September 26, 2021


Technical Analysis of Financial Markets

Theory Versus Reality

Theory Versus Reality

The 1998 Academy Award winning movie Good Will Hunting features several scenes that will live on in American cinematic history. One in particular, “The Harvard Bar Argument Scene” was especially satisfying. In the scene, Matt Damon’s character, Will Hunting comes to the aid of his friend by using his self taught intellect to put down a pretentious Harvard grad student.

WILL: See the sad thing about a guy like you is in about 50 years you’re gonna start doing some thinking on your own and you’re gonna come up with the fact that there are two certainties in life. One, don’t do that. And two, you dropped a hundred and fifty grand on a fuckin’ education you coulda got for a dollar fifty in late charges at the Public Library.

The dialogue in this scene parallels my own beliefs about what it takes to become a great trader or money manager. In short, the difference between theory and reality, pedigree versus pavement, reading books and selling subscriptions versus managing money- your own or otherwise. Theory although potentially complicated at first can be mastered with time and repetition. Reality is ever changing and is rarely if ever mastered, specifically when it comes to forecasting the future (markets).

For me personally, theory came easy. Memorizing material for exams is a cinch, and I’ve always tested well. Application to real world situations is a different story. Where is one to turn when all that textbook knowledge fails you and the memorized theory doesn’t play out? I’m not suggesting that reading Edwards & Magee, and John Murphy technical analysis books is a waste of time. It pays dividends to have a background in the fundamentals of whatever method you employ to analyze markets. I’m not suggesting that your CMT, CFA, FRM, CFP etc. etc was a waste of time. The alphabet soup of financial designations shows dedication and perseverance. I’m not suggesting that understanding Dow Theory isn’t beneficial.

I am suggesting however that too much theory can work against you. I’ve seen this first hand in my own experience trading. I’ve read or reread nearly all of the classic TA texts. I’ve memorized enough material in finance and trading for two lifetimes. But where I really learned and progressed?

I blew up trading accounts.

I went to and printed out the charts day after day of the top 20 gainers and losers on the day, going back to reverse engineer to try and see how or why stocks made the moves they did.

I found a great mentor with twice the experience I had.

Kept a trading log.

Then, I failed a second time.

In all of this, I learned how I react emotionally in specific circumstances. With my own money on the line and other’s money whom I care about. I learned that to succeed you have to learn to think for yourself while keeping in mind there are major differences between text book and real life. I guess you could say that I am part Clark and part Will Hunting, I’m a CMT Charterholder but I will always think of myself as street smart when it comes to the markets. I have the losses, the diary, the screen time, and finally the success to show for it.

So while I hope not to be serving kids fries at a drive-thru on their way to a skiing trip, even if I am – at least I won’t be unoriginal.

Happy August 1st everyone! I’ll be in touch soon with our August playbook.

Enjoy the scene.