From the June 01, 2010 issue of Futures Magazine • Subscribe!

Far From Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement

Far From Random: Using Investor Behavior
and Trend Analysis to Forecast Market Movement

By Richard Lehman
Bloomberg Press, 2009
$39.95; 233 pages

“Far From Random” is an interesting read, if for no other reason than it challenges conventional wisdom about trading markets. Richard Lehman takes aim at the one of the prime tenets of Wall Street: one cannot time the market successfully. He argues that Wall Street trades primarily on fundamental analysis, an inferior analytical approach that does not allow for timing markets. His major premise is examining the market from a behavioral perspective is the most important way to analyze, time markets, and profit from trading. Lehman argues there is “... a growing body of content that views the action of the stock market not simply as a compilation of the actions of individual stocks but as a compilation of the actions of the participants.” Although his major premise is not unique, the trading approach he defines is a matter for thoughtful consideration.

Lehman does not mask his opinion of Wall Street and the analyst/pundit structure that serves it. After some minor poking about the slowness of Wall Street to catch on to the notion of market research as it relates to human behavior, he includes a quick thrust to the heart of Wall Street and its academic lackeys. “The time has come to stop listening to the party line of Wall Street. and the academic community and to stop deluding ourselves about the stock market,” he says. That delusion, he says, comes from the long-time defense of a stock-market paradigm “conceived in a different age” and founded on theoretical concepts that no longer apply, concepts that have been questioned “time and time again.”

Lehman does give the reader a timing-based approach to trading the markets, although he gets there after explaining the context of his theory and the underlying “realities” about the phenomenon of human behavior influencing market behavior. Again, although interesting, the back-story is not original. Anyone who has spent any time around the markets understands that markets move on the collective will of the participants and that fundamentals may or may not influence that movement.

Lehman’s contribution to our better understanding and better participation in the markets is his explanation of trend-channel analysis. These last three chapters are the best in the book, as he explains in detailed, technical-analysis terminology (perfect for the technical wonk) how one measures at the market level the effect of human behavior on the markets. Systematically he explains the notion that trend channels “remove the vagueness in charts and provide explicit determination of direction.” Laboriously, he guides the reader through the maze of information needed to explain his theory with complex narrative, charts, and graphs. This brings the reader full circle, as he shows how Wall Street is wrong and one can actually time the markets with his trend-channel approach.

Lehman writes his book clearly and well, and any reader with an interest in the markets will find it interesting and thought-provoking. However, the reader also must have both an interest in and an aptitude for the somewhat abstract realities of technical analysis.

Brandon Jones is a writer by trade and a trader by choice. Although not a professional trader, he trades on a regular basis to maintain and improve his portfolio return. He can be reached at brandon@affectwriting.com

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