Full text of "jim-sloman-ocean-theory "

Ocean Theory

Introduction

1. Delta Theory

2. Adam Theory

3. The Ocean Equation

4. The Ocean Index

5. The Natural Market Mirror

6. The Natural Market River.

7. The Natural Moving Average

8. The Zen Moment

9. Law of Reverse Effect - 1. .

10. Law of Reverse Effect - 2.

11. Law of Reverse Effect - 3.

12. Law of Reverse Effect - 4.

13. Law of Reverse Effect - 5.

14. A Peek at Advanced Ocean

15. Oneness in Duality

PREFACE
A true story:

Jimmy Sloman a trading approach that explains the outer symmetry of the markets. He
also developed another approach. The Adam Theory, which explores the inner
symmetry. It is an approach that in essence says: Watch what the market is doing right
now, because that’s the best predictor of its future path. This book is about his third and
most significant discovery — Ocean Theory — a set of analytical approaches that
model and describe the deep core of market movements.

The story behind this book has a lot of significance for me. I first met Jimmy in 1991 at a
seminar where he was a guest speaker. The interesting thing about the investment
seminar was that it was about intuition, not about specific, technical techniques to apply
to market analysis.
Luckily, I had already determined that the success that we achieve in our quest for
trading profits is not completely a function of what we know about market behavior, but
also what we have learned about ourselves. I quickly realized that Jimmy was someone
who had spent a great deal of time trying to figure out exactly who he was, and how the
rest of us can also learn to understand ourselves. In the process, he had learned a
great deal about how markets behave. By understanding ourselves, and how we
respond to events, we can estimate how others will respond, and therefore we can see
more clearly into the behavior of the market. I learned a lot about myself at the seminar
and more importantly, I had met a new friend. Jimmy Sloinan.

He and I continued our friendship over the next few years, visiting each other when
possible and generally “staying in touch," though our life paths were in different
directions. He had just begun a book that was to become Handbook for Humans, and
as life explains it, he tried to write the book that he wished someone had given to him
early on as a field-guide to navigating the passage of life. (Handbook for Humans is now
available.)

Jimmy had already discovered Ocean in the mid 1980s, although I didn't know that until
well after I met him. My path took me deeper into market and personal analysis,
forming an investment software company with a partner, and working with several well-
known and respected market analysts.

By early 1999, I was back on my own, and had turned my attention to reading for myself
again. I was particularly interested in the concepts of multiple time frames, realizing that
the best trades normally develop when several time frames line up in synergistic
agreement. Knowing that Jimmy was probably my best avenue to a solution to the
problem that I was encountering. I turned to him for advice, I will never forget the call I
made to him and how this now changed my life.

1 asked him, “Jimmy, we both know that when several time frames line up, it produces
the best moves, he agreed with me and then I asked him the two most important
questions that I had. “When looking at various time frames- which way would you go,
from shortest to longest or vice versa? His answer, without hesitation, was "both ways.”
Obviously an interesting way of approaching the issue, but I wondered how it could help
me, since it appeared that to follow his advice would be difficult to implement with a
computer program.

I let it slide for the time being and asked my second question, which was, “Which time
frames should you look at and how would you determine them in advance?" Once
again, without hesitation, he shot an answer back to me. He said. “You need to look at
all of them at the same time and let the market itself tell you which ones have the most
significance, since that changes with time."
Once again, my mind dis-jointed a little, since I expected that the real time
computational power necessary to use his advice wasn’t available to me. Needless to
say these were intriguing answers to my questions, and I intuited that they were
probably correct, but how was I going to use anything he’d told me?

We talked a few more minutes, and then he hesitated and said, “You know Par, these
are the very issues that I addressed a few years ago when I was studying markets, and
I've come up with the solutions. I call the methodology Ocean. It is a mathematical
model that analyzes the market on all time frames. Once I’m done with this book
(Handbook for Humans), “I’ll show it to you.”

Actually, he had once briefly talked about some of the more interesting aspects of the
approach, but I was on a different path of market inquiry relating to swing analysis, and
he was too deep into his book to break away long enough to fully complete the math
and train me on a method that even he hadn’t completely worked out yet.

A month or so later he called me and asked if I was interested in seeing how Ocean
works & if I would be open to the idea of developing the specialised software necessary
to make it available to other traders. I said yes to both questions. I was fascinated by
the ideas, in what life had told me before about it, and by virtue of my background, I
have a good deal of experience in converting trading ideas into code and making it
available to the trading public. (Though I must say, I haven’t seen anything like Ocean.)

Jimmy and I continued to talk and the outcome of those talks has produced the pages
you are now reading as well as advanced developments of the theory as embodied in
the Ocean Master program.

I hope you receive as much insight and gratification in learning these beginning
elements of Ocean Theory as I have.

— Par Raflalovich

Introduction
A free market, we could say is in the business of digesting information and rendering it
useless. It’s an organism for metabolizing information, and as with any organism, once it
has metabolized its food, that food is no longer useful to it.
In the ease of a free market, the information that the market seeks can only come in the
form of buy and sell orders. The market has no other way of receiving any information.

An example: Let's say that a hundred people in the world know that a severe draught is
going to affect the price of coffee next month, but that they have told no-one else and
also have done no buying or selling based upon what they know. Does the coffee
market "know" this information yet? No, it’s completely unaffected by it.

Only when some person or institution starts buying or selling based upon that
information can the market begin to receive it and the more people or institutions who
do so, the more the market can be said to “know" this particular piece of information.

When that piece of information is widely known among those who participate in that
market, and corresponding long or short positions have been taken based upon it, then
the market can be said to have fully digested or discounted the information available up
to that moment, and it is no longer possible to make a profit based upon that
information, unless the information changes.

At that point the information may be fascinating and even accurate, but it is no longer
possible to make a profit upon the information, simply because a market has no way of
distributing free money to those who don’t possess some food that the market hasn’t
digested yet.

Only if one possesses information that most other market participants don’t know yet
does the potential of a profit based upon that information exist. This may seem obvious,
but it is violated frequently in practice by many traders, as we’ll see.

Of course, one can always make a profit by luck or accident, but trading that is
profitable long-term cannot be based upon the whims of luck for obvious reasons.

Basically, there are two types of information available to a free market.The first type is
what is called "insider” information. If you know that XYZ is going to raise its dividend
next month, and this is not public knowledge yet, you could profit very well through your
inside information. However, profiling from this type of information is illegal in most
countries.

The second type of information occurs if you can usefully analyze the market, from
public information, in a way that only few marker participants know about. In this case
you would also have “inside information, but in a way that is legal and usable.

The potential misjudgment comes when we acquire some system or method of

approaching the markets that is widely marketed and available, whether classic or
modern. No matter how accurate the system or approach may have been in the past, if
it is more widely marketed and available to marker participants, its consistent profit
potential must go down, because the market is increasingly digesting this information.

As a market increasingly digests a particular way of analyzing or approaching that

market, the method becomes more and more ineffective for purposes of making a profit.
It may still be useful in an academic sense, or as a subject of intellectual fascination, but
it must become less and less satisfactory as a profit-making engine because it has the
same limitations on life-span as any other "insider ' information that is booming public
knowledge.

What usually happens is this: Gann or Wykoffor some other brilliant analyst comes up
with a theory or set of theories that look at markets in a new way, the newer and more
radical the better (because the less like other systems that are known by the market).
And with this new approach the analyst makes successful profits or predictions.

At time the theory is published, but its knowledge and acceptance into the marketplace
is very slow at first. It is simply not very widely known yet, and for that reason its profit-
making potential continues, though slightly diminished since it is known by a few more
participants.

As time goes on and the theory becomes more widely known, though, its profit-making
potential goes down even though it continues to make predictions that sometimes are
fulfilled. What happens is that the predictions become more sloppy' on average.

As an example, let’s say a turn is predicted by Gann, turn might come earlier than it
otherwise would as more participant take-positions anticipating the turn. Or the turn
might become more rounded instead of angular. Or it could become sloppy in other
ways. In any event the profit potential goes down on average as the market is
increasingly in possession of this information. Any particular turn or prediction, of
course, for various reasons could be as accurate as before, but the predictions on
average become less amenable to making profits. Finally the theory becomes very
widely accepted and acclaimed, and ironically, it is just at this point that the theory stops
making money on average for participants. Particular participants or predictions may get
lucky, but in general the system or approach is much less effective.

As time goes on, even though the theory or approach is widely acclaimed, participants
who are alert begin to notice that they are not making money on average using this
approach. In fact, they begin to have losses using it because the market can see them
coming. And as this becomes slowly known, the theory or system becomes less
popular and is slowly discarded by more and more people. Finally it becomes relegated
to the dust-bin of market history — interesting perhaps, but discredited or irrelevant.
As this happens, its profit- run king potential begins to pick up again and the new
participants who are using it begin having some good successes. And they tell their
friends or associates — and the cycle starts all over again.

But not quite. Instead of oscillating back and forth between popularity and unpopularity,
that is, between non-profitability and profitability, the system or method usually settles
into a kind of symbiosis with the market, whereby those participants who are using it
make neither profits nor losses on average.

I know, that of course means that they’re taking losses on average, because of
transaction costs, hidden Charges, asked spreads, and other sources of friction against
profits. Yet the approach still has some successes and these are widely touted, and so
the process continues.

How, then, should an investor approach the issue of market theories, systems and
approaches? In my opinion, the only way to stay ahead of the markets digesting of
information is to partially develop your own system.

That way the market has no means to know about your "insider” information. The
exception to the above comes from your own buying and selling in that market, but that
is a small fraction of the market's activity.

