One of the best ways to learn how to understand something complex is to first understand something simple, something that works the same way…

To understand the complex motion of the stock market, we can use simple waves on the water. The water waves can help us visualize what can often seem difficult to comprehend and make it easy to understand.

During my days in the College of Engineering when they were teaching us physics, advanced calculus and engineering analysis it was not uncommon for the professors to use water waves in the examples to help us learn to visualize what was happening in many different complex and dynamic systems. All those fancy equations were hard to understand but the waves rolling along the water made it easy for us to see the ideas in our mind’s eye…

So if the stock market is a complex and dynamic system and we can use advanced calculus or simple waves on the water to figure things out, lets choose the simple water method…

It’s all about watching, understanding and timing the different waves as they move through the market. Then watching to see how they all add up…

So we can start with the really big long term waves or market tides. Long term things. You can think of the tide as a really big, long wave. That is something that comes along slowly to raise the level of the market. Things like Demographic Shifts, Unemployment Rates, Interest Rates and Election cycles. Things that change slowly with long term trends that are measured over the course of years. Seasons and annual events like Christmas Shopping come each year but they are always different. Earnings season comes quarterly and so on. The market tides are all big, slow moving stuff that affects the market trend over the long term.

As the time frame gets shorter we go from tides to add in the waves. Market waves can be large or small and even though they have a predictable rhythm they are each totally unique, with differences in size and timing. These are more frequent things that we consider. Market waves have an affect that is more immediate and shorter duration. This could be things like Summer Hurricanes or Winter Storms. They come in, run their course and have an effect for a while but it is not always long lasting. Things from months to weeks are in the wave range I use.

Then there are the ripples. The things that are short duration and small effect. From weekly, down to daily or even hourly events. Things that come and go. Maybe a company announces a new product, a merger or layoffs. Something that runs its course fairly quickly. When I get up at 5 AM to look at what happened overnight in the markets in Asia and Europe, the little market news events of the day over there will come along and affect the US market at the open and the results may not last more than a few days, hours or even minutes.

Finally there are splashes. That is something that makes a big unforeseen impact. An earthquake or a terrorist attack might fall into this category. You may never see it coming and it can totally change your life and the market you trade, it can come without warning in one unpredictable instant and change things forever…

Everything adds up over time, the tides, waves, ripples and splashes all serve to come together to create that single point where the market is trading at any given time.

So the tide may rise to lift our boat while the waves may serve to take us lower and lower for a time…

You can see how simple, yet complex, it is to add up all the different tides and waves to determine where you are at any given time. Then the trick is to figure out how they will all interact and where they will take the market in the future.

This can take a lifetime of study to get it right and we will never be perfect. The goal is not to be perfect. The goal is to get good. Good enough…

So now it is time to look at my portfolio and see my stocks in terms of their own waves and then look at what tides, waves, ripples and splashes may be affecting each of my stocks. Do I think there is a rising tide that will lift them to new highs or is it time to sell because of a coming wave? Should I move on to other opportunities because there may be ripples on the way? Beware the unknown splash that can come at any time.

The waves in the market are always changing so we have to always be ready to change as well…

Watching the waves and learning to time the events and how they come together can take a lifetime. Successful timing can result in making a lot of money or losing a lot of money. It is a journey and every day there is something new to learn.

Join me, follow along, have fun but most important be careful out there…