The Nature of TA - 2] Discipline

In the first article in this series on The Nature of TA [The Objectivity of TA], I sought to outline the way in which rational TA is objective in response to the common misconception that it must be biased and therefore hopelessly subjective.  This article will look to further illustrate how rational TA is also a discipline - the way in which a field of study, or a particular science, is a discipline.  Like any discipline, it has its own set of principles and methods by which it proceeds, by which it excludes anything extraneous to those principles and methods. It works within certain parameters – hypothesis on the one hand, and the empirical testing of that hypothesis on the other. Any clarity or progress it may find results in not con-fusing together with TA, in one indistinct homogeneous lump, those extraneous factors that may clamor at the door, such as news, fundamentals, and macro outlooks.  The distinctions are drawn, and then maintained in a disciplined manner despite all the siren calls that would distract. The whole point of proceeding scientifically is to create some order, however provisional, out of the seeming chaos [the terms ‘order’ and ‘discipline’ could well be used interchangeably here].  Of course, there is a further point to this as opposed to just a theoretical exercise. Where on the one hand I’m arguing for ‘disinterested’ TA, the whole point of that TA, on the other hand, is about the application of it in the staking of [market] positions. And it’s with these positions that one becomes very interested in indeed, for one’s now invested in them. With the study or discipline translating into practice, the idea of discipline continues to apply.  Yet that discipline now becomes more than a disinterested ordering of external phenomena/ random prices on the chart for the observer. Rather, it becomes more about the ordering of one’s own inner psychology or emotions [in a word, one’s subjectivity]., for now one has much to win or lose as a participant.  With this in mind, the practice of rational TA must appear to us as something like Janus, the Roman god with two faces – it faces first toward the theory, and then turns back to face the application of it. This is where the rational discipline of a science also becomes a disciplined technique.

1] TA as a Rational Discipline

Often I’m asked if my charts are taking into account printing, or Covid, or mass adoption, the FA, government regulation, or the current news of the day, etc. The suggestion here is that some external event or set of conditions can throw all TA into doubt, making it a futile exercise. But the exact opposite is true when using TA as a discipline - it serves as a correction to the news of the day, or the momentary persuasion or enthusiasm that we may be particularly and presently prone to. A smattering of reading on the history of speculative markets is enough to know how gullible the collective we can potentially be. Remember, TA is founded on the uncertainty principle; inflation or deflation, the unknowable of future government policy, the breaking of some news event or another, all of this is mere grist to the mill for TA. For TA filters out [or grinds up] all extraneous factors to simply focus on the development of price. The reader may ask what of FA [fundamental analysis], could it not also make a mockery of the chart. Well, not really, for all fundamental analysis is looking to find the value of some asset, and that value has ultimately to be priced [or discovered] by the market. One could always argue, from a fundamentals perspective, that something’s value is well beyond what the market could ever value it at, but this would take you into a private realm of value divorced from the social and public valuation that markets provide. The continued pursuit of such a private valuation would take you into something akin to the strange world of the gold bug, where the asset is valued so disproportionately to its public value that it’s never parted with [we’ve all heard those stories of gold coins found in the walls of old miser’s shacks]. The TA of the chart keeps the fundamentals grounded, and the FA gives the TA some substance - FA without TA is blind, TA without FA is empty.

As for other methods such as on-chain analysis, or QA [quantitative analysis], they are not TA, but they are still perfectly fine. Like TA, they will make price predictions… if they’re to remain respectable and not degenerate into pseudo-science. There should be a tolerant live and let live attitude between these various approaches, which essentially involve interpretations of quite distinct material [and interpretation is all we have]. Though not inherently inimical to each-other, they may be competitive insofar as their respective price predictions are involved. And that would be a good thing - one would hope this might lead to a healthy rivalry and sportsmanship of sorts [possible insofar as participants are objective and disinterested], all of which would be in the best tradition of science, where ideas often battled it out in the public media. It was those that could both best save the appearances and explain them that won the day.

