by taking out an ARM mortgage loan so they can save all that money in a rising interest rate environment. The great illusion is that the Bull has been reborn. Some pundits have even had their heads handed back to them on a silver platter, much like John the Baptist. We suspect most mechanical systems will work fairly well in the short term and the short view, whether one is a proponent of Elliot Wave, DOW Theory, or just plain Technical Analysis. There is something in this market for everyone. Google.com at $175.40 per share today, defies my imagination and reason. Of course, $300/claim for JDS Uniphase at the height of the NASDAQ Bubble seems like a fairy tale when we are now in its LA LA LAND of $3 and change/share! This is what I call a chainsaw massacre.

Bright Beam of Light for Day, Pivot, and Swing Traders with Google at $175.40/Share

Let’s look at the DOW Industrials containing 30 stocks:

We have been to the Abyss and done a hopscotch over it. Whether one uses Wave Analysis, TA, Pivot Analysis, Dow Theory, Martin Weiss Theory, or your market brand and chart analysis that works for you, the above chart has money to be made. Today’s FOMC at the FED gave us another 25 basis points in the FED Funds Rate, now at 2.25%, and the mumbo jumbo from DA FED on the CNBC Bubble Vision is all about “Balanced Risks.” The truth in the above chart is that there is no “balanced risk” when family money and my money is on the line in this market, with me as the “caretaker” of the family cash. One is damned if they do and damned if they don’t.

The savvy trend is your friend, traders, using whatever mechanical trading system they use, can still make money buying and selling stocks… if that is all they are doing 8 AM to 5 PM. I call this babysitting the market and one’s money, investment capital, and profits [to make money and avoid trading losses]. A lot of my global markets guru friends are doing quite well in the gambling casino with their mechanical systems, even though they are smart enough to understand that a Great Secular Bear Market exists for generally 10 to 12 years.

These guys earn my respect and admiration for having very little fear. These rascals can stare at the Black Bear in the Dark Cavern and reflect the light of the Bear’s eyes and teeth into their mechanical system. That’s a feat of magic in our view! That is NO FEAR, and in our view the RED BADGE OF COURAGE! – should they get a little mauled…

The Cavern of Darkness – Rogue Waves, Don’t Buy Treasuries, and Fannie Mae

I think everyone is too sanguine about this de facto competitive devaluation by the US. To me, this is a very serious and very dangerous policy pursued by the US. I’ve never heard any central bank telling the world not to buy their assets. But this was essentially what Alan Greenspan said in his Frankfurt speech on November 19. We are now talking about a gradual sell-off in US Treasuries that would take yields on 10-year notes to 5.0%. But if the world really were convinced by Greenspan, why would bond yields stop at 5%? Why should US equities be spared? – Stephen Li Jen from Debating the Dollar

Anyone with half a bird-brain knows that Greenspan told folks at his speech on November 19, 2004 in Frankfurt, Germany, not to buy US Treasuries in a “daunting and measured balanced risk” FED$PEAK-EASE to weaken the US Dollar. John Mauldin’s “Outside the Box” editorial Debating the Dollar is a most interesting read and full of good stuff in this Cavern of Darkness. Thanks, John!

What was the all-time high on the DOW Industrials? About 11,600 to somewhere about 11,800, wudn’t it? I don’t remember, as that’s Ancient Wall Street History Class 101! Let’s Assume 11,800, shall we? I measure currency destruction by the FED and Bernanke’s printing press in the so-called inflation of real estate prices [novices and idiots call it realty price appreciation – See: Blitzkrieg Essay #5 – Ponzi and Electricity]. Let’s assume that realty in all markets of the USA appreciated [currency destruction, or inflation] 10% per year since the Year 2000.