To that end, this book is designed to give you a deeper understanding how markets
work internally, and then to give periodic suggestions as to how you could explore from
there in your own investigations.

Please note: As noted on the website below. The Ocean Hook is designed to increase
your comprehension of how markets function internally. While this book can be used as
a launching pad for your own investigations, it is not intended to provide a
Comprehensive, tradable approach to markets. That is the province of Advanced Ocean
theory and the Ocean Master program. Info about the Ocean Master program, if you
wish to look into it, can be found by going to the website* www.mayyoubehappy.com
and clicking on the button ‘Ocean’ 1 on the home page.

1. Delta Theory
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 trend line 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-dav 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 trend lines, we run into the same problem. Which trend lines we draw depends
enormously upon the time frame that were looking at, whether we’re connecting
bottoms or top and which tops or bottoms. When I first started trading I used trend lines,
and when using a given chart 1 couldn’t help noticing that after a while 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 in between. 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 back test the system
using a lot of data and have the back testing suggest which constants or inputs yield the
best results. Of course the problem there, among others, is that 5 weeks of back data
may suggest a much different constant or set of constants than 50 weeks 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?
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 no 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, the foremost of which is the
judgment (therefore, some arbitrariness) required to deduce the “personality’' of a given
market in a given Delta time frame. For this reason I kept looking for something else.
Was there some approach to markets that was more closely non-arbitrary? That was
my question.

This doesn’t even scratch the surface on Delta theory. For additional information, please
consult The Delta Phenomenon, written by Welles Wilder based on my lecture notes
and available from deltasociety.com.

There’s a fascinating new timeframe in Delta which I've come across, and in my opinion
it may be the most important one. It’s making some astonishing predictions. Perhaps it
will be presented someday in a new edition of The Delta Phenomenon.

2. Adam Theory
My second attempt at exploring a non-arbitrary way of looking at markets led me to
what is now called Adam Theory. I asked myself this question: If you had a sighting of
some object (a submarine, say) at point A at one time and another sighting at point B at
the present time and you had no other information, what is the least arbitrary thing you
could say about where that object might show up in the future? Let’s graph it:
A practical answer is that we should look somewhere along the line extending beyond
A-to-B.

But where along this line should we look: Again, we have limited

resources so we can’t look everywhere along the line. And a deeper prob-

lem is that we don’t know the route the submarine took to get from A to

B. We might be assuming that it took a straight line from A 10 B, but in

fact, we don't know that.

The only facts we really know arc that it was sighted at A and subse-

quently sighted at B. And we don’t know the route it look to get from A

to B, so we cant assume it’s travelling on a straight line extending out

beyond A-to-B.

If we had to pick out one point 0 where we would be most likely to

sight this submarine again, where would it be:

Really, there's only one point and that’s the one representing an exact

repetition of the movement from A to B. So C will be an equal distance

out from B as B is from A, along the line extending out from A-to-B.

Notice that point C docs not assume that the submarine travelled a

straight line from B to C. It could very well have followed a circuitous

route from A to B, anil also from B to C. And of course it may not show

up at C. Nevertheless, point C is the most likely place where it will show

tip. No other point is nearly as likely.

And what is the best time to look for the submarine at point C? An

exact repetition will again be the most likely. An equal time interval from

time T/Now out into the future to T/Puturc as T/Now is from T/Past. If
the sub was at point A at 3 o’clock and point B at 4 o’clock, our best

chance Iro sighting it again will he at point C at 5 o'clock.

An interesting thing to notice is that this line of reasoning will hold

true for any time frame and any distance scale.

Now, in order to talk about the market more precisely, lets establish

some terminology. Tm is Time/Now. or the now moment; Th is Time/-

History, or some moment in the past; Tr is Time/Fiirure, the equivalent

moment in the future.

And similarly, Pn is the price at this now-moment, Ph is the price at

some moment in history, and P s is the price at the equivalent moment in

the future:

Tn Tn Tr
As with the submarine, if the market was found at point A (that is,

price Pu at timcTu), and then at B (that is. price Pn at time I n), then the

most likely place to find that market in ihc future is at point C (price Ph

and timeTr).

Or to put it differently, if Pit is some arbitrary historical price and Pn

is the now price, then the most likely future price Pf will be an equal dis-

tance out from Pn as Pn is from Ph, along the line extending out from

PH-to-Px.

The most interesting thing here is that the historical time Th is com-

pletely arbitrary. Therefore we could have two historical prices Pill and
Another way of talking abouc the 2ml reflection (also called the 2nd

interval, also called the Adam projection) is that it is the market’s own

projection out into the future.

As a side matter, we can note that the truest projection into the future

always equals the number of dimensions in the space. Thus the 2nd

reflection is rhe markets truest projection into the future in 2 dimensions.

In a 17-dimensional space, the truest projection forward would he the

17th reflection.

Another cool thing about rhe 2nd interval is that it constantly and

automatically updates its own forecast. As each now moment is reached,

the forecast into the future is also revised. Anti we can call this an inner

symmetry, since the symmetry spreads outward in both directions from the

inner (now) moment.

Moreover, the 2nd inrerval (2nd reflection) is relatively non-arbitrary,

since no arbitrary numbers or constants have been introduced. No $pe-

cific number of clays, minutes or other time intervals have been specified.

No specific sequences of number, such as the Fibonacci sequence, have

been used. No numbers, such as round numbers or certain fractions, have

been given prominence over any others.

Additionally, there is no lag time, The 2nd interval is always project-

ing out from the now moment, with no time lose to averaging.

2ND INTERVAL

1ST INTERVAL

Finally, the 2nd interval adjusts itself to you. You have only 10 look ai

i he 2nd interval and ask yourself, If the marker really went that way.

woultl l warn the trade? Thus it automatically adjusts to your style of trad-

ing, the level of market activity that you're comfortable with, and SO on.

We can only cover a few high notes here. For additional information

on interval theory, please consult Adam Theory, written by Welles Wilder

based on my lecture notes, and available from deltasociety.com.

There are some further advances in interval theory which might be

presented some day in a new edition of Adam Theory.

29

3. The Ocean Equation

Now wc come to the theory mentioned in the lust sentence or two of

the Adam Theory book, now called Ocean.

I noticed a strange thing going on in markets. I noticed that if I drew

a line connecting the now moment and price to anywhere the market was

in the past (or conversely, as it is projected into the future using interval

theory), that the slope of that connecting line was smaller the farther out

1 went. Its ordinary and obvious, of course, hut it also struck me as a hit

strange too. Why was that happening?

31

'p

*
In the summer of 1983 I was involved as a professional trader in
Chicago and I also happened to he intrigued by the movements of the
moon. I he Delta Phenomenon grew out of the cross-pollination of these
two activities, and later grew to include the inlet actions ol die 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 rhe sun and moon arc 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-con-
stants required by other approaches, even something as sophisticated as,
say, Fourier analysis.

Of course, Delta has some arbitrariness of its own, the foremost of

which is the judgment (therefore, some arbitrariness) required to deduce
the “personality’' of a given market in a given Delta time frame. For this
reason I kept looking for something else. Was there some approach to
markets that was more closely non-arbitrary? That was my question.

This doesn’t even scratch the surface on Delta theory. For additional
information, please consult The Delta Phenomenon, written by Welles
Wilder based on my lecture notes, and available from ddtasociety.com.

There’s a fascinating new timeframe in Delta which I've come across,

and in my opinion it may he the most important one. It’s making some
astonishing predictions. Perhaps it will be presented someday in a new
edition of The Delta Phenomenon.

2. Adam Theory

My second attempt at exploring a non-arbitrary way of looking .it

markets led me to what is now called Adam Theory.

I asked myself this question: If you had a sighting of some object (a

submarine, say) at point A at one time and another sighting at point B at
the present time and you had no other information, what is the least arbi-
trary thing you could say about where that object might show up in the
future? I.ets graph it:

A practical answer is that we should look somewhere along the line

extending ot beyond A-to-B.

But where along this line should we look: Again, we have limited
resources so we can’t look everywhere along the line. And a deeper prob-
lem is that we don’t know the route the submarine took to get from A to
B. We might be assuming that it took a straight line from A 10 B, but in
fact, we don't know that.

The only facts we really know arc that it was sighted at A and subse-
quently sighted at B. And we don’t know the route it look to get from A
to B, so we cant assume it’s travelling on a straight line extending out
beyond A-to-B.

If we had to pick out one point 0 where we would be most likely to

sight this submarine again, where would it be:

Really, there's only one point and that’s the one representing an exact
repetition of the movement from A to B. So C will be an equal distance
out from B as B is from A, along the line extending out from A-to-B.

Notice that point C docs not assume that the submarine travelled a
straight line from B to C. It could very well have followed a circuitous
route from A to B, anil also from B to C. And of course it may not show
up at C. Nevertheless, point C is the most likely place where it will show
tip. No other point is nearly as likely.

And what is the best time to look for the submarine at point C? An
exact repetition will again be the most likely. An equal time interval from
time T/Now out into the future to T/Puturc as T/Now is from T/Past. If
the sub was at point A at 3 o’clock and point B at 4 o’clock, our best
chance Iro sighting it again will he at point C at 5 o'clock.

An interesting thing to notice is that this line of reasoning will hold

true for any time frame and any distance scale.

Now, in order to talk about the market more precisely, lets establish
some terminology. Tm is Time/Now. or the now moment; Th is Time/-
History, or some moment in the past; Tr is Time/Fiirure, the equivalent
moment in the future.

And similarly, Pn is the price at this now-moment, Ph is the price at

some moment in history, and P s is the price at the equivalent moment in
the future:

Tn Tn Tr

As with the submarine, if the market was found at point A (that is,
price Pu at timcTu), and then at B (that is. price Pn at time I n), then the
most likely place to find that market in ihc future is at point C (price Ph
and timeTr).