2] TA as a Disciplined Technique

Besides a rational discipline, as in an objective field of study, TA in turn, also serves as a rational discipline over everything that would come under the rubric of subjectivity. Here TA, applied as a technique, is as much a restraint over one’s psychology and emotions as it is about purely technical rules as applied to the chart. As a discipline, in this more subjective manner, TA then also involves a context such as a wider general strategy. and more particular tactics, that always belong to a market participant, that subject and initiator of all trades and positions. Indeed, it is this larger strategy that provides much of the discipline required over the momentary emotion and reactions of the day, for this discipline, in its more practical aspect, is the means by which the news and noise of the day is ‘bracketed out’. With this in mind, there is no ‘pure’ trade - trades, longer term positions [and even investments for that matter], only make sense within a context, and that context is primarily supplied by the subject [the subjective factors always counter-balance the objective ones]. So for example, from a disciplined perspective, going ‘all in’ on something becomes a near meaningless statement. One would have to unpack it, and ask of it what the wider context of the agent going ‘all in’ actually is [given the rationality of the uncertainty principle this could never be taken literally, one would hope]. After the uncertainty principle was first laid down as the basic principle from which all monetary matters rise, then it may begin to make sense. Perhaps a person has put most of their liquid worth into a core investment, which they have reason to think will most probably continue to perform well. In this scenario, they’d have real assets, other sources of income, no debt, and perhaps a suitable time preference. In contrast, a person going ‘all in’ on something with nothing outside of it [or what is worse, with debt and leverage] would not be a case of rational TA [or even rational FA]. It would simply be undisciplined gambling due to the irrational failure to recognize the uncertainty principle. Of course, there are gradations involved here - one could align the extremes on a spectrum, with perfectly rational and conservative investment at one extreme, and the extreme gambler at the other. The reality is that the bulk of traders and investors on this spectrum will be closer to one pole or the other. The potential here is for the investor/ trader/ speculator to get the balance right, with the possibility of the ‘ideal’ being an exact half-way point [but I’m getting speculative here]. The main point is rational TA as a discipline will cover the conservative bases first before taking on further risk. The obvious parallel to this is warfare - your positions are well-fortified first before venturing forth on raids. Further, the discipline over the psychological factors [the dreaded FOMO and FUD] could be said to actually consist in the strategy - something like FOMO [the fear of missing out] is ‘defused’ by staking some position to take the sting out should the market move against you [careful not to be outflanked]. Likewise, FUD [fear, uncertainty and doubt] is neutralized naturally in having it inbuilt into your very system [remember, everything rises on the uncertainty principle]. These psychological factors are as real as anything else, and are indeed the cause of volatile markets when taken in the mass. They must therefore be taken into account for any rational disciplined TA, for from a rational perspective, it’s pointless to clutch the fundamentals [however perceived], grit one’s teeth, and dig in one’s heels when the market moves solidly and convincingly against you [not talking about short term volatility here]. This is the complete opposite to the rationality of the uncertainty principle, and is rather based, more often than not, on the certainty principle, which is effectively irrationalism [and hence you’ll see all the memes that side-step rationality to bolster this irrationality]. In this scenario, our metaphor of warfare goes awry, and market participants, like troops in the trenches answering the bugle, just become cannon fodder for the market.

It’s been my intention to illustrate here the way in which rational TA serves as a discipline. Rational TA will deal very much with the nature and reality of things insofar as they are complex as opposed to simple. Complexity leads to uncertainty, and uncertainty to hedging. These are the driving principles that in turn make sense of all the opinions and positions you hold, and the trades you take. As a discipline, rational TA will eschew all enthusiasms no matter how convincing and water-tight they seem. For the sad fact is that, as a brief survey of history reveals, human nature has a strong propensity to believe something the more certain it appears. This certainty is more often than not built on what seems the most solid of principles, reinforced with the most technical jargon, and given the most credence due to the backing by authorities and the weight of mass belief. Without that enlightened skepticism of the uncertainty principle our rational faculty is soon ‘outsourced’, and we then become prone to all manner of delusions. Investments and trades always inevitably involve choice. To make good investments and trades, one needs to make good choices. And one can only makes good choices, and hope to be successful in those choices, by exercising their own rationality.

Further reading:

The Art of War - Sun Tzu

Extraordinary Popular Delusions and the Madness of Crowds - Charles Mackay