That’s four years. 11,800 would coincide with the top of the morning and the top of the DOW. Assuming compound interest like your typical banker [11,800 x 1.1 x 1.1 x 1.1 x 1.1 = 17,276], the DOW should be at 17,276 today. Sorry, Charlie, It Ain’t! OK! Assume your realty market’s not so hot. Let’s use 5% appreciation [a measure of currency destruction]! Doing new math [11,800 x 1.05 x 1.05 x 1.05 x 1.05 = 14,343]! Sorry, Charlie, It Ain’t!

Ye Gads Gerome! Gee Whiz! I love playing with a Hewlett Packard 12-C Financial Calculator! This is what I call the time value of money, albeit paper. The point is, if the mechanical systems huggers are doing pretty short trades as they babysit their capital, profits, and money, they probably are making some pocket change for their risk. If their trades are not short-term, they could lose their long-term assets in their mechanical system model – Time Value Money-Wise. Now, that’s a true Cavern of Darkness with a lot of risk when DA FED actually controls the Financial Markets, including real estate which cannot be a market bubble, since it is all local. Sir Alan, give me a break, Pal.

I ain’t stupid, and, Nope! – I like my Gonads and my Feet [shooting oneself in the foot, if you miss and hit a more vital spot! Big Ouch!]. I will also steer clear of an ARM mortgage just as I would avoid going into a city infested with rats with fleas [hummm, the FED could be infested?] carrying the Black Death!

Rogue Waves? See: Jim Puplava’s Perfect Financial Storm Series

Fannie Mae? See: Realty Reality for our favorite fudge candy.

Call It a Rap, Put the Moon to Bed, and Boogie On, Baby!

We recognize the ability to play the casino on Wall Street. Some Folks [Pundits] can make money buying and selling stocks when these folks’ only pre-occupation is babysitting their capital, profits, losses, and the markets — whether they are reading tana leaves, tea leaves, used coffee grounds, chicken entrails, or a mechanical trading system that works for them. There are profits to be made, in coming inches to eyeball with the glint of light in the Great Secular Black Bear in this Cavern of Darkness. I applaud their courage, tenacity, bravery, and skill. They have more Gonads than I, since the bulk of my portfolios belong to folks over 75 years of age who can only tolerate minimal risk.

I won’t risk the Family Jewels on a trading model, given the circumstances of the Family Trust. But, it can be done, if the trader can sell at the pre-ascribed set trading loss to recover capital. Mechanical Systems to me are like Baby Sitting 101, in our view, when I have another job to do to take care of making my income. Besides, when there’s a rigged DA FED-controlled Gambling Casino, why to bet and play and lose your capital?

I take a more holistic approach to the markets for my portfolios. I recognize that at any time I wake up, any stock or mutual fund [Eliot Spitzer, read me, Baby!], can get hammered on the news, insider fraud, accounting irregularities, or a financial melt-down. I understand the destruction of the current money system [Federal Reserve Notes] and the FED’s role in manipulating the heavy metals markets, because I follow Midas Bill Murphy and www.gata.org.

I believe in ownership of physical heavy metal as part of my investment strategy. I believe that I cannot play options with any degree of certainty because of the FED and its Wall Street Shenanigans. What should go down does not, and they snick my money. Playing the Bull, makes no sense in a Great Secular Bear Market. Moving money off-shore to alternative currencies in numbered accounts makes sense, in addition to gold grams at www.goldmoney.com. Being in a trading house money market fund exposed to the GSEs’ ability to use money market fund intermediation is pointing the loaded .45 Colt at my Feet.

I prefer cash-only US Treasuries [I can only lose how much Bernanke prints!]. When one recognizes that the FED has destroyed at least 95% of the purchasing power of the 1913 US Dollar, that the FED will do anything to perpetuate their Ponzi Shell Game of Paper Funnie Monie and the Financial Markets, this all is one big rigged Gambling Casino Crap Game that I can’t play in with short term trading mechanisms, since I don’t want to babysit Family Money every waking minute. I have a Life and a Future! Some would say that I am just a Chicken. Perhaps so. Cluck, Cluck, Cluck!

