Synthesis

Dear Readers,

A step back from the immediate market and something in the more theoretical line for this fortnight’s article. For from time to time, it pays to take stock of our pre-conceptions - as the [paraphrased] saying goes ‘the unexamined thought is not worth thinking’. The topic is synthesis, something to be contrasted to analysis. Where in analysis, we tend to focus on the division of something into its constituent parts, synthesis is that intellectual activity that combines distinct things into a whole. In the world of thought, many great steps were achieved [and we stand on the shoulders of giants] by such activity. At the beginning, Socrates gave us the dialogue, a method whereby wisdom and ignorance combined in dialectic to give a form of knowledge. Plato soon after gave us the hypothesis, a combination of observation and thought, where even if certainty were lacking, something similar had to be the case. And Kant, at the start of our modern era, grounded for us the notion of empirical knowledge in his synthesis of concepts to sensory observations, where that knowledge was not ultimate but fallible, not necessary but contingent - we always bring to bear our own concepts when forming a pragmatic/ scientific form of knowledge. He was perhaps the first established figure to take us beyond the uncritical cogitations that in good analytical fashion were producing a mere mechanical mode of thought. Here was enlightened criticism in full flight. Sadly, it was not to last long as we regressed to more rationalist and uncritical modes of though aka ideology soon after. That said, there is a remnant of the more subtle and critical way of thinking that has survived, one that is fully hedged against the illusions of certainty. Some are familiar with the notion of the ‘paradigm’ [the positive bent], and even more are aware of the ‘bias’ [the negative bent], where the subjective elements of thought are still recognized. I’ll here focus on the more positive, practical, and creative aspect of all of this in what we call the ‘paradigm’ [the projection of concepts]. It is the more subjective half of that ‘synthesis’ with which this article is concerned. For it’s my opinion that the activity of synthesis [not just analysis] applies very much not only to the performances of the disinterested chartist doing TA, but also to the performances of a trader, who now, as an active participant in the market, becomes very much interested indeed.

The Fictional Element of Synthesis

With synthesis in mind, the chartist is perfectly aware that they are bringing to ‘bear’ [not to be confused with the animal moniker] a set of presuppositions to their observations, by which those observations are interpreted. In being thus aware, those observations can only ever attain to a provisional status - they remain in a middle-ground between certainty about the future [clairvoyance] on the one hand, and complete arbitrariness on the other. What the more astute reader may recognize here is their similarity to scientific theory, where empirical science also proceeds by a synthesis of theory/ hypothesis and observation, and where the dominant theory is that which performs best in capturing/ saving most of the phenomena.

Of course, science can never be certain, it is not metaphysics, and is only provisionally held until a better theory comes along. Common to both science and technical analysis [or technical synthesis] is the suspension of judgement that we are all familiar with in a cinematic setting [we imagine it true]. However, where in the cinema we suspend our judgment altogether for a shorter duration, for the length of the fiction we enjoy whilst inhabiting that space and until the lights come on, in the world of hypothesis, that inhabits a conceptual space, we suspend our judgment partially and for a longer duration until a better theory comes along [we consciously accept it as if it were true]. Or should I say, we should half suspend our judgement, for this seems to involve a tension and balancing act that our own nature seems ill-equipped for. What habitually happens, and we are creatures of habit after-all, is we tend to lose this balancing act altogether, and fall into the kind of fictional belief as is to be found momentarily in the theatre. Only now it has become a prolonged belief in the fictions of our own mind and making. We are now ‘down the rabbit hole’ and immersed in the world of ideology. Moving on to how synthesis applies to technical analysis.

The Synthesis of TA

TA practitioners should first and foremost have clearly before their minds the hypothetical nature of all their projections and predictions. They are not certain and certainly not hermetically-sealed from reality. Rather, they are open to their notions being tested, and the test is simply price development, and those tests dependent on the particular time-frame on which the projections are made. Predictions are resolutely thought to be fallible - any confidence in them derives from their corroboration/ confirmation by further subsequent price action. It is only this aspect of performance that gives them their validity, their value. It is a sober-minded way of proceeding, which removes all illusions and delusions from the picture. And such is required, for anyone with any familiarity of history, especially financial history, will be all too well aware of the propensity for our gullible nature to indulge in all manner of delusions. Though the reader might be thinking this is all a bit theoretical, there is a very practical element to this insofar as technical analysis actually proceeds. So much for the theory, now for the practice.

Chartists face a screen full of seemingly random information. Not quite a blank page, they nevertheless begin their drawing, looking for some pattern, some rhyme, some logic to what would otherwise appear as just chaotic phenomena. The instinctive drive is to create some order out of the chaos. Lines are drawn and measurements are taken, and it’s found that the longer the time-frame, the better they hold. Zoom out further again, bring in even more data, and yet again a longer-term trend might be found.

