From Ocean Theory: An Introduction
© 1986, 2002 by Jim Sloman
My approach to markets in recent years, and my interest in them, has been to look at the whole issue of non-arbitrariness, that is, for elements or aspects of market analysis which may not depend upon the particular biases of the person observing the market.
In every system or approach to markets which I have come across I have noticed that at some point the user of that approach has to supply some relatively arbitrary number or constant or trendline or whatever, and that this input radically determines how the market looks to that observer.
For instance, let’s take a simple moving average. In order to use a moving average, we have to specify the number of days to which the moving average will apply. A 10-day moving average is going to present a much different picture or “window” on a market than a 200-day MA.
As a slightly more sophisticated example, if we use an exponential moving average we have to supply a constant for the EMA. And a constant of 0.1 is going to present a radically different picture of that market than a constant of, say, 0.5.
If we use trendlines, we run into the same problem. Which trendlines we draw depends enormously upon the time frame that we’re looking at, whether we’re connecting bottoms or tops, and which tops or bottoms.
When I first started trading I used trendlines, and when using a given chart I couldn’t help noticing that after awhile the chart would be covered with lines going every which way, connecting all manner of bottoms and tops, some short-term, some longer-term, some inbetween. And the question became, which ones really matter? The answer, it seemed, depended on my particular biases.
In Elliott Wave, I noticed that it was always pretty clear after-the-fact exactly where the five impulse waves were, but it wasn’t always so clear in the moment. Was this movement a 5th wave or an extension of a 3rd wave? I noticed that different Elliott experts gave different interpretations of the same market and that even the same expert often had “alternate” interpretations.
Please understand, this is not a denigration of Elliott or any other market approach—since all can have value under the right circumstances—but rather, pointing out that all current approaches are subject to this problem of arbitrary input.
The same arguments can be applied to almost any market approach from Gann to Wykoff to Dow, among the classics, as well as to more modern systems and approaches. A little experimentation with various market approaches and you can verify this for yourself.
One answer to this challenge is to “tune” the system, that is, to backtest the system using a lot of data and have the backtesting suggest which constants or inputs yield the best results. Of course the problem there, among others, is that 5 years of back data may suggest a much different constant or set of constants than 50 years of data. Which is more significant, the larger data set or the more recent one? The answer to this question seems to involve more arbitrariness.
Then there’s the problem that the market can quite suddenly change its character in a very radical way, so that the old constants or inputs are no longer so relevant. So the question kept arising in my mind: Is there some approach to markets that involves less arbitrariness?
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My first approach to this question was the market approach now known as the Delta Phenomenon.
In the summer of 1983 I was involved as a professional trader in Chicago and I also happened to be intrigued by the movements of the moon. The Delta Phenomenon grew out of the cross-pollination of these two activities, and later grew to include the interactions of the various movements of the sun, moon and earth.
Why those bodies and not other planets or the stars? We can easily see in an informal way why the movements of the sun and moon are so much more important. Simply look at the sky. Notice that the sun and moon are so much larger to our view than the planets or stars—a rough way of indicating their much greater relative influence on the earth.
This kind of market approach intrigued me because it seemed to be based on something less arbitrary than one based on the user input-constants required by other approaches, even something as sophisticated as, say, Fourier analysis.
Of course, Delta has some arbitrariness of its own, which is centered around the judgment (thus, some arbitrariness) required to deduce the “personality” of a given market in a given Delta time frame. For this reason I kept looking. Was there some approach to markets that was more deeply non-arbitrary? That was my question.
Further information on Delta Theory as originated by Jim Sloman can be obtained from a book called The Delta Phenomenon, written by Welles Wilder and available from deltasociety.com.
I’ve discovered a new timeframe in Delta, and in my opinion it may be the most important one. It’s making some astonishing predictions. Perhaps it will be presented in a new edition of The Delta Phenomenon someday.
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