One of the most amazing traders I have ever met was a blind musician. Mr. Hamilton loved to trade the markets and his approach was very different than most other traders. To him, the markets made music; there was a rhythm to the market. It was this rhythm that he used to capitalize on market moves.
When I worked at Omega Research, the software company that created TradeStation, I was fortunate enough to have an understanding of the markets and programming. This combination allowed me to travel the world programming custom indicators and systems for all types of traders. This is how I was introduced to Mr. Hamilton.
The Internet was moving from bulletin boards to webpages. A 56-baud modem was super fast, and market data was broadcast from an fm receiver or satellite — even cable delivery was rather new. You called your broker to place trades and all markets were traded in a pit. Now this wasn’t the 60’s, 70’s, or 80’s. It was the early 90’s just over 20 years ago. It amazes me how much has changed since I started in this business.
Now I digress. Mr. Hamilton loved the S&P. Back then it was $500 a point, and a 4-5 point day was a big day. But Mr. Hamilton had the uncanny ability to be able to convert sound to numbers in his head. He just needed a way to hear the market. So we worked together on an indicator that played the musical scale up as the market moved higher and down as the market moved lower. It would switch to the next octave with each full point. So the open was always based on middle C and Mr. Hamilton knew exactly at what price the markets was trading by just listening.
He just needed the open price and then knew the current price based on the note that was being played. Mr. Hamilton’s musical ear told him at what price the S&P was trading. I must say it was fun testing the indicator with him and matching the prices that he was hearing to what I was seeing.
Mr. Hamilton was able to hear the music of the markets and he was able to get an idea of how it was moving and when it was likely to stop moving. He explained it to me as a crescendo in music. The market would be in a lull then it would start to build in tempo and then when the music hit its fastest tempo and peaked he would exit his trade.
I always thought his way of trading had a high correlation to the way Floor traders traded, as many told me they based their trades off the noise the pit was making. It is also one of the biggest reasons that floor traders had a hard time trading off the floor, as that one element that gave them an audible clue of the market had disappeared.
How was Mr. Hamilton a successful trader just off of one indicator? You almost can’t even call this an indicator in the traditional sense, as it’s not even visual on the chart. We have all heard of tape reading and although we no longer read tapes, the same principle still applies just in a different format. The markets do make music and have periods of lulls and then explosions or crescendos. The ability to quantify and identify them is based on each person’s interpretation of the indicators.
I can put 10 people in a room, have them all look at the same indicator, and get 10 different interpretations. This is why the market moves up and down, we all have different opinions of where the market is going. This is why so many people use indicators to try and quantify their interpretation of the markets.
If I gave you the same indicator that Mr. Hamilton had, would you be as successful? The answer is probably not. I would bet there are only a handful of people who have the ability to convert sound to numbers. Maybe it’s a musician thing, maybe it’s a blind person’s other senses being stronger. I don’t know the answer. But I do know this, and it’s the point of this article. What works for someone else, be it a market Guru, educator or friend, may not work for you.
Anybody can apply an indicator to a chart, but only a few can interpret the market from that indicator. If the indicator does not make sense to you, it will not work for you — no matter how good someone says it is.
Indicators in general are derivatives of the price data. They try to quantify where we are in relation to past data or try to predict levels where prices should react. In either case, it is less about the specific indicator and more about what price action is doing at these indicator levels.
Are indicators self-fulfilling prophecies? If enough people are looking at the same indicator than something is likely to happen at that point. Take for example the tried and true 200-day moving average in stocks. Why do we see it tested and held so many times? When that level is repeated and repeated by the TV talking heads and the blog authors and more and more people hear about it, then it does act as a self-fulfilling prophecy. Understanding the psychology of how the markets move is a critical aspect of trading.
Which brings me back to Mr. Hamilton. Was there any magic in his indicator? I would like to think so because I programmed it, but the reality is no. It was his ability to hear the markets’ music and his understanding of the psychology of the markets that made him a successful trader. He didn’t want to get into the market when the crowd was frenzied and the crescendo was happening. He wanted to get out and take his profit and look (hear) for the next trade.
While this may seem over simplified, my 20+ years of programming for traders has led me to a few conclusions. Any indicator you use in your trading must make sense to you. You must be able to understand the calculations and what it is trying to quantify. Just because someone says an indicator must reach a value before you do something, doesn’t mean that indicator’s value won’t change over time.
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