What STOPD Is Really All About
There is a misunderstanding from many people that Special Theory of Price Discovery (STOPD) is about price behaviour patterns identified from historical data. That is incorrect. There are others who guess that STOPD is just a repackaged support resistance price levels like the Fibonacci ratios. That is also incorrect. I can understand where these beliefs come from but that is simply not what STOPD is about.
I am going to set the record straight here.
Data Mining From Historical Price Data Has Limitations
To understand the difference between STOPD and other normal researches on price patterns, including the more convoluted ideas like Elliott Wave Theory, one must distinguish between data mining and and simulation modeling.
All the existing trading techniques and methodologies are driven by real data. They are created based on direct and indirect experience of the events already happened. Chart patterns are driven by patterns discovered from the historical price data. Technical analysis indicators are created to simplify the decision process on actual data. For some, technical indicators are borrowed from scientific methods in hard science disciplines to handle the financial data even though they may not be aware of that. Even the esoteric techniques like Elliot Wave Theory are formulated from observations of past data.
The advantage of this kind of approaches to data analysis is that you can quickly confirm your ideas from other historical data. If the observation is simple, it is probably sufficient to draw proper conclusion from the data too. Many good trading concepts like support resistance levels and chart patterns are discovered this way.
The disadvantage with this approach to data analysis is that more complex conclusions draw from the data can be completely wrong. They just look correct for two reasons. First, the esoteric nature of the concept makes it not possible to disprove it. Second, the causation relationship could be temporary or coincidental as there is really not enough evidence in the past to prove or disprove the idea. Elliott Wave Theory belongs to the former and the random market calls from famous gurus for the ultimate top of the stock markets belong to the latter.
STOPD Was Discovered Through Simulation Not Data Mining
My approach to the problem of finding useful trading setups in financial markets started out the same way just like the others. It was pure data mining. Of course, many interesting things were discovered with the power of data crunching. As someone properly trained with scientific methods, however, the landscape of financial market analysis back then (and even now) is still not scientific enough.
The research results from the data mining effort opened the door to massive resources backing my research, I took the problem seriously and approached it from a completely different direction afterwards.
I created technologies to mass simulate market activities with virtual participants. Each programmed to act a certain way like humans. This was one fun project leading to the discovery of STOPD. Instead of assuming things that are just guesswork to start with like many economists, I assumed nothing. I experimented with simulations in almost all possible combinations to identify the core characteristics of our markets.
I discovered that given the way how participants behave in aggregation, the markets are indeed predictable at times. I figured out the general principles behind price movements. Thus I chose to name it Special Theory of Price Discovery because it is not applicable if the distribution of market participants are not following what we have in real life.
The theory developed from simulation has to be confirmed with actual data. I did exactly that across many markets and timeframes. From tick data to monthly data, they all fit nicely following the STOPD principles. From that point onward, I have my anchor in understanding price behaviour at a completely different level.
STOPD Is A Fractal-Like Framework
Those people who thought they know what STOPD is about thinking it is just fancy naming of support and resistance completely missed the point. The price levels from STOPD can be used as support resistance but that is just a very basic application of the theory. The real power of STOPD is to allow one self to see the markets in a different way, making it much easier to accept the uncertainties entail any markets and focus on ways to deal with the parts that are more predictable.
Majority of people using fractal concepts on financial data focuses on identification of turning points. That is pretty useless in the eyes of real traders and speculators. In fact, the need of precise entry is the last thing a successful trader should worry about. I guess that’s the difference between me and many of these non-traders who research on financial markets. I focus heavily on the practical side of my research. I like to produce trading models and trading setups that can be used in my trading. My clients prefer that too, obviously, as they have a better handle of what I am doing with their money.
My take on fractal-like behaviour in financial markets is that it is something specific to each individual market. In other words, the interactions of important price levels in higher timeframes and the lower ones do not necessary produce the same behaviour across different instruments. The reason is quite subtle – even though we know the market participants of various categories would behave a certain way in aggregation, their reactions are affected by the specifics of the markets. A good example is the subtle microscopic differences in price actions between Emini S&P and its close cousin S&P 500 ETF, SPY. They affect each other. They move together almost in sync but never really exactly the same, especially at important turning points.
After I published STOPD, I fully expected that there will be negative response to my work since I am not a famous guru. My take on trading for retail traders is pretty much hated by everyone who hope and dream to trade for a living. Hence it is very likely the book will be dissed as something useless. My goal, however, is not about acceptance. My goal is about establishing the fact that financial markets are predictable in certain ways and I found the proof.
The surprise gain from publishing STOPD, however, is that I’ve learned that there are other people like me who have been tackling the same problem for many years. Getting in touch with these exceptional individuals, I have learned much more than what I can figure out alone in my lifetime. It opens the door for me to further my research in ways I could never imagine of. This outcome is better than all the scenarios I have imagined already.
This short clarification about STOPD is written for those who want to understand what STOPD is without buying the book. However, this piece may not be able to stop those who like to speculate on things spreading myths about STOPD. It will be interesting to find out what people think of STOPD in 10 years.