Or to put it differently, if Pit is some arbitrary historical price and Pn

is the now price, then the most likely future price Pf will be an equal dis-
tance out from Pn as Pn is from Ph, along the line extending out from
PH-to-Px.

The most interesting thing here is that the historical time Th is com-
pletely arbitrary. Therefore we could have two historical prices Pill and
Another way of talking abouc the 2ml reflection (also called the 2nd
interval, also called the Adam projection) is that it is the market’s own
projection out into the future.

As a side matter, we can note that the truest projection into the future
always equals the number of dimensions in the space. Thus the 2nd
reflection is rhe markets truest projection into the future in 2 dimensions.
In a 17-dimensional space, the truest projection forward would he the
17th reflection.

Another cool thing about rhe 2nd interval is that it constantly and
automatically updates its own forecast. As each now moment is reached,
the forecast into the future is also revised. Anti we can call this an inner
symmetry, since the symmetry spreads outward in both directions from the
inner (now) moment.

Moreover, the 2nd inrerval (2nd reflection) is relatively non-arbitrary,

since no arbitrary numbers or constants have been introduced. No $pe-

cific number of clays, minutes or other time intervals have been specified.
No specific sequences of number, such as the Fibonacci sequence, have
been used. No numbers, such as round numbers or certain fractions, have
been given prominence over any others.

Additionally, there is no lag time, The 2nd interval is always project-

ing out from the now moment, with no time lose to averaging.

2ND INTERVAL

1ST INTERVAL

Finally, the 2nd interval adjusts itself to you. You have only 10 look ai
i he 2nd interval and ask yourself, If the marker really went that way.
woultl l warn the trade? Thus it automatically adjusts to your style of trad-
ing, the level of market activity that you're comfortable with, and SO on.

We can only cover a few high notes here. For additional information
on interval theory, please consult Adam Theory, written by Welles Wilder
based on my lecture notes, and available from deltasociety.com.

There are some further advances in interval theory which might be

presented some day in a new edition of Adam Theory.

29

3. The Ocean Equation

Now wc come to the theory mentioned in the lust sentence or two of
the Adam Theory book, now called Ocean.

I noticed a strange thing going on in markets. I noticed that if I drew

a line connecting the now moment and price to anywhere the market was
in the past (or conversely, as it is projected into the future using interval
theory), that the slope of that connecting line was smaller the farther out
1 went. Its ordinary and obvious, of course, hut it also struck me as a hit
strange too. Why was that happening?

31

'p

P
*

Hut .his goes again* common sense, since we *11 h>°*

crudes who trade at different timeframes. Some traders do indeed rlinve
on very short trades, a few minute., or even less, whereas othe, trade s
equally successful, usually rake rradcs in timefcunes of weeks °r months.
Indeed, one of the most successful “traders' ever, Warren Buffett, takes
trades in timeframes of years or even decades. So what s going ont

What occured to me after a svhUe was that the market Jidn't have a
linear tela, .on to timeframes, that is, it had a ^ different rehuon .o toiger
timeframes than to shorter ones. Hence traders with all sons of diluent
timeframes could, if they were good, make money in markets. Hut what

was this relationship?

I began to investigate mathematically die difference between different

timeframe, in markets, and in differem markets. And 1 soon real, red that
1 needed to use the percentage difference travelled by pt.ee rather than the
absolute difference, in orde. to compare moves in different markets and

time frames equally.

hut percentages have a problem, that equal percentages up and down

don't come back to the same place, hor instance. .1 Fa stock is at 100 and
up 50%. its now at 150. But the,, it it tails 50%. it doent 6*
to 100, but rather to 75. Percentage moves in opposite directions don,

cancel each other out.

That's when 1 realized that I needed to use logarithms of prices instead

of prices then. selves. 1c would have the same effect as using percentages of
price moves, with the important difference that a logarithmic move up or
down of the same amount would bring you back to the same place.

So in the summer of 1 986 I started fooling around with a spreadsheet.

The first column was the date. The second column was the closing price

for ihar day. And the third column was the natural log (In) ol the price,
multiplied by 1000 so that I’d be looking ar whole numbers. I happened
to be st inlying wheat futures, and it looked like this:

760102

3393.

8129

7601051

3521

3167
760106

34 91

6158

760107

3580

0183

760 1 0P

_ 3563

8178

760109

3538

8171

760112

3643

8201

Then in the fourth column I put the difference between todays log
price and yesterdays, so that, in effect. 1 was looking at an equivalent to
the percentage difference occurring in the price each day. and I multiplied
this by 100 to give a nice round positive or negative number to look at.
(For convenience sake I started the fourth column on line 100, to make
historical calculations easy should 1 want to do those.) It looked like this:

760510
7605J§_
760520
7 6012 j —
760524
7 60525
760526_
760527
760528

3518

3413 .

34 88

3646j

3550
3590
3631 1

3621
81 72
0166
6159

8157

8201

81 . 75 ..

0186

8197

0195

•713

• 1 4 3
443C
2668
1 120
1136
-276

The first three columns still contain the date, price and natural log of
the price. Dl(lnP) is simply the one day difference of the log price today
and the log price yesterday (multiplied by 100).
Hut I was interested in why different timeframes behaved differently,
and so I began to investigate differences of more than one day.

To keep things simple, I decided to look at differences of 1, 2. 4, H and

I f» days, to start.

So now 1 added four more columns to the spreadsheet after Dl(lnP):

mi

I 136.

2291 .

Again, Dl(lnP) is the difference between the log price today and the
log price yesterday. D2(!nP) is the difference between the log price today
and the log price 2 days ago. D4(lnP) is the difference between the log
price today and the log price 4 days ago, and so on.

My interest was in how much the market tends to move in different

timeframes. I didn’t care if the market was moving up or down in a par-
ticular timeframe; my interest was in how large its movement was.

So I took the absolute value of each of those differences in those

columns, and added five new columns. Now it looked like this:
a b s ( D 81 a b s ( D 1 6J

abs(DI)

abs(D2)_

abs(D4L

abs(D81 abs(D 1 6J_

» ■

^ » v

713

1308

3295.

1085 1937

143.

856

2966
2B7 2909

4430

4287

2979

3432 , 7251

2668

1762

905

2118 3614

1120

1548

2739.

556 1 5172.

1 1 36

22S6 7

ac A
4018

RQ Si

1052 6691

oooi

276

3073

860.

5053.

5959 _ 9047

564

~ 2509'

_ 3369

6108 7173

Note that the numbers in the picture above arc the same as the num-
bers in the previous picture, except dial now they’re all positive. abs(l)4),
then, represents the absolute (positive) value of the difference between
today’s log price and the log price A days ago, ere.

What I was looking at now in those columns was the extent to which
the market had moved in that timeframe, regardless of what it's direction
had been (and expressed through logs in a way that was similar to look-
ing at percentage movements).

Now I wanted the average of cadi column. What was the average move-
ment of the market in each timeframe?

The spreadsheet had about 10 years of wheat data, over 2500 rows, so
I dutifully extended the calculations down, and then took the average of
each column. It looked like this, five numbers above the names:

35

I looked at those numbers for awhile, knowing they represented the

average movement of the market in each lime frame. Then I wanted to
see what the ratio was between the numbers. So I took the ratio between
each average and the one before it, and that resulted in the four numbers
on the top row:

1.44
1 .40

1.40

1.46

960

1383

1936

2702

38M

ubs(DI)

a b s ( D 2 )

abs(D4)

abs(D8)
abs(D 1 6)

It struck me immediately that the four numbers seemed to be remark-

ably similar. Why should the ratio of each average to the one before ii he
around 1.4?

I checked 10 years or so of data with some other commodities to see

if the ratio was similar, and it was. Very puzzling: It was always within a
few points of 1.41 or 1.42.

Then it dawned on me: The square root of 2, 1.414. What the time
doubled, the average movement hud increased by the square root of 2.

At that point I thought momentarily that price changes happen as the

square root of 2. But then I looked at the ratios again, and asked: What
happens if the time increases by a factor of 4?

So 1 took the average movement over a 4-day period ( 1 936) and divid-
ed it by the average movement over a 1 -day period (960). and got a ratio
of 2.02. I took the average movement over a 1 6-day period (3938) and
divided it by the average movement over a 4-day period (1936). and got
a ratio of 2.03. It looked like this:

bs(D2) abs(D4) abs(DR) ab s(016

abs(D 1

So when the time increased by a factor of 4, the average price move-

ment increased by a factor ol 2.

Then I did the same tiling with 10 years of gold, 10 years of the S&P,
ten years of soybeans, and so on. And the ratios were almost the same.
Then I knew:

Price movement, on average, changes as the square root of time.

Or expressed as an equation: AP - AT 1 ' 2

Realizing this equation in the late summer of 1 986 was a very big deal
for me. I remember actually screaming when the equation occurred to
me. It astounded me that this hidden order could he going on behind the
scenes. What’s more, that it was going on in all time frames in all markets
simultaneously. Astounding!

A few years later I found otn that I did not originate this equation
after all. It is ultimately derived from a paper published in 1905 by
Einstein on brownian motion, and applied to time number series in 1951
by H. M. Hurst.

Einstein found that a panicle suspended in a liquid would move ran-

domly, and that die total range of the panicles movements would expand
according to the square root of time.
Iliac in turn is not unrelated to the laws bv which gravin’ and light
propagate outward. The brightness of a star diminishes in proportion to
the square root of one’s distance from the star. Similarly, the influence of
gravity diminishes according to the square root ol the distance from the
gravitational object.