Denouement

Interesting essay on www.mises.org. I direct y’all to Sean Corrigan’s The Saga of John Law and Richard Cantillon. A most interesting read. We would also direct to this scribe of Reg Howe: Déjà Vu: Central Banks at the Abyss, which was fortuitously posted on 7 December 2004.

We view the financial markets as a cavern of darkness, a deep, dank black hole that sucks in the believer’s cash for the long-term pivot play. In this black hole is an assortment of players waiting to fleece the investor of their hard-earned cash if they don’t carry a flashlight or lit candle to illuminate their trading model. Given the actual returns to Wall Street gambling with the current destruction of the paper money system, short term gains can be made, however, the long term prospects of doubling one’s money are Fool’s Gold in our view.

The best trading mechanism for pivot plays in the financial markets will include several delta hedges, including physical ownership of real money, aka gold and silver bullion. The DOW at 14,000? The DOW at 17,000? Possibly, perhaps. But why take the risk in such a black hole of Calcutta? Besides, I would rather believe in Santa Claus than in financial markets, acting freely for my money. Babysitting, in our view, is just too much work. I have done that, getting all of my portfolios to safe positions.

© 2004 Ole Bear
Editor for Realty Reality at www.financialsense.com
Aka, Gale Bullock
Proprietor, www.pgtigercat.com
Email

Art Soukup
“In the land of the blind,
the one-eyed man is king.”

Mechanical systems – Are they a ray of light or a cavern of darkness

What an interesting question that the Contrarian Roundtable has decided to address.

The above question is being asked in the context of an observation written as ” To many people have been fooled into following a mechanical system or a newsletter that follows one, only to lose their pants and their shirts.”

Before that question can be examined, it is necessary to address two other questions to generate a correct answer. Once done, we are prepared to talk about light beams and dark caves as the roundtable members polymorph into quantum-mechanical physicists dressed up as spelunkers.

We are spelunkers because we are going into a dark cave. We are quantum-mechanical physicists because we are carrying a electric torch ( flashlight); which is a quantum mechanical device. A long rope with lots of knots will get us into the cave and serve as our abacus for calculations. If you want to think of the rope with knots as your trusty newsletter or your computerized trading software, that’s fine. Its an excellent rope with plenty of knots for everybody to hold on too and do the calcs. Chris Laird and I built it many moons ago so we could proceed to “do the cave thing on a vast range of subjects.”

Also, somebody will have to strap on a waistband that carries “THE POUCH”. Now at this point in time, because I am the only guy at the Roundtable who knows what’s in “THE POUCH” I guess I should carry it; a grim task that I do not relish.

“Wait a second,” says Sol Palha.

“I second the motion,” says Alan Lunt.

“What was the question that got seconded?” says John Tyler.

“Oh,” says Sol. “Grim task!! What’s in THE POUCH?” and “Is this going to hurt anyone?” says Sol.

“Yeah,” says John. “‘We want to know before we go! Harump… Harump… All this stuff about rays of light and dark caves with stinky bat dung, pools of water that have fished with big sharp teeth and of all things, NO EYES, spiders running everywhere, slippery rocks, holes with no bottoms…almost wish we never asked the dumb … er. Brilliant question.”

“Yeah, and what about the poisonous snakes?! Don’t forget the snakes, Art. It’ll be a heck of a way to go,” says Alan. Alan silently thinks to himself,”Hmmm…maybe the pouch is a med kit?”

Well Roundtable, to answer the TWO questions that were seconded before they were asked:

No, I am not going to tell you what is in “THE POUCH”; at least not yet. YES, you are probably going to be hurt, but the bright side is that the pain will probably only last forever. Besides, Mary Puplava is standing at the top of the cave doing what Mary does best, and as far as questions go, I would like to say that there is no such thing as a dumb question or a brilliant question. There are only dumb answers.

“Which is?” says Sol and John and Alan in unison.

Why hosting this Contrarian Roundtable you see; and of course praying.

“Oh yes. I see. Hosting the roundtable. Thanks, Mary. Without your wonderful support we would not be here” says All.

