Winner Take All
by William R. Gallacher

Apr 2001

An entertaining polemic

When a book bills itself as "brutally honest," you are usually in for some interesting reading. Gallacher wastes no time in taking on a moral tone, exposing the idiocy of emotional basket cases (who shouldn't be in the markets in the first place) and commodity broker crooks who add no value to the process (and are good at nothing other than fast talk and sales techniques).

While these opening observations are based on truth-seeded stereotypes, they don't seem all that necessary. Do we really need to hear that there are a lot of sad sacks in the markets who shouldn't be trading, or that there a lot of dishonest / incompetent brokers out there? Maybe I am off base to assume this is common knowledge.

The book is at its most interesting in uncovering the fallacy behind some highly esteemed mythical legends. Elliott, Gann and Fibonacci, when it comes down to it, appear to have little substance behind their methods, and Gallacher does a thorough job of exposing that fact. He also shines some sunlight on the seemingly ubiquitous (at the time of this writing) Larry Williams, aggressively painting him as a fraud.

Gallacher is neither totally wrong nor totally right in his methodical destruction of technical analysis. What he overlooks is that fundamental analysts and many technical analysts actually have a similar problem: attempts to profit from predicting the future frequently prove futile because the higher the probability that you are right, the lower the probability that you can make money off that knowledge before others do.

The best way to use technical analysis (in this reviewer's opinion) is not to try to predict the future, but only to measure probabilities of an event occurring, and then to place bets when probability assessment shows conditions to be favorable. That is to say, if event A happens under certain conditions, then the probability of profitable scenario B occurring, while still uncertain, may have increased enough to make the trade a worthwhile risk. Many chart patterns only follow through 50% of the time (or less), but can still be used profitably via proper understanding of reward to risk.

This basic understanding—that trading is a game of probabilities in which it is impossible to win every time—is why good traders aren't bothered by routine losses. When Gallacher says "deliberately preparing for a loss is perverse, pessimistic, unnatural, yet correct," he shows that he has a personal stake in being right, and does not fully understand that trading is above all an odds game. (Is it "perverse" or "pessimistic" for a poker player to expect not to win every hand?)

Gallacher says "All the big winning plays I have seen in the market can be traced to a correct call on economic fundamentals." He must not read much. Take Richard Dennis, for example, who turned a few hundred bucks into hundreds of millions with no fundamental input, or Marty Schwartz, who was a failure as a fundamental analyst for 9 years but became one of the most consistently profitable traders of all time after making the switch to TA, or Ed Seykota, who turned $5,000 into $15,000,000 with a purely mechanical system.... and so on.

Last of all, Gallacher leans on technical analysis himself near the end of the book. If he were a true fundamentalist, he would continue holding a position that was going against him until he was convinced that the fundamentals have changed. If the fundamentals haven't changed as you know them, and you get out of a market only because the price is moving sharply the wrong way against you... then guess what, you're using a form of technical analysis whether you meant to or not!

In conclusion, I have to say that most of Gallacher's beef with technical analysis is a straw man. He actually attacks the poor habits (overtrading, risking too much on a trade, not taking losses etc.) that are the hallmarks of bad trading in general, not technical analysis as a method.

An entertaining book, with some good food for thought, but one in which emotion was given a little too much free reign.