From time to time, people make comments expressing doubt about our approach to markets, technical analysis or active trading in general. We can't possibly begin to address all of the different arguments we hear from these skeptics, but some of these ideas have been in circulation so long that people have begun to take them as fact. Just to keep things in perspective, we'll take a closer look at some of these skeptics' own claims.

One of our favorite complaints to hear from skeptics is that if a superior technical system were available, everyone would use it and the system would stop being profitable. What planet is this supposed to happen on? People make disastrous financial decisions every day. Why would they suddenly start trading profitably when the opportunity presents itself?

Most people wouldn't trade a profitable system even if it were available. No matter how effective a trading strategy is, skeptics will respond, "If it were really effective, everyone would be using it." Where does this idea come from, that the best practices are the ones "everyone" does? There are too many counterexamples. Signaling before changing lanes, paying bills on time and eating right are all very good practices but it's quite conspicuous that not everyone is doing them. We're embarassed for the both of us to have to say this dear skeptic, but crowd behavior isn't always the best example of ideal behavior.

It's not uncommon to hear that if a system were really any good, its originators would keep it a secret. Why? There is no shortage of bad traders to take the opposite side of profitable transactions. No matter how good a system is, there are plenty of people who will dismiss it as luck, insist that they are on to something even better, assume that it can't be very good unless "everyone is doing it," or just not know that the system exists. When it looks like there just aren't enough people to take the opposite sides of our trades, we'll get worried.

Many academics, parrotting Eugene Fama and Burton Malkiel, insist that successful active trading would require some useful information about the instruments traded. So far, so good. Then they bring in the idea that all available information is reflected in the current price. Why they believe this, we may never know. We have an alternative theory:

• All available information is simply available.
• Some market participants will ignore that information, assuming that the market already reflects it.
• Some market participants will misinterpret that information and act on it.
• Some market participants will correctly interpret that information and act on it.

Guess which group of market participants will make money....

This idea also comes mostly from academic economists. Those who realize that useful information does exist will sometimes still insist that prices themselves do not contain useful information. Do they believe that prices are just made up arbitrarily? The profit or loss on any trade is always (selling price - buying price) * number of shares. Price is absolutely inescapable. As these academic economists very well ought to know, prices do contain information. Strategies that use this information profit at the expense of strategies that do not.

As ironic as it may seem, a good number of the same skeptics that insist active trading can't be profitable are quite eager to provide market advice of their own. Specifically, buy stocks and hold onto them. They'll eventually go up. Somehow, this strategy must be invulnerable to the "too many traders" problem. By some miracle, the market price has yet to reflect the information that prices will go up. Even more amazing, after condemning technical analysis, buy and hold advocates will then endorse buying an index fund on the grounds that the index has had an upward price trend! Suppose that you do buy and hold. If the value of your investment begins to decline, how far does it have to fall before you decide that the buy and hold strategy is broken?