“Say,” says Sol, “What’s Mary praying about?”

In addition to holding onto the rope so we can climb out later, she is praying, “Please, please, please… Whatever happens from this point on and until they all come back, please do not let events unfold in a manner that will compel Art to open the pouch to perform the grim task.”

“Gee,” says John Tyler. “Sounds like we are supposed to be more fearful of the pouch than anything else in the cave…I mean bat dung, blind fish, spiders and all.”

“Yes! Of course!” says Alan Lunt. “By being most fearful of what Art has in the pouch, nothing in the cave can bother us, and we can all do the quantum thing; find out why people are losing their shirts as good quantum-mechanical physicists should.”

“Wow,” says Sol. “You have nothing to fear but fear itself, and Art’s got it in the pouch!

It’s time to Rock and Roll. I got the flashli… err TORCH, so I’ll go first. John and Alan take shotgun along with the other roundtable members, and Art brings up the rear.

As the Contrarian Roundtable ropes down into the cavern of darkness, I remind Mary that this is a good time to start praying. In fact, it would be a good time for all the readers of this article to pray along with Mary. We are going to need it.

Half Way Point.

As the party rests halfway down the cave, we find questions scribbled on the wall. Sol does not turn on the torch as we still have a little light from above.

John and Alan notice that all the readers have come along with us and are murmuring and humming. Casting a glance at each other, they say nothing. The readers are probably just reacting to the first whiff of bat dung and assuming they will adjust quickly. Alan thinks that he heard one of the readers whisper, “peas, peas, peas,” but he can’t be sure because of the strange way the sound echoes and then muffles. Besides, Art looks at the questions and explains them.

Question 1 – Has there ever been an effective system?

Question 2 – Is there such a thing as a “black box system”?

For Question 1, the answer is yes.

An example is scissors, a closed mechanical cyclic system, which always performs as long as the system’s critical parameters remain within limits. The parameters are sharp blade edges, an un-broken pivot point, and a strong hand to provide the energy for a cyclic repeat. Snip, snip, snip goes the scissors to the front page of your newspaper. Look, kids, a bunch of paper dolls to dress up the Christmas tree.

For Question 2, the answer is yes.

An example is a red-tipped paper “match,” or as the Germans like to say, a “lucifier.” Has-du-ein-lucifer-bitte?,, Do-you-have-a-match-please? A lucifer is an example of an open, non-cyclic “black box” mechanical system. Friction is an input to the red tip, and fire and light are brief outputs, with a gentle wisp of smoke as a reminder of its past. Something happened here.

I started with a red tip and ended up with a black tip. An input to the black box system and an output from the black box system. Research is all about figuring out what is inside the black-box system.

So, with two examples, we now know that “systems are effective” and “black box systems exist.” After we get out of the cave, we can search the Internet for more examples.

With everyone rested and Q1 and Q2 answered, the readers climb back up the rope. They see that the way down is getting darker, the passage is narrowing, and by now, they have heard something about a pouch, a fearful pouch, a pouch full of fear, and the “peas, peas, peas” guy is insisting that the Roundtable guys were talking about a “pouch potato.” Whatever the rumour was, a few decided to stay at the halfway resting area and shout what they managed to hear to the top.

The Roundtable proceeds to the BOTTOM.

At this point, voices and names blend; it is just a sound stream when anyone speaks. No one can tell who said what, so we all agree to speak slowly with plenty of pause time between sentences. There is plenty of thinking time between sentences.

Bottom of Cave.

We are now ready for the headline question……..

“Mechanical systems – Are they a ray of light or a cavern of darkness?”

Strange as it may be, the mechanical systems question has five answers.

FIVE answers you say!!!

Wait a second, that’s impossible. I only see TWO choices in the question!

How can 1+1=5?

Well, when it comes to math, 1+1=2.

However, the question’s formulation allows for 5 events because a two-choice “OR” question has 4 knowable events and 1 NON-knowable event.

