Recently an alert friend of mine, who seems to be, as many traders are, always on the lookout for the ultimate strategy, sent me a list of twelve charts accompanied by a sales letter that he had come across online. He wanted my opinion...

The sales letter claimed that the author had discovered some almost magical (according to his own description, "uncanny" was the exact word) candle formation that always predicted huge surges in price movement.

I read the sales copy and looked over the charts with interest. With a bit of focused attention I was able to deduce what his secret candle line purported to be. This information, which he called "proprietary" and charged his members for access to, consisted of various manifestations of what appeared to be some form of a doji candle line. Hardly "proprietary."

I was able to identify it in 4 of the 12 charts he referred to in the sales letter, though the author claimed it was present in every single chart. It looked a little different in some of the charts but such variations are common in the realm of candlestick analysis.

So the mystery of the secret candle line seemed solved. What did I think of the validity of his 'Trade and Grow Rich' strategy?

As stated in the sales letter the strategy consists of: Predicting the strongest stock in the market for January using his ultra secret "proprietary" candle line... entering and exiting each trade successfully at a profit while  re-investing all profit... repeating this success another 11 times to finish the year with a 6.6 million (or some comparable) total profit.

Sounds like a walk in the park, doesn't it...

Of course, they say 'the Devil is in the details,' and many scams revolve around telling partial truths while leaving out very important details, leading the reader to erroneous conclusions.

There are a number of things that make this strategy un-do-able...

First of all, even the best of strategies seldom produce better than a 50% success rate. The trader can make money on these because his winning trades win more than his losing trades lose.

In order to impress his readers with the final 6.6 million figure, the author must assume a 100% success rate for the duration of the strategy. This flies in the face of any reasonable expectation and smacks of hype!

In many of the charts, including one from a company called Phazar, it took 3 months after the candle signal for the market to make its most significant gains. Also the upward movement consisted of 2 candles. But his strategy assumes that the month after a signal and entry  will show the greatest gains, and then the trader will move on to the next 'strongest stock.'

This simply isn't practical. To grab the profits he is speaking of would require trading at a scale wherein 12 trades a month would be overkill. One trade per quarter may come closer to the ideal, but even that would be pushing it.

Since entering and exiting the market is the most precarious part of trading, any strategy that involves excessive entry/exits must be considered impractical, as it naturally exposes the trader's Achilles heel more often than is necessary.

Lastly, any strategy that involves candle lines as its primary component should be discounted. The reason for this is that most of the time candle lines are not very reliable. For instance, you may see a line that indicates the bottoming of a movement, but what scale does that candle relate to? Does it indicate the turning of the movement, or of a movement within the movement? Candle lines do not come with built in scale information, so using them as a primary strategy in trading is dangerous!

This is not to say that candle lines are useless. There are certain areas in a movement wherein candle lines provide very useful information. The trick is knowing when to pay attention to candle lines. Through most of the duration of a trade they can be effectively ignored.

Leaving the analysis of his strategy, I took a look at the content of his sales copy. The wording of it was interesting... He used words and phrases like possible, mathematically possible,  always forecasts huge upward moves, predicts, uncanny.

First off, there are a lot of things that are theoretically possible in the market, but they sure aren't probable or practical. To say that something is "mathematically possible" doesn't mean that anyone can actually do it.

Furthermore, to have the gall to use words like always when speaking of market movements is highly inappropriate and should be esteemed at zero validity. The word always never applies in the market, not even with sound and reliable trading strategies. Price movement is far too flexible for such a confining label.
The word, predicts, though often used, is a bit of a misnomer. I touch on this in the article Does Prediction Play a Role in Timing the Market? You can find this in the Questions area at www.blt.cc.

By using the word uncanny, the author seems to be making an attempt to imbue his methods with some kind of magical aura. This is another red flag. It is also something that will likely backfire on him, as most traders are looking for concrete methods, not black magic spells...

There was a definite trend within his sales copy that seemed to be leading the reader toward theoretically valid but practically useless ideas. The hype words, such as "amazing," and the focus on getting rich was also disturbing.

There are so many trading strategies out there! The line between a scam and a well-meaning but mediocre strategy can blur easily. Any emphasis on extravagant sums of money or effortless measures to make it should be flagged. Something is likely amiss! Take your time and consider the proposal, otherwise, you just might end up lining the pockets of a scam artist.

E. Allon

MHN volume 3 number 1
September 1, 2005
www.blt.cc