A new trader quickly determines that in order to be successful, one must master market predicting. After reading some books in the conventional literature, he attempts to find repetitive market patterns and cycles using price bars or mathematical indicators. He may fall prey to various expensive system promotions. In spite of the abundance of such prediction methods in books, systems and software, in the long run, probably 95 percent of traders lose. Nevertheless, almost no traders question the proposition that exploitable, repetitive price patterns and cycles exist.

People are naturally susceptible to wishful thinking. They believe what they want to believe in spite of obvious evidence to the contrary. Short-term luck causes many such faithful traders to reinforce their invalid beliefs. Unsuccessful traders have a distorted view of the markets, themselves and what they are really doing when they trade. It is very difficult for them to shed these misconceptions so they are doomed to long-term failure.

It turns out that it is possible to examine historical market price action with mathematical and statistical tools and determine whether such repetitive patterns and cycles exist. Chaos Theory is the mathematics of analyzing systems such as market price action.

Chaos analysis tells us that market prices are highly random with a trend component. The amount of the trend component varies from market to market and from time frame to time frame. Short-term patterns and repetitive short-term cycles with predictive value do not exist. The patterns of prices and indicators traders use to predict occur as readily in random data. Thus, you have about as much chance to predict short-term market prices using technical analysis as you do to predict future numbers on a roulette wheel.

Edgar Peters examined four years of tick data in the S&P. He concluded that while short-term data is not totally random, the deterministic element is so small as to be barely measurable. He concluded that "it is highly unlikely that a high-frequency [short-term] trader can actually profit in the long term." He also found that there are no cycles in intraday data.

This is not opinion. It is scientific fact. Traders who ignore it do so at their financial peril. Does this mean the markets are a random walk and that eventually all traders will lose because of the costs of trading? No. Traders must exploit the longer-term trend component of stock market price action to obtain a statistical edge. This is precisely what trend-following systems such as GetFolio.com do. It explains why good trend-following systems traded in diversified market portfolios tend to make money year after year while day-traders invariably lose in the long term.