To understand the five events, I will reduce and restate the question, always keeping in mind that we are doing this to find out why “too many people have been fooled into following a mechanical system or a newsletter that follows one, only to lose their pants and their shirts.”

MECHSYS equals “A” “OR” “B”.

MECHSYS equals “NO ray of light” or “cavern of BRIGHTNESS” <–FIRST knowable event.

MECHSYS is 0 0 <–FIRST knowable event….reduced view.

MECHSYS equals “NO ray of light” or “cavern of darkness” <–Second knowable event.

MECHSYS is 0 1 <–Second knowable event….reduced view.

MECHSYS equals “ray of light” or “cavern of BRIGHTNESS” <–Third knowable event.

MECHSYS is 1 0 <–Third knowable event….reduced view.

MECHSYS equals “ray of light” or “cavern of darkness” <–Fourth knowable event.

MECHSYS is 1 1 <–Fourth knowable event….reduced view.

MECHSYS equals Fifth non-knowable event.

MECHSYS is x x ? <–Fifth NON-knowable event….reduced view.

x means we do not care what the bit settings are.

? is the NON-knowable event.

The first 4 events are knowable and we will now name them.

Event 1 is called OFF-Bright. The flashlight is off, but the cave is glowing with light.

Event 2 is called Cavern of Darkness. The flashlight is still off, and we can not see anything.

Event 3 is called Light-Bright. With a ray of light now present, the cave is also glowing brightly.

Event 4 is called Light-Dark. With a ray of light now present, but the cave is now dark.

Notice how the Fourth knowable event is also an output that you can get from the word “AND”.

MECHSYS is 1 and 1

MECHSYS is “ray of light” AND “cavern of darkness”.

The torch is turned on. We heard a “click.”

We all assume that Sol turned on the torch, because he was carrying it when we started into the cave.

Everyone hears a swishing sound and thinks it bats or something, but I know it is just Sol busy waving the torch; wondering how come he cannot see a light beam, and how come when he shines it at what he knows to be a cave wall, there is no reflection.

Lost in thought, no one wants to admit that the torch is on but the cave is dark (according to EVENT number 4) so everyone pretends that the cave is bright (according to EVENT number 3); and it is so.

The conversation continues.

Man, This rope and knot calculator is really neat.

I can feel the 0 or 0.

Yeah, And I can feel the 0 or 1.

Me too, I can feel the 1 or 0.

And I can feel the 1 or 1.

On top of that I KNOW that as I feel the 1 or 1, it is also a 1 AND 1.

At least for a moment, until it changes.

Which gives me a real big problem.

How so?

Well my math says 1 OR 1 = 1, but 1 AND 1=2, but 1 only get 1 out, so the AND is kind of like an ADD, and the OR is kind of like a what ???

A merge.

Yeah, that’s it!! A merge.

This is getting creepy. Let’s get out of here. Say, Art. your not going to open the pouch are you?

No, not yet. We still have event 5. Remember, How 1+1=5?

Oh yeah, the NON-knowable event…

Yeah, that’s right. MECHSYS is x x? <–Fifth NON-knowable event…. reduced view.

So how are we going to know the non-knowable event?

You can’t!!

What! But I thought you said we could!

Remember, I told you about 1+1=5 only after we were at the bottom of the dark cavern.

Everybody feel the rope again. Slide your hand along the rope. Feel all of the EVENTS.

Notice anything? As you slide your hand back and forth along you will feel the “X” “X” and the question mark.

Minutes pass in total dark silence.

Finally some one speaks.

“We have a mechanical system inside of which, there are many black-boxes.”

And then someone else.

Yeah. “We also have a black box inside of which there are many mechanical systems.”

And again.

Wow. “I can feel it, but I can’t know it.”

And so 1+1=5. You can feel, but not know, the Fifth EVENT.

A few minutes pass in silence.

Does everybody feel comfortable tossing away your newsletters, and so on?

Have you gotten used to the logic pain and know that it is with you forever?