Picture a central point that is radiating something. It can be a star

radiating light waves or a planet radiating gravity waves. It can be the
starting point ol* a particle in random motion, its sphere of motion
expanding outward. It can he the now moment of a market, radiating out
movement in price.

In each case, from that central point, picture an influence expanding

outward and weakening in force at a rate proportional to the square
root of the time or distance traveled.

Thats what the market does, in effect.

I now Iwd this equation about markets which I called the Ocean equa-
tion (because it was so comprehensive), and I was blissfully unaware that
it had already been discovered.

As I studied the Ocean equation. 1 continued to be amazed that all

markets and all time frames in all markets were simultaneously following
it. Truly astounding.

but what could be done with it?

4. The Ocean Index

This remarkable equation, I later found out. is also connected to what

is called power-law scaling in fractals.

But what really does it mean in markets?

Again, picture an influence expanding outward- and weakening in

force — at a rate proportional to the square root of the time or distance
traveled. In a free marker, that expansion is the airrage movement of price
away from its now starting point as time moves outwanL

AP - AT 1 ' 2

Charted, it looks like this:

Lets say (hat lime is bring measured in days, though it could be any-
thing. Notice that at the end of 1 day price will have moved, on average,
up or down l price-unit. At the end of 4 days price will have moved, on
average, up or down 2 units (square root ol 4). At the end of 9 days price
will have moved, on average, tip or down 3 units (square root of 9), and
so on. This is the markets average expansion in price from its current
starting point, over time.

Knowing this, we can now predict the average movement over one day by
knowing the average movement over some other time frame. For example, in
the chart above wc could take the average price movement over 1 6 days—
4 units here — and divide that by 4 (square root of 16) to get a prediction
ol i he average movement over one day.

Similarly, we could rake the average price movement over 1 1 days, say,
and divide by the square root of 1 1 to get a prediction of the average
movement over one day.

The chart below shows such an idea where the number of days,
instead of being 1-2-4-8-16 as before, has now been selected randomly.
What we’re looking at below is the absolute differences in the logs of
prices over the various time periods of 1-7-13-22-41 days, each one an
average of about 1 0 years of closing prices in wheat:

ahs(D 1 I abs(D7

abs(D22) abs(D41

If we take each of the numbers above and divide it by the square root
of its corresponding time period, then, we should get a number very close
to the number — %0 in this ease — for I day. Let's see:

3497

abs(DI) a b 3(07) ab*(D13> abs(D22) abs(D41

lo show how close those numbers arc, let’s now take the ratio of each
one to the 1-day one:

1.MJ

1.02

985!

902
What this tells us is that we can use average price movement in any
time interval to predict average price movement in any other interval —
and specifically in a rime interval of 1. Once we can do that, then we have
a way to “normalize' price movements in different time frames to make them
directly comparable with each other.

We simply take the change in the log price over any time interval and
divide it by the square root of that time interval to “normalize” the price
movement and make it directly comparable with any other movement in
that market. Each price change, normalized in this way, is then called the
Oceanlndex. For example, in our wheat chart it might look like this:

760$ 1 8

3539

8172

ol

02

o3 1 o 5

08

760519
•

8 1 66

ITTTm!

34J3_

8159

-7 13

-925

• 1 630 |

• 1ALL

377

7605211

3488

8157

-143;
-606.

•838

-1537

102

760524

760525

3646

3550

6201

8175

4430.

-2668

3031

124S.

2063

*35
655

139

1 2 1 .1
•740

760526

3590

8188.

1 120

-1094

1664

906

'

760527

363 l

8197

1136

1595
1733

37 2

760526.

3621)

*1*5

-276,

608

1143

1674

810

The he column , as before, is the date. Ihe 2nd column is the dosing
price. The 3rd column is the natural log of that price (multiplied by
1 ,000 to give a nice round number to look at). The row with the arrow is
the hundredth row of the spreadsheet (for convenience' sake) and that is
where we begin our calculations.

The fourth column (Oceanlndex/l, or ol). then, is the difference

between the (natural) log price today and the (natural) log price 1 day
ago, divided by the square root of 1 ro normalize it.
3

A final adjustment is to multiply the result by 100 to give a nice

r^und number to look at.

Ocean Index/2, or o2, is (he difference between the log price today
and (be log price 2 days ago, divided by (he square root of 2 to normal-
ise it. OceanIndcx/3, or o3. is the difference between the log price today
and the log price 3 days ago, divided by the square root of 3. And so on.

Notice that were using the Fibonacci sequence of 1-2-3-5-8 days as

our lookback lengths. There’s nothing mystical about that: its simply a
convenient way of studying different lookback lengths in (his market, ol
giving us a good ■‘.snapshot” of this market, so to speak. (Other snapshots
could he taken with other sequences.) It sail be continued as below:

ol
o 2

o3|

05

08

013

o 2 1

034

— _i LJ

713—

-143

-925

•806

-1630
-8 38

-1671.

•1537,
377

102

5 i£\

635

-374L

•13<

-200

3031

2063

. 6551

1213

1 9™ 1231

405

•2008

935
i3s*:

-749

1010

• 254

M20'

1130

-276l_

-1004

1*9.5

606

1 66*
-238
1143

9061

1733

1S1A.

•196
m.

910

ULl

1370

1118.

1267 1

1260! _
1451 ;

96

150

181

3073 1978 2271

-86*1 17741 1289

1067

200B
2107.

2159

1613

658

2103

1768

886

Notice chat since we've been using log prices instead of prices them-
selves, that were (to use a metaphor) looking at percentage changes here
instead of absolute changes. This allows us to directly compare price
changes in any market with price changes in any other marker.

Put together, this means that the Oceanlndcx of any rime interval in
any market can he directly compared with the Oceanlndcx ol any other
rime interval in any oilier marker. Or to put it differently. Ocean Indexes
provide a way to compare all time frames in all markets simultaneously.

Why would we want to do that? Because the change a market makes

in a given time frame is an indication of its ‘thrust" in that direction in
that time frame. And those different thrusts can he compared.

For instance, we could graph line 110 of the spreadsheet above. The
snapshot" of the Occanlndcxcs would look like this:

Since all Ocean I ml exes are directly comparable in absolute terms, we

can compare them on the chart. There's some downside thrust in the
short-term, but at timeframes of 5 days and above, the thrust is on die
upside at at average level of 500 or so. Kxcept for the 21 -day timeframe,
where we see an upthrust above 1500. Let’s look at die next day:

&

2500 -
2000

3500

3000

2500

I call a chart like this an Ocean snapshot. It gives an instant picture ol

the activity in this market at different lime frames, all normalized so that
they’re completely comparable across markets and timeframes.

In the chart on the previous page, we can see thrust building in all
time frames from 3 to 34 days, with the primary thrust centered around
a 1 3 day timeframe at a level around +3000.

If we got into the position, we would expect to be in this trade for a

couple of weeks, give or take, depending on how the Ocean snapshots
evolved from day to day. This in turn would tell us a lot about where to
place our stop, since larger timeframes require larger stops.
Another interesting way to look at an Ocean snapshot is to present ii
way, as a three-dimensional column chart:

3500

3000

2500

2000

1500

1000

ririmiffmttftittmtttttttttttt

In (lit chart on die previous page, as rime flows from front to back wc
can see the build-up in virtually all timeframes. Of particular note is the
steady progression of thrust in the 3d -day timeframe. Though the action
right now is centered around a 13-day timeframe, the trade could easily
turn into a longer-term trade.

At this point, in accord with the principles previously espoused, I’ll

leave it to the reader, if you feel it would serve you, to explore these
approaches further and perhaps develop your own unique methodology
in using Ocean snapshots.
I think one promising place to look would be to take exponential
moving averages of the Ocean Indexes in different timeframes and chart
ilietn along die lines used above. Liter on in this book we'll look inro a
Natural Moving Average.

For now, we'll turn next to the Natural Market Mirror.

5 . The Natural Market Mirror

Because Occanlndcx numbers can be compared in absolute terms, a

world of possibilities opens up. Most importantly, it allows us 10 average
them:

Since in effect each number is simply making its prediction about

what the average 1-day (log) movement will be, when its averaged with
another Ocean Index number, the overall prediction is simply enhanced.

What we can do then is let some sequence of time scales weigh in with
their predictions by averaging them. It can be any sequence we like.

I personally often used a Fibonacci sequence for this since it allowed

me to look at different time scales conveniently, with sort of a "not too
much, not too little feeling. For example, here’s a spreadsheet where I
used weeklv S&P data:
In this example Fibonacci Ocean Indexes from 55 10 2 were used, and
then averaged. Notice bow o2 and o3 Occanlndexes rend to jump
around quite a bir, while o55 and o34 arc more steady. This is typical.

Then I did some experimentation with including or not including

lower-end and higher-end Oceanlndcxcs in these averages, which I called
Fibonacci averages. For instance, here 55/2 and 34/3 averages were taken:

210 6 3 163
100 6 4 1~ 185
160 47 | 162

IMi

r,a

138

192 67

31

141 1

102

123
173

23

20

And of course the corresponding graphs can he looked at:

IFV «h
ETDETH

034/3

This gives a very interesting picture. Notice how the o55/2 and o34/3
averages are trending downward. This is a rich area for exploration.

I did a number of experiments where I measured point “profitability"

versus different timeframes of Fibonacci snapshots. I lew's one example,
where I varied from 21/5 to 55/2 in various combinations in six different
commodities, and then took a sum of each column:

Notice that those Fibonacci snapshots dial included o2 were die most
profitable, followed by those that included o3, and so on.

