A Hidden Code in the Markets?

08/17/2012 10:00 am EST

Focus: STRATEGIES

Ross Beck

President, Geometric Trading, LLC

Trader Ross Beck explains why he believes that the financial markets do have a "hidden code," and shares some examples of how it can benefit the individual investor.

Is there a hidden code in the financial markets? Is there a hidden code in the charts? Our guest today is Ross Beck to talk about that. Ross, is there a hidden code in the charts here?

I think there is, Tim, and it is hidden in the sense that...I think the Masons have said something like if you want to hide something, put it in plain view, and it is kind of like that.

When you look at a chart, most of us when we see a chart we see disorder and chaos, and what is our instinct? We want to see order. So how do we do that with a chart? We see a dog's breakfast, what are we going to do? We start drawing lines. We start looking for shapes sometimes.

Have you ever looked at the sky and seen some clouds and we know they are random, but if you are sitting beside someone and you say that looks like a horse, and they go "Oh yeah, I can see that." Well, that applies to the charts as well. Sometimes we all look at the charts and start seeing the same shape, and then guess what? It does reverse.

An example of that is in 1929. That crash, if you look at the chart it starts to go parabolic, it goes to a vertical side of a circle, okay? So that segment of a circle gave an accurate prediction of when the market was going to reverse.

The circle is just one of many shapes that we look for, and something that I refer to as geometric trading. So I look for triangles, and that is something a lot of traders look for and trade off of. Also squares. Gand was a pioneer of using squares on the chart, and arcs. Michael Jenkins wrote a book about geometry in the stock market in the 1980s about the subject and spent a lot of time on that subject as well.

So people are looking for these shapes, and most of the time they don't even know they are trying to look for these things. And often when there is a reversal, that is why it happens.

And so traders are all looking for an edge in the market. Do you feel like the geometric trading of looking for these shapes can give people an edge?

Yes, I do, because we live in a very different world from the times of the golden age of technical analysis, when everyone had paper charts and there were no computers. Nowadays, people are writing code. They have a very high level of education and math. So this is who you are competing against.

If you are small retail investor or trader, it is very difficult to compete against these people, so what gives a person an edge? Looking for simple geometric shapes. So when we see a simple trend line, often that single simple trend line is one piece of a larger shape that can be playing out in the market.

Each market actually has its own composite personality depending on whose trading it. The people that traded the market 50 years ago are very different from what they are today, so it is important for us to find out, who is that composite person? I want to know everything about those people that are trading because-and equities are pretty good for that vs. more diluted indexes, like the S&P for example-it is harder to gauge that personality than it is a very narrow tech stock.

Just look at any computer geek, you kind of get a picture of what that guy eats for breakfast and what he does socially, right? All that information is useful to the trader, and all of that is reflected in the composite personality of that stock. So once you get to know that personality, you will start to see certain shapes and patterns that conform to that personality, and that is very predictable.

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