Hearing no complaints, I ask, “How would you now like to see an actual fifth Event?”

An actual XX?…!!! Is that possible?

Well, you are all well prepared, and up to now, I have seen no need to open “THE POUCH.”

Besides, we had to leave the cavern to see the fifth event. I’ll take a point; Sol has tail-light.

As I climbed out of the cavern, it seemed about 100 times faster than the climb down. It was all quite orderly of course, no pushing or shoving, like we all had on some anti-gravity boots or something. As we passed the halfway rest area and popped out of the cavern onto the grass, we heard an echoing sound coming from a reader at the halfway point. “The Roundtable just shot by us like a bat out of hell. Let’s get out of here.”

I noticed Mary was thrilled with the Roundtable on the grass, which was completely safe. Her prayers worked.

The Pouch was still closed. Of course, the Pea mumbler wasn’t sure if he should quit, so with a funny smile, he kept mumbling…”Peas, Peas,Peas.”

Now, quickly, before we lose our quantum-mechanical physicists mindset, close your eyes. To see the Fifth event, you must close your eyes and listen. And then you will see.

Before we went into the cave, I read this phrase on the web.

“Catastrophe requires multiple failures – single point failures are not enough.”

Got that.

“Catastrophe requires multiple failures – single point failures are not enough.”

With that in mind, listen some more and paint the picture in your mind.

Actually, it is the exact reverse. All catastrophes are ALWAYS caused by a single point failure. And the specific “single point failure” is always the one that was never considered. As a group, single-point failures all have one common amazing property, the ability to get around or bypass all built in defenses in the system; and they all end with a common five word lament….”We never thought of that.”

Now, see the fifth event, which is unknowable.

Seven and one-half million parts.

Billions of dollars.

Millions of engineering man-hours.

Positive temperature coefficient o-ring for Morton Thiokol booster rockets part number x-xxx-xxx.

A single point failure occurs… a temperature inversion.

Ka-Boom!! May the Challenger Astronauts rest in peace.

Do you see it, everybody? Do you see the Fifth EVENT?

Before any quantum-mechanical spelunkers could speak, pea-mumbler yells out, “I do.”

“It’s the temperature inversion.” Horray! Horray!

Exactly, say I. And what is the name of the Fifth EVENT?

The Roundtable yells, “The name of the Fifth EVENT is “We never thought of that.”

An article reader chimes in “Yeah. It’s even got five words in its name too.”

John Tyler jumps up and down, shaking the pea-mumbler by his shoulder in pure joy, yelling, “And that’s why there are no dumb questions or brilliant questions.”

The only things that are are “DUMB ANSWERS.” Horray! Horray!

After everyone quiets down, Sol Pahla says, “O.K., Art. We get it. 1+1=5. So what’s in “THE POUCH?”

“A butterfly net.”

“A what?… A butter…a butterfly net? There are no butterflies down in that cavern of darkness that we just spelunked. Do you mean all this time the fear in the POUCH was a butterfly net?

“Yep. Think of it as some kind of med kit.”

Sol says “Huh?”

Now Alan Lunt is thrilled. He knew it all along. It was a med kit, after all.

So he chimes in with, “Sol, let me explain. What Art is saying is that while we were down in that deep dark cavern hole, learning the other events and stuff, if any one of us as quantum-mechanical physicists had said that we understand quantum-physics,… well, Art would be forced to open THE POUCH and gently slip the butterfly net over the person who spoke. We would then proceed to safely get the insane physicist out of the cave and hopefully into a rest home. And he did not lie, for he truly carried the most fearful med kit in all of human existence. What’s neat is that we all got back safe, and we still have our pants and shirts on, and all of our marbles seem to be intact….maybe.”

That’s right say I.

And because of the o-ring in all of the newsletters and computer calcs, we are all just pounding sand with a yo-yo, waiting for a K-Boom worldwide.

Tell we meet again,

Art Soukup –

Originally published in September 2004, this article has undergone several updates over the years, with the latest update in February 2024