Different markets have different personalities in this way, and there's a

rich vein there for those who care to look. Nevertheless, these and other
studies eventually convinced me that, in general. Oceanlndex snapshots
should start with ol, and then sequentially include o2, o3. o 4 and so on
up to the rcachback limit being measured.

Since this rneihodoloty includes all Occanlndexes up ro the rcachback

limit, ic also has the advantage of eliminating a source of arbitrariness that
had crept in.

When this is done, its as if each timeframe is being given its chance
ro give its input on rhe direction and thrust of the marker, and adds to
the emerging consensus, like bettors at a racetrack. The difference is that
in this ease the market itself is providing those bets.

When we average an inclusive sequence of Oceanlndcxcs beginning

with ol— the average of ol, u2, o3, o4. and so on— we’ve constructed
what I call a Natural Market Mirror, or NMM. (How lar the sequence
should go on the upper end we ll gel into later.)

Here's an example, again using wheat, beginning June 4, 1976

7G0502 3713

760603 3724 3223

760604 36/6

760607 3763
760606 3814

760609 3853

7606 1 0 3893

76061 1
760614

8267

3778

8208 -2928

760616 3703

In this example, were using an NMM with a rcachback of 40. That is,
each day we’re raking the 40 sequential Occanlndcxcs from ol through
o40 and averaging them to get our NMM index. When we chart that, it
looks like this:

4500

4000
3500

3000

2bU0

2000

<*

5 6

> 10

3676

j 3763
, 3614

3663

3893 3786

3778

3669

3703

3G78

H56

| 1490

1 1 785

1 969

2148 1239

1143

289

586

364 1
Notice that chough wheat itself is holding ac its former lows, the
NMM has broken down through its low, and more importantly, its thrust
has declined from a high of 2148 to a low in the 300-400 range. This
market is in trouble!

Notice, too. that these NMM numbers could be directly compared in

absolute terms with the NMM numbers occuring in any other market.

l ike Oceanlndcxcs, NMM numbers are always directly comparable

across markets and across timeframes using different scales or timeunits.
For example, NMM s computed across a timescale of minutes could be
directly compared with NMM s using a timescale of weeks or months.
This is also a rich motherlode for those willing to explore it.

Here's another example of an NMM chart, starting in July ol 1979 in

heating oil. The market is the black line and its scale is the left axis;
NMM is the area chart behind it, and its scale is the right axis:

55

Notice how the upward thrust of die market is continually declining

in absolute terms from the 300-400 area down to almost zero NMM as
the chart progresses, !>efore the final failed upthrust in NMM, which
reaches its peak and begins declining dramatically just before the market
itself flails and embarks on it.s breakdown.

NMM charts arc a delight to analyze because they contain a wealth of

information in concise form. In effect they arc like the market’s own
internal analysis of itself. Moreover, that analysis is always in real time and
doesn’t lag as moving averages do.

In addition, NMM charts from different markets and timescales can

always be compared not just in relative terms but in absolute terms. The
positive/ negative values of NMM represent the thrust ol a given market
at a given time and scale in apples- to- apples terms.

Many other interesting examples and analyses of NMM could be

given, hue I will leave that in the intrepid readers capable hands. This is
a very rich vein of ore for those who would like to strike out on their own.

I he question that began to interest me at this point was:

Does NMM change as greater reachback lengths are added, and if so

is i here some ideal length ofrcachback data for NMM? And if that's true,
is that ideal reachback length different for different markets?

I asked myself those questions, and to begin to answer them con-

structed a way of calculating comparable “profits" in points for different
lookback lengths of NMM in different markets.

The results were quite striking. Here’s an example:

«?

57

Looking at this chart (opposite page), our question then is:

In constructing an NMM, what begin- and end-points generate the

most profit, on average?

Let’s look first at the begin-point (the ol to ol3 scale along the side).
Notice how the profit peaks as they go from front to back begin to lessen.
This helps to confirm our earlier conclusion that an NMM works best
when it includes low Oceanlndexes such as ol, o2, o3. etc., and that
starting at higher numbers such as »10 or ol5 is less efficacious. Starting
from ol is also less arbitrary.

Now let’s look at the end-point (the scale oil) to o70 running along
i he from). What we notice is that looking at this chart is like looking at
a mountain ridge. The high “profit” ridge of the mountain runs from
from to back at an end-point of o-IO, and falls off from the ridge on either
side as the end-point of NMM decreases or incrcascss.

Of course we’re introducing arbitrariness now by favoring one end-

point over another, but were only doing so in determining how much
data to use. (And in more advanced theory, we look at how to remove this
piece of arbitrariness.) This whole area is a motherlode for those who
would like to look further.

Now we ll explore the Natural Market River, or NMR.

59

6. The Natural Market River

The Natural Market River, or NMR, gradually took shape in my

mind as I studied the chart below, taken from chapter 4:

5.00

4.00

3.00

2.00

1.00

2 0.00
• 1.00
- 2.00
- 3.00
- 4.00
TIME

I was looking for some son of non-arbitrary curve char would fall away
naturally as lime went further our from the now moment. Something
where the influence of each price point would be Iclt on die overall pie-
diction of the next day’s movement, and yet too where the influence of
each price point would diminish naturally as it was furthei from the pre-
sent. And my eye fell in particular on the bottom half of rhe AP = T 0 '"
curve, like so:

What if now we let this natural sequence (which describes the basic
underlying behavior of any market) modify the influence of the price at
each rime point (in determining the overall thrust of rhe marker) as that
time point extends farther back in time? We would have the NMR, ansi
die equation would look like this:

And I realized that die Y-axis difference on this curve of each succes-
sive one-day time interval was, of course, simply rhe difference of the
square roots of their lime intervals. That is. (P* - 0®-*), (2'*’ - 1°*), (3 05
- 2° 5 ), .... and so on. Notice that this sequence contains no constants any-
where: none have needed to be supplied.
NMR = AsPioo (l 0 5 - 0« 5) * AiPw (2** - 10 >) + AiPm (3°-* - 2 US ) +
AiPw (4 0 5 - 3 0 - 5 ) 1 AiP% (5 0 - 5 - 4°-5) + ....

What’s astonishing 10 me is that the NMR ;uul the NMM are noi at
all mathematically identical, and indeed are calculated in quite different
(non-;irbicrary) ways — and yet seem to agree about 80% of the time.

One of them (NMM) is averaging, in effect, each different time-

frame’s prediction for the next day's movement. The other (NMR) is
looking at the naturally-declining influence on the present of each 1-dav
(or 1-unit) change as wc go farther back in time. Different approaches.
And yet they generally agree most (but not all) of the time. In our spread-
sheet for wheat, we now need to move ol (column D) up to the top of
the spreadsheet so that NMR can reach back for it.

Date I Price I InIP

700102

760105

760106
760107

3521

491

3500

6129

6167

8158

0103

3703

853

517
I hen rows 100 through 108, for example, would look like this:

IEZ3HQI

760519

760520

760521

760525

760527

760528

760601

3539

3493
3646

3550

3590

3631

3621

0172

8166

8159

8157

0201

8175
8186

8197

0195

8225

4430

2568

1120

1136

276

3073

7G0602 3713
844

706

1534

1266

1838
Its worth noting that NMRs are also constructed in such a way that
they can l>e directly compared with each other in absolute terms across
various markets and timeframes, from corn to Cisco, from minutes to
months.

Now we’ll look at how the NMR can be incorporated into another
aspect of Ocean:

63

7 . The Natural Moving Average

Effort* to develop a natural moving average were in the background ol

my mind for a long time. It seemed to me that the simple concept of a
moving average was the most powerful idea ever discovered in the Search
to analyze series ot numbers. Here was something that could summarize,
in die most powerful way, what was happening.

Due the simple moving average had some powerful defects too. One,
it weighed all its time points equally, without adjusting for nearness to the
now moment. And second, an arbitrary constant gets introduced which
radically determines what you see. A 10-day moving average of a market
looks far different than a 200-day moving average.

A big improvement, in my opinion, was the EMA, or exponential

moving average. I don’t know who discovered it, but they did some fine
work. The great insight of the exponential is that the distance itself

between the average and .lie price is always adjusted, in this ease by <he
constant. To take a simple example, if the price moves to 100 and the
EMA is at 90 and the constant is 0.1, then the new EMA becomes 91.
The EMA moved 0.1 of the distance which separated it from the price.

In addition, if we analyse the EMA mathematically, we find that it

gives price points more weight as they get closer to the now moment. 1 lie
exact way in which it does this, of course, is determined by the constant
you supply.

And there’s the rub. Ikcause once again were introducing a constant
which, depending on what we supply, radically alters the “window”
through which we're looking at die market or number series.

To remedy this shortcoming, some fine work hv Clundc and others

lias been done to vary the constant based on the volatility o< the market.

I would now like to add modestly to these el forts.

As always, 1 was looking for something where this adjustment for

volatility would he non-arbitrary in that there would he no introduction
of new constants. And where the adjustment for volatility would not he
programmed in (if die volatility changes this much, change the constant
that much), but rather where the volatility-adjustment would naturally
arise somehow from the market itself.

In calculating the exponential constant, I used the absolute value of

NMR for the numerator, which provides a natural falling-off in influence
as the price moves farther from the now momenr. The denominator
became simply the sum of the (absolute value of the) ols over the period
of rime in which data is supplied for calculating the NMR. If we supply
40 days (or units) of data to calculate the NMR. then we supply 40 days
(or units) of ols for the denominator.

The resulting ratio is then used as the constant in calculating an hMA

in the normal way.

The denominator of that ratio is the sum of the absolute changes in

the natural log of the price. The numerator is also those same changes,
but naturally adjusted (by the differences in the square roots of time) for
the falling away in influence as time goes away from the now moment.