Given this curiosity, both predictive and explanatory theories might be brought to bear on the data [our paradigms as mentioned earlier combined/ synthesized with our observations]. Predictive theory [longer term TA and modeling] confines itself to predicting future prices, while explanatory theories more ambitiously look to explain why the phenomenon of the chart rises in the first place [speculation, wisdom of crowds, madness of crowds, a force of nature, money mechanics etc… explanatory theories are macro theories].

There is not really much more to say here, as far as disinterested technical analysis goes, but of course chartists are more than just disinterested observers of the chart. Though they may bring to bear their disinterested theory to observations in order to make sense of them [to interpret them], they are also most often market participants. Now the disinterested chartist becomes very much an interested speculator. And with a change of hats, so to speak, the speculator now brings not so much some grand theory to the chart, but rather a particular strategy. Finding themselves now in the arena as market participants, another kind of synthesis arises. Combined with the TA already performed on the chart, and now motivated by speculation, is a concrete strategy - all positions taken are with reference to a wider strategy, and not ‘true or false’ in the abstract, that could somehow be devoid of first-person context.

The Synthesis of Trading

What I mean by the synthesis of trading is that a trade by a seasoned trader is never isolated and viewed as simply right or wrong in the abstract. Rather, the particular trade is brought into a general scheme of an over-all strategy. This will take into account wider circumstances, positions, exposure etc. In doing so, traders resolutely contextualize their particular trades. Whereas the trade may make sense for one trader, given their circumstances, it may make no sense at all for another trader given their particular circumstances. What’s involved here is the rejection of a particular trade as an ‘abstraction’ that might be universally valid [this blanket approach is the logical outcome of a lack of critical understanding toward TA as covered above - either TA is confused with clairvoyance, or TA is considered propaganda to drive sentiment].

Of course, what’s involved in taking this later approach is a complete disregard for risk management, which will always have a first-person dimension to it - a trade may not involve much risk at all to one person, but a lot of risk to another, and whether or not it does depends on circumstances that are utterly idiosyncratic to the person involved.

The Synthesis of Modeling

Finally, synthesis also relates to models [here, ideally, we are back to disinterestedness… the motivation being intellectual curiosity not speculation]. Models are always and everywhere only interpretations that make projections/ predictions. It’s those predictions that are the means by which subsequent price development tests them. In testable/ empirical fashion, they either pass or fail in the real world. Of course, it is always easier to fail, or to invalidate, a model than it is to completely validate it. As mentioned earlier, this is simply the nature of hypothesis - it’s only a provisional/ pragmatic ‘truth’ and only valid as long as it works…. as if it were true.

My particular model is the LGC. As a synthesis, it comprises both concept and observation. As a concept/ hypothesis, and along with all growth curves, it predicts an explosive start to be followed on by a diminishing rate of growth to eventually culminate in a plateau where the growth becomes stabilized. The theory looks to both capture past price action and predict future price action [notice ‘predict the future’ does not equate to ‘tell the future’]. I think that most would agree that. on the face of it, it looks to be holding up well so far. It [the converging channel] has been tested a few times, and held up well.

Summary

It’s been my aim here to show the role in which ‘synthesis’ plays in all the various activities above. Not only does it inform the TA, which in turn informs our trading, but it also inform our modeling insofar as one participates in that activity also. Yes, it is not ‘purely objective’, but that would only be the objection of those lacking an understanding of the nature of hypothesis. The criticism here, or rather lack of it, is really just naivety. Synthesis is everywhere, displayed in our paradigms and projections, for how could we escape our own footprints and shadows? And what validates them as such [TA and modeling], what distinguishes them from mere biases, is their disinterestedness. One would have to be a hardened cynic indeed to dismiss the notion of disinterestedness altogether, and of course this is where the ‘chart as propaganda/ marketing’ would assert itself. In the context of this article, that interpretation would be considered complete degeneracy.

As for trading. not only are individual trades to be contextualized within a wider strategy [an activity of synthesis], but so too should that activity of trading in general by contextualized within our wider life. For trading to make sense, it has to be a means to an end, much as money itself is. If the ends/ goals are lost sight of, we run the risk of becoming that hamster on the wheel, always seeking to increase those digits on the screen [and caring just a bit too much], always continuing to put our stakes [even if increasing] down on the table, and not knowing when to take our profits [I mean really take our profits by putting into real assets], whether on individual trades, or in the hanging up our trading boots altogether one day… or just for one day of the week for now.

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