THE BUGABOO OF TIME DISTORTION-AND WHAT TO DO ABOUT IT

This element of the psychological problem is of particular importance in any technical approach to the market. In a technical approach, decisions are made on the basis of what a stock does. To remain aware of what it does requires charts. Charts accomplish the purpose because they provide at-a-glance perception of what a stock is doing over large periods of time. This very reason for the effectiveness of charts is the heart of the time-distortion problem!

To see this, consider:

The relationships between stock price motion and time are presented in a chart in vastly compressed time. Price motions that took months to occur are perceived in a chart in seconds. The mind is free from considering time when a chart is studied. But the mind is never free from time considerations when a stock is in motion, and youre in it! Time-price relationships which are easy to sense in looking at a chart refuse to make themselves even noticeable as real time crawls along.

The effect is closely analogous to a motion picture film. Viewed frame by frame all fluidity, grace, and even reality of motion cease to exist. Speeded up into an acceptably compressed time scale, exotic dancers can delight as though real.

In the case of stock charts, the situation is just reversed. The chart presents -information over past time on a compressed time scale like that of a movie fflm running at normal speed. But real life stock price changes are viewed as additions to the chart at movie film frame-by-frame speed!

You wiU find that you can analyze a chart with perfect objectivity over all past time. But start adding real-time data at frame-by-frame speed, and objectivity vanishes just when you need it the most.

You can set up a powerful demonstration of this for yourself in this way:

Assemble a series of past Mansfield chart issues. Sort out all the white "Page Ones" in chronological order. Clip off all parts of the page except the weekly chart: of the DJ Industrial Average. Staple the left-hand edges together.

Now bend the package in the middle and fan the sheets before your eyes as if you were shuffling a deck of cards. Concentrate your attention on the 18- to 20-week cycle. If you fan at a reasonably constant speed, you will find that you will know, in advance, what motion in the average is coming up. Your charts will come to life with cychc motion! Then, when you come to the last chart, the motion will subside-but you will retain a strong impression of what comes next!

What this accomplishes, of course, is to force each added data point on the chart (insignificant in itself when presented in real time) to be perceived as part of the entire fabric of price-time action. In this way, price-time rates may be quaUtatively sensed, as they cannot be with a static, add-on chart.

As always, the mere recognition of this problem gets you a long way toward a solution. The use of positive, advance-decisions possible when using the objective action signals is also a definite aid.

You can also take specific steps to train yourself. Practice selection of an issue from chart services of the past. Do the plotting and analysis work just as if you were going to trade in the stock. After all analysis is complete, add one new datum (daily or

weekly high-low). Repeat analysis, paying particular heed to the impact of the addition. Continue in this way, always striving to attach special significance to each new bit of evidence. You will gradually gain a sense of relationship between chart time and real time.

It is even more effective if you do this as real time goes along. Carry a number of fully analyzed issues along day by day and week by week before you start to trade. It is truly difficult to over-emphasize the importance of this barrier to success. All time spent in this manner will reap large rewards as you swing your new abilities into actual practice!

DEAUNG WITH "SCALE EFFECT"

This is another highly significant factor when deaUng with charts. The kernel of the problem is that no chart is unique. The time-price pairs that constitute the data on which the chart is based are unique. Once established, they appear in your Wall Street Journal just exactly as they appear in "Friend Jacks Journal," 2000 miles away.

However, when you construct a chart of this data and Jack charts the same data you will sometimes have difficulty believing that the two charts describe the same stock. In fact the significance of time-price relationships in a stock can be suppressed and/or lost if care is not used in the selection of scale factors!

Now, the tune scale factor that you choose is simply the space that you allot on your chart to represent a particular unit of time (day, week, etc.). Similarly, the price scale factor is the space you allot on your chart to represent a specific unit of price (one-eighth, one-point, etc.). Thus, by choice of scale factor, a chart can minimize time effects while emphasizing price motion, or vice versa.

If you fix your time scale factor, you can accomplish the same results by varying the price scale factor. Or you may select both so that you must stand yards away in order to see relationships without receiving a surrealistic effect. Through compression of both scales, you can convey a sense of unimportance and insignificance for both time and price motions-hence of the stock itself!

The problem is thus seen as one in which you must first know what it is youre looking for on a chart. Then you must choose scale factors which optimize the ease of perceptivity of the desired information.

You will want to experiment on your own in this area, but a few guidelines can be drawn:

1. Use daily charts for components with periods of one to 13 weeks.

2. Use weekly charts for components of 13 weeks to nine months in duration.

3. Use monthly charts for components of nine months and longer.

4. In general, arrange the scale factors so that the price motion over the time period of interest forms a nearly square chart.

5. To suppress the effect of short components while emphasizing the longer ones, plot the price motion in less space while retaining the same scale factor for time.

I suppress the effect of long components while emphasizing the short ones, plot the price motion in more space while retaining the same scale factor for time.

7. If a pattern youre analyzing (a triangle, for example) seems insignificant to you,

enlarge both price and time scale factors. 5. if your attention seems riveted on what you know are insignificant phenomena,

reduce both pric« and time scale factors.

Chart services present a different version of the same problem. In such charts, the space available is fixed, as is the time span covered. This means that the time scale factor never varies from chart to chart and issue to issue.

At the same time, the price motion of all stocks charted by the service must be displayed in a fixed amount of chart space for the total time covered.

Thus, a highly volatile issue vidll have a compressed price scale {with all that this impHes), and a sluggish issue will have an expanded price scale (with undue emphasis on short duration fluctuations). Use is made of this fact in Chapter Seven, where the scale factor of the Mansfield chart is actually measured as an indication of volatihty.

All of this means that the same types of cyclic phenomena occurring in two different stocks charted in this manner require a shift in your thinking in order to effect the required same interpretation. Either this, or one or the other of the two charts must be replotted.

For the methods described in this book, replotting for analysis purposes is required anyway. This is the time to consider the impact of scale factor. However, in order to make effective use of chart services in scan and selection, you must practice negating the effect of scale factor change from chart to chart.

COMBATING EMOTIONAL CYCLICALITY

This may or may not be a real psychological barrier. Nevertheless, assumption that it exists at least helps to overcome the persimmon effect, and hence does no harm. If it does exist, experience in overcoming it is essential.

Return in thought to the price-motion model. It has been emphasized that human decisions are what set in motion the chain of events that result in price change. But a decision is an effect which demands a cause. A human decision is caused by something. If the decision is a logical one, the decision is based on deductions which are reasoned from facts. If a decision is made in the partial or total absence of sufficient facts on which to base a logical conclusion, then we may say that emotion or feeling has been the determining factor.

Now couple the above line of reasoning with the fact that something causes masses of investors to make buy and sell decisions which result in a fair chunk of price motion being cyclic in nature. Furthermore, they do this pretty much in unison. Add to this the surety that individual investors never have all the facts needed on which to base logical buy and sell decisions-and often have very few. It becomes a fair assumption then, that many buy and sell decisions are characterized more by emotion than by logic. The obvious impHcation of all this is that the emotional attitudes or feelings of masses of investors vary in a cyclic manner, and that cyclicality in stock prices is nothing more than a reflection of this.