The result, the Natural Moving Average or NMA, automatically

adjusts for volatility without being programmed to do so. and without
introducing any constants. It looks like this:

/ /V* f y s // / / /

This example is from sugar again, which is the light line. The heavier
line is the NMA. Notice how, perhaps a third of the way through the
chart, the NMA abruptly halts its downward plunge and begins a more
sideways move, just like turning a corner. Another interesting thing to
notice is how, in general, the market when in a bearish mode stays below
the NMA, and when it's in a bullish mode it stays above its NMA. And
of course there arc non-arbitrary ways to optimize that.

This particular chan uses 40 days of back data in its NMA, hut could
use more or less.

In constructing the NMA (using our example of wheat), we’ll need ro

add a new column after ol, the absolute value of ol. Now the first five
columns look like this, with the data beginning at row 3:

Date Price.

760102 3393
7 G 0 1 0 5 3521

ol a D s (o 1 )

3703.

760107

3500

8103:
251/

And NMM, NMR and NMA (srarting at the sixth column), then
look like this, with these indices beginning at the lOOih row:

Ratio

-197

-1JM

1083

240

1054

.03 3493

.09

. 3

5
>7

.02

5'

1534

3770

1 2GG

1265

.03 1 3541

The ratio here is broken out separately ro show how it varies with time
and the market. This is the constant that is then used in an exponential
moving average to form the NMA. (The first value of NMA. row 100, is
simply made equal to the market price at that moment.)
The graph of the NMA, starring at row 100, look* like rliis
NMAp is an NMA using price dara (the chart on the previous page)
NMAni is an NMA using the NMM itself as its data. It looks like tliis:

700520 7C061® 700710 763610 760914 7C1012 761110 761209

The market, wheat, is the thin line at the top. scale left. The NMM
is the thin line below that, scale right. And the NMAm is the darker line-
going through the NMM. scale fight.

Notice how, in general, the NMM stays above zero when the market
is going up and goes below zero and stays there when the market is going
down. And of course the NMM can always he measured in ahsolurc
terms. In this case the downward thrust of the NMM goes repeatedly
below -2000, indicating very strong breakdown energy in wheat.

But now, by adding a Natural Moving Average ro the NMM, all sorts
of refinements become possible. For instance, notice how, on the right
side of the chart, the NMM crosses above its NMA, then comes down
and 'kisses’ it before rising strongly above it again. This kiss of rhe NMA,
followed by a strong rebound, is very indicative of where rhe marckts
inner organism is moving. And conversely.

69

An interesting variation is to apply the NMA to the NMR Since the

NMA is itself constructed from the NMR, we have the phenomenon of
one indicator helping to fashion another which, in torn, then adjusts the
modification of the first one.

The formula looks like this:

NMA,, = [abs(NMR)/Iabs(ols)l(NMR -NMA.,) * NMA_,

It’s well to remember that, since the amount of data we supply to the
calculations will affect what we see, there's still an element of arbitrariness
to Ocean as it is presented here. It could be a fascinating journey for the
intrepid reader to look into how to overcome that.

71
8. The Zen Moment

I have frequently run across the notion in traders that they should
somehow be perfect, that if they were only good enough that they would
never or rarely have a losing trade.

This is tragic nonsense. I have never known any trader who didn’t have
losses, and more to the point, I have never known a great trailer who did
not have plenty of losses.

One of the qualities that the great traders have is that they keep their
losses small. This is not trivial. One of the greatest traders I ever knew said
that it took him the entire first six months of his trading career, trading
constantly every day, to learn just one thing to get out of a losing trade
quickly and automatically, keeping it small.

Conversely, I remember a famous afternoon when one of the fellow

traders in our group came to the absolute conviction that the market had
to go up that afternoon, and he cook a large position in support ol this.
The only problem was, the market started down ami kept going down.
All the way down, he said that the market had to turn around because his
indicators told him so. Although we all implored him to get out of his
position, he wouldn’t and didn't, and lost $400,000 that afternoon, thus
wiping himself out.

The market ultimately is not constrained by anything whatsoever. For

instance, although it might have a strong tendency to have three impulse
waves in an advance, it doesn’t have to. Ultimately, the market can have
5 or 17 or 7 if it wants to. It doesn’t have to “follow ' any system, no mat-
ter how powerful that approach may have been in the pasi. h does mot
have to follow WykolT principles, Gann angles, the sun and the moon or
even the Ocean equation. The market may have strong tendencies to do
these things, but it doesn’t “have to" follow any system or go anywhere in
particular or at any particular time.

This being so. the only thing we’re ever really dealing with in markets
is probabilities. We can determine, for instance, that the market lias a
greater probability to go up now than down over a certain timeframe. A
very slight edge in truly determining this can have a huge impact.

I lave you ever watched two lanes of traffic merging into one, or been
part of dial? There’s a fascinating phenomenon that goes on. If two cars
are horh poised to go next, the one with the very slightest edge is die one
that will almost always wind up going ahead. Observe it yourself the next
time. The very slightest edge becomes the determining point.

Napoleon once said that in a battle, there comes a very slight moment
when things could go either way, and the outcome of that small moment
then becomes decisive to the direction of the whole.

Inexperienced traders sometimes talk about achieving 90% wins or

something like that in their trades. I wonder on what planet that would
take place.

73
In my observation, it one can truly obtain a very slight edge, even just
in going from say 58% accurate to 62%, that edge can convey an actual
consequence for a trader’s career out of all proportion to that seemingly
small expansion.

This is why, in my opinion, ir is advantageous to develop at least par-

tially your own approach to markets. The Advanced Ocean Software that
is part of the Ocean Master program is designed to give yon a set of tools
with which to develop your own market innovations, should you wish to
go in that direction.

********

In my opinion, to accurately track this magnificent natural creature

called the market, constantly twisting and turning, we must become a
true follower of it rather than a predictor of it.

The great Zen masters were noted for following life rather than trying
to light their way upstream. They became adept at "listening'’ to life and
letting ir go where “it" wanted to go.

Indeed, many true stories exist of a conqueror advancing on a village

in medieval Japan and a Zen master simply walking out the other side,
leaving behind everything and whistling a tunc as he walked. They were
flexible, and not attached to what had existed before.

In the area of trading the great traders arc like that. I he) - track rather
than lead. They follow rather than predict. They have humility, and so
they continually attempt to get in tune with what the marker is actually
doing as opposed to whatever it’s supposed to he doing.

The preceding chapters have attempted to bring some interesting

notions for understanding and exploration of markets to your attention.
As stated earlier, however, rhis material is not intended to provide a com-
prehensive, tradable approach to markets. The latter is the province of
Advanced Ocean theory and the Ocean Master program.

Now lets take one of the elements of Ocean Theory, the mirror-like
reflectivity of markets across past and future, and sec if we can benefit by
extending it a little into other areas. Then we'll use our deeper under-
standing of* this element to come back to markets.

75

9. The Law Of Reverse Effect - 1

As we've seen, che markets arc always reflecting themselves. To use a

metaphor, the market is continually radiating what I call “market waves”
from its central Now moment out into both the past and the future. The
Ocean Equation and the subsidiary equations chat we’ve seen here are, in
a sense, refinements of this fundamental dual nature that markets- and,
as we're about to see, everything else — display.

I’d like to extend Ocean Theory a little beyond markets now. in a way
that can potentially directly benefit your personal life. We’ll begin by
introducing what can be called the Law of Reverse Effect, a corallary of
Ocean Theory’s fundamental view that everything is mirrored.

To begin this story of dual effect, let's start with purely physical nature
first, the basic foundation, and then go on from there. So let's look briefly
at quantum physics:

In quantum physics, whenever an electron pops'' into reality from

the vacuum, a positron (anti-electron) also pops into existence at the same
time. It has to, because they come into being together, as a pair, because
they can’t come into existence otherwise.

A similar phenomenon occurs, for instance, with protons: When a

proton pops into existence from the Void, it’s accompanied by an ami-
proton. Why? Because they aren't actually separate; they're actually just
two halves of the same phenomenon.

At a slightly different level, we see this same duality in the alternation

of day and night. Are day and night actually separate? No. They're just
two faces of the same phenomenon, the loration of the earth.

Summer and winter, to take another example, are also just two halves
of the same phenomenon— the earth's journey around the sun while
being tilted on its axis. "Summer" and "winter" arc the names we give to
the front and hack face of that one phenomenon.

In the area of linquistics, we see the same thing, for instance, as soon
as we’ve created the concept of "up," we've also created the concept of
"down" at the same time, because the two parts only take on meaning in
relation to each other.

The same, ofeourse, occurs with "hot and “cold," “left" and ‘right.”
''beauty" and "ugliness. ‘ Tight" and “wrong," “light' and darkness,” and
on and on. They all come into existence together. (If you’d like to explore
this aspect of the topic further, please go to wmv.mayyuubehappy.com,
click on the Search button at the left, and type in the word "duality. ")

What I hadn't really appreciated before is how this universal dual it)'
extends into the dimension of time as well: That is. every negative event

77

iy accompanied by an equal and positive event, ami vice-versa, and that

these two kinds of opposites are also two faces of one phenomenon.

My understanding in rhis area of time-duality greatly increased after a

study of Natural Hygiene’s concept of primary effect and secondary effect
in relation to drugs and medicines.

Wliat this brilliant movement, grounded in 19th century naturalism,

says about drugs is this: The primary effect of ever)’ drug is the apparent
one, the obvious one, the short-term one. But there's an equal effect, they
say — the secondary effect, the long-term one, which not only takes place
after the primary effect but is the exact opposite of it.

A few examples: We take a stimulant, such as caffeine or nicotine or

cocaine or amphetamine or whatever, to get more energy. But where docs
the extra energy come from? It can only come from the living body; it
can't come from a drug, which is lifeless and inert. Only the body can act.

In acting to neutralize the poisonous drug, the body is stimulated to

produce more energy than it wants to in that moment. And the body
obliges, producing the extra energy*. But like double-entry accounting, an
equal debit is now added to the ledger.

Because the body produced more energy than it wanted to (hiring that
lime period, after the initial stimulation there follows a period of less ener-
gy' while the body recuperates and restores its energy' reserves.

If this process of "stimulation' continues, over time the body becomes

more and more fatigued — rhe exact opposite of the effect that the stimu-
lant is supposed to produce. The secondary or long-term effeer of any-
repeated stimulant is gradual exhaustion.

We could also say (hat the first or primary dfcct is the myth; the
opposite or secondary effect is what becomes the realtiy.

Another example is when we take alcohol or a narcotic or a rranquil-

izer or whatever to relax. The primary effect, the one that's initially
noticeable, is indeed one of relaxation and calming. But the secondary
effect, the one that comes later, is just the opposite — a period of greater
anxiety and restlessness.

Continued over time, the heroin, barbiturate, tranquilizer, alcohol,

etc. becomes more and more addictive and produces a state of underlying
anxiety which can only be relieved temporarily by taking larger doses of
the drug.

The intense anxiety which accompanies withdrawal of rhe heroin or

barbiturate or whatever is simply revealing rhe true reality of what rhar
individual has become — wore anxious, the secondary effect.

Similarly, anti-depressants over time make one m ore depressed. Just

ask the takers of anti-depressants, who eventually and inevitably get on a
merry-go-round of searching for the 'next' and "better" ami-depressant.
The primary effect, the sense of feeling better, is eventually replaced by
the long-term and secondary effect, that of feeling worse.

Similarly too. for instance, with cholesterol-lowering drugs. They

bring down the symptom, high -cholesterol — that’s the primary effect. But
only addressing the underlying cause (a high-fat. high-cholesterol diet)
will bring about a true healing process

If die underlying cause isn't addressed, the underlying disease of

increasing arterial plaque will continue to worsen — that's the secondary
effect, the reality of what is actually happening.

A final example in the <lrug area: We rake antacid drugs to bring down
heartburn, excess stomach acid. (In other words, we attack the symptom
instead of altering our diet in a more natural direction, which would
address rhe cause.) Interestingly, studies of anracid-rakers show that over
time the body actually increases its production of stomach add — that’s
the secondary effect.

(For more info on primary-secondary as it relates to the body, please

go to rnayoubebappy.com and do a Search — button at left — on the words
"primary secondary.")

So far, what we sec is that the primary effect is the immediate one, the
short-term one, the attention-getting one. The secondary effect is the
later, longer-term, more permanent one. and it's the exact opposite of the
primary effect. And of course, the secondary effect is always the real effect
that is achieved.

What shall we call this general phenomenon? For want of a better

name, I call it the The Law Of Reverse Effect. And now let's see how this
beautiful principle might extend beyond drugs.

81

1 0. The Law Of Reverse Effect - 2

As The Law Of Reverse Effect extended itself (in my pondering) inro

the dimension of time, I began to see its connection to other events.

First, from the area of physics again, there was Newton’s law that every
action is followed by an equal and opposite reaction — a duality in time
and the basic principle used to drive rockets.

To journey further into this mystery, 1 looked at the death of the

dinosaurs. Some 65 million years ago a giant meteor struck earth, and the
resulting dust-clouds blocked out the sun and severely chilled the planet
for a time. According to archeologists, this wiped out at least 75% of the
lifeforms that existed at that period.

If we were to go back and observe during that time, we would call it

an unmitigated catastrophe. In theological terms, we could ask how God

could be so cruel as to allow three-fourth ot all the life on earth to he

wiped out.
Yet the extinction of the dinosaurs and other life had a very interest-
ing secondary effecr. Up until then the liny mammals had occupied only
a slight niche in the ecological space, because the space was filled by the
dominant dinosaurs.

The death of the dinosaurs bestowed a great empty ecological space

upon the mammals, allowing them to expand and flourish and multiply
and develop. That, in turn, led to the rise of the primates and ultimately
to us humans being here.

In short, we wouldn’t be here bur for the catastrophe of the extinction

of the dinosaurs. That catastrophe was the primary effect, the short-term
one. That you and I and other humans arc here in existence— thac’s the
secondary, longer-term effect.

In other words, the 'bad' catastrophe allowed something to happen

which we would probably label as a great ' good.' namely that the mam-
mals and primates and humans flourished. Something "bad" led to and
was followed by something -good."

Then I began to see that this principle exists everywhere and extends
into everything.

For instance, when we fast to allow the body to rebalance itself, we

often go through what are known as "healing crises." where our symp-
toms seem to get worse ar first, whatever they might be. That’s the pri-
mary effect — the immediate, short-term one.

But longer-term, as our body cleanses itself of toxins, we experience

83

much greater vitality and health — that’s the secondary effect. (For more
on this subject, go to the website and search on the word fasting. )

I he same thing happens at a slower pace, for instance, if we adopt a

natural fruitarian diet. (Search on "fruitarian.”) As our body experiences
a more natural, cleaner-burning diet, it naturally begins throwing oft
accumulated toxins, which dien circulate in the bloodstream until the
body can eliminate them.

During this time our conditions or symptoms, whatever they may be,
can seem to become worse — that’s the primary effect. But on a fruirari
an/raw-fond diet, an extraordinary sense of well-being gradually begins to
come over us — that’s the long-term, secondary cffccr.

Notice that, at first, going more in a natural direction and letting

nature do the healing seems to make things worse, but long-term they
tend m get much better. Conversely, the more we take drugs to suppress
our symptoms (the short-term fix), the worse the long-trrrn underlying
toxification and pollution of the body (which we call our ’conditions'' or
"diseases") becomes.

This same principle would hold true if we humans wanted to facilitate

the world in healing ecologically. At some point lutmans may choose to
come back to nature when we see that otherwise life on earth, including
ourselves, will go extinct. At that time we may drastically alter, in a more
organic and natural direction, our ways of farming, our ways of eating,
our ways of living together, our whole approach to the earth.

If this is done en masse, it’s important to remember that the environ-

ment will scent to get worse at first as the earth neutralizes its built-up
toxic load the primary effect. (Meanwhile, the temptation will be to
apply short-term fixes to obtain temporary relief.) But long-term,

through an organic process, the earth can heal itself ecologically this
way — which would be the secondary effect.

The primary effect, the apparent one, is always the myrh. That’s the
termporary effect that occurs when we treat the symptom instead of the
cause. The secondary effect, the longer-term, more gradual one, is what
becomes, more and more, the actual tea lit)-.

85

1 1. The Law Of Reverse Effect - 3

Now let's apply this Law Of Reverse Effect to a current world situation.
For example, let's apply it to the current conflict (2002) between the
Israelis and the Palestinians:

On the one side, the Palestinian people feel opporcsscd, subjugated,

deprived of liberty and the means to economically sustain themselves.
They have a deep anger against what the)’ feel is a deep and continuing
injustice. Militarily, they are faced with helicopters, infantry, tanks — the
elements of a large and powerful army. The Palestinians are complcrcly
overmatched militarily. Where and how to direct this rage? The rage gets
channeled into what Israel knows as "suicide bombers. '
Palestinian suicide bombers want to inflict pain, bloodshed and fear
on Israelis as a “payback” for the pain and suffering that their own people
have endured and are enduring. And they achieve this: The Israeli people

do experience pain and suffering and fear. So this is the temporary result,
the primary effect.

Meanwhile, the longer-term effect of the suicide missions is to increase

the feeling of insecurity among the Israeli population in general and
thus to increase the power of right-wing elements in Israeli society and
government. This in turn leads to more military solutions and thus more-
pain, bloodshed and fear among you guessed it — the Palestinian people.
And that's the secondary effect.

On the other side, the Israeli people arc experiencing a great deal of
fear and insecurity. Phe little strip of land called ‘Israel ’ has only been
carved out in the last few decades and feds extremely tenuous. Israelis feel
besieged by angry neighbors who, they feel, want them to disappear. Only
they’re nor going to. One thing (hey learned from the Holocaust was to
srand up for themselves.

In consequence of all this, Israel has a big army and a large right-wing
element and a feeling that no-one is going to be allowed to push Israel
around or tell it what to do. Least of all terrorists. So it damps down on
the Palestinian territories in order to control this horrible terrorism. And
the effect is achieved: Military dampdowns do indeed cause terrorism to
be temporarily reduced. This is the primary effect.

Meanwhile, the more-gradual, less-obvious effect is to greatly increase

the long-term despair and rage and lack of hope among the Palestinian
people. This in turn fuels a desire among its more extreme elements to
lash out at their opporcssors in any way possible. A desire grows among
the young to die for ones country. And military planners, outmatched
completely in men and weaponry, turn to suicide bombing as a way to
strike. All of this tends to increase, long-term, the number and degree of
suicide bombings in Israel.

87

This is tlic secondary effect. The very thing that Israel does to decrease
terrorism and increase its security acts to increase terrorism and decrease
security. Whether you arc pro-Israel or pro- Palestinian in this conflict, it
is not difficult to see the mutual devastation of both peoples and both
economies in this mutually destructive conflict.

That is, each side achieves the exact opposite effect ol what ir intends.
This is the Law of Reverse Effect in action, to make use of this law in a
positive direction, we have to begin by understanding the other side and why
it is feeling so fearful and pained.

This also applies, of course, to those interior parts of ourselves that we

reject, push away, make war on.” If wc can welcome these parts of our-
selves when they appear in consciousness instead of pushing them away,
a positive cycle can begin. But this welcoming is not the same as buying-
in to tlieii message: We can love thar rhcy’rc there, like the melody of a
beautiful bird, without at all needing to buy-in to what they’re saying.
(Hoi more information on this aspect of our subject, please go ro the
nutyyoubehappy.com website and click on the "Reality" button at left.)

This very wide-ranging Law Of Reverse Effect applies to every area

I’ve looked at so far. As a last, different example, let’s rake finance.
In die up-cycle of human financial affairs, more and more money
(credit, that is, debt) is treated. The percentage ol debt in the society
increases among individuals, corporations, municipalities, states and
national governments. This is what wc sec now.

This increasing credit bubble creates an effect, for awhile, of greater

prosperity and financial well-being — that’s the primary effect. With
minor ser-backs. that’s basically whar we’ve seen since the Great
Depression of the 1 930's.

The secondary effect comes when (he debr/crcdit bubble collapses, as

it inevitably must sooner or later. Eventually every debr/crcdit bubble in
history has collapsed upon itself, as the increasing debt soonor or later
exhausts the ability to service it.

When this happens, a financial recession or depression occurs — that's

the secondary effect. This secondary effect follows the primary effect as
surely as night follows day. And yet, like all “negative" events, this painful
contraction serves a beneficial purpose, in that it wrings out distortions
anti excesses and creates a solid base for the next great movement upward
in human events.

12. The Law Of Reverse Effect - 4

Now let's* come back and apply our knowledge of the Law Of Reverse
Effect to the situation of trading in markets:
In markers, longs push up markets by their buying, and shorts push
down markets by their selling. This is the Primary Effect, the immediate
ami obvious one.

The Secondary Effect, the more lasting one, is exactly the opposite.
That is, it is the longs who ultimately drive down markets, and it’s the
sellers and shorts who ultimately drive them up.

When sentiment has gotten very bullish about the prospects for some
market, the long positions build up over time. At the moment when
everyone who’s bullish has taken their position, there’s no buying pressure
left; everyone’s just waiting for the market to go up. Thus the slightest

selling pressure is able to drive it down. And as the market starts down, it
is the lottos who propel it down farther as they gradually and then more and
more arc forced to change dicir mind and sell.

Conversely, when sentiment has gotten very bearish about the

prospects for some market, outright selling occurs. As well, short posi-
tions build up over time. At die moment when everyone who’s bearish has
either sold or taken their short position, there’s no selling pressure left;
everyone’s just waiting for the market ro go down. 7 hus the slightest buy-
ing pressure is able to drive it up. And as the market starts upward, it is the
sellers (gening back in) and the s/sorts (getting out) who drive the market up
further, as they gradually and then more and more arc forced to change
their mind and buy.

This is the Secondary Effect, of the law Of Reverse Effect, in action.

A knowledge of this paradoxical principal — char longs drive Bear

Markets and scllcrs/shorts drive Bull Markets — is very helpful in under-
standing the hidden signals of markers. Markers arc best understood as
psychological animals composed of crowds, whose recurrent emotional
excitements, in all time-frames, leave signals in the price.

These emotional signals can be deciphered, but not with the usual
tools. 7'hcrc was a time when a trader could draw some trend lines on a
chart and some support and resistance lines and they would work like
crazy because almost nobody knew about them. This was back in the late
1 9th century. They still have some value today, but the difference is that
millions of traders arc looking at them now.

There was a time when you could look at Hags, rates-of-changc,

MACD, ADX, etc., etc. and they would be clean and relatively fake-out
Ircc. No longer. The markets have wized up to those things and many

oilier*. The usual and known indicators, even in complex forms, are
anticipated now and thus much less amenable to profit. You may have to
take some time to find this out for yourself.

Markets are different mechanisms from most other phenomena in life.

If the sun was about 93 million miles from earth in the 19th century, it's
still about the same distance in the 2 1st. We can still draw upon that
knowledge. But in markets, the knowledge that was useful yesterday won’t
work today, precisely because millions of market participants arc aware of
it and attempting to use it for the same purpose.

Modern-day markets have changed. As millions of traders have gotten

access to the information, indicators and signals that used to he confined
to the few, markets have taken on a more paradoxical tone. The pattern
that previously signaled this kind of move is now more likely to precede
tin opposite kind of move instead.

1‘liis opposite and Secondary Effect, whose signals arc more bidden,
must be detected and used in order to navigate successfully in modern-
day markets.

I he parts of Ocean Theory that you’ve learned in this book can make
a good initial foundation for your further investigations, if you wish, in
this direction. Because the Ocean indicators arc much more natural and
less arbitrary, they form a better foundation for software that detects the
natural and subtle signals of the Secondary Effect that is the key to the
more sophisticated and paradoxical moves of modern-day markets.

93

13. The Law Of Reverse Effect - 5

The twin subjects of money-management and risk-management arc

critical ones for the succccssful trader. Without at least a preliminary
understanding of how much equity to risk on each trade, it is virtually
impossible to consistently prevail in markets.

It's often thought by traders that increasing their position-size will

increase their ability to make the "big killing” in the market that will con-
stitute success. T his potential for the “big killing” in a large position is the
Primary Effaces. The Secondary Effect, which of course show's up at the
same time, is the potential for the “big wipeout.”

It has been my observation that traders generally wipe themselves out

because of their attempts to get large monetary increases quickly. I have
never known a trader who went out of business because of a series of small
losses; it is always one or more catastrophic losses that do it. Catastrophic

losses, in turn, almost always result from the attempt to make the “big
killing’ by trading with position-sizes that arc too large relative to the size
of the equity in the account.

Most traders I know who have been successful in markets have done
so alter giving up the chase after the “big killing’' and thus also given up
the potential Secondary F.ffecc of the “big wipe-our."

It is the sign of an immature trader that lie or die is primarily focused

on potential profits. It is the sign of a mature trader, in contrast, that he
or she tends to focus on potential losses. The Law of Reverse Effect says
that if we use large position-sizes, relative to our equity, in order to secure
large trading profits thac well most likely wind up with the Secondary
Effect instead — of sustaining large losses.

Paradoxically, it you want to increase your trading profits it is wise,

according to Ocean Theory, to drastically Isaac: your position-size and overall
margin commitment as a percentage of your account.

Thus, in terms of risk-managcmcnt/money-managcmcnt, at the level

of this book I’d like to offer (be following general guideline to you:

hi general, use position -sizes and an overall commitment small enouugh

that you sleep well. No more than 4-5% of equity per position is good.

It’s common to see ads touting 90% accuracy in trading. In reality, if

you can achieve 60% trading acctiiacy you will have a tremendous edge
and will do extremely well if you hair good money management.
It can be shown mathematically through information theory that if
you can achieve a 60% accuracy rate that your best ' betting" strategy is
to use. in total. 20% of your trading equity. This is recommended.

95

14. A Peek at Advanced Ocean

In Advanced Ocean Theory, embodied in Advanced Ocean Software,

die indicators you've already learned arc combined with others not pre-
sented here to form multiplexed indicators of unique power.

The surest way to ruin as a trader, aside from using too much margin,
is to attempt to pick tops and bottoms in markets. It is far wiser to let a
strong trend establish itself and then get an at retracements.

But the $64,000 question is: How can we tell that the retracement is
ending? This is an example of where Advanced Ocean shines.

for instance, one indicator that is a favorite of Ocean Masters is called

NMC. When the NMC falls to zero — has a “zero hit" — that indicates,
with a high degree of probability, that the retracement has ended. Then,
when the NMC "bounces away" from zero, its a good time to enter.

To see a preview of some charts of Advanced Ocean in action, go to

(he website www.mayyoubehappy.com , click on the button at leli allied
Ocean, then click Ocean website (which will cake you ro a preview of our
new Ocean website), and then click on The Software.

r r '

15. Oneness In Duality

The two opposites in life always come as a package, the primary and
secondary effect, equal and opposite, like Newtons Third Law of Motion.
Every "catastrophe" or "bad" event also eventually brings about a great
good. And conversely, every "good" event also brings about something we
would label "bad." They always go together because it's the very nature of
existence to always balance itself.

Everything in the universe is matched by its opposite and always has

been. In the dimension of time, the primary effect (the myth) is always
followed by the secondary effect (the reality).

When we truly see this, and perceive the inherent pairing of all things,
we naturally surrender more to the flow of existence, to contributing our
pare without obsessing about what die ultimate outcome will he.

We see that what we call 'bad" actually makes possible what we call
’good," that the two always come as a package, and that the one can t
exist without the other. We see that existence itself can't exist exccpr as
what we think of as these dualities, but which are really just different
manifestations of the same phenomenon, the same energy, the one— the
great mystery that loves without exception all pans ol irsclf, the ineffable
light that includes both light and darkness.

Perceiving this, we naturally let go, like a dosed fist relaxing, of our
resistance: our resistance to the way dungs arc. 10 the way we ourselves
arc, to the way other people arc. to rhe way the world is. And our actions,
including those actions intended to serve life, occur wirhin that larger and
more relaxed context.

Then we do our part, whatever that may he, in great humility and
compassion and surrender, as we see tlut our actions arise by themselves
and that, in any event, “we” aren’t doing it. Paradoxically, chat surrender
of control is the very thing that tends to lead, by Ocean principles, to the
effects of greater harmony, effectiveness and alignment in our actions.

This is an exquisite and beautiful existence, subtle and balanced in its

divine perfection, always being however it is supposed to he, always going
by definition wherever It is supposed to go.

May you have a fascinating and compassionate journey.

Much love,

\1 |im sloman