Technical Analysis - Smoke & Mirrors?

[dragon8]

I am a newbie to tech analysis and have only studied it for a couple of months.
I would appreciate comments from forum users as to the success or otherwise they have had with tech analysis. Sometimes I wonder if shapes on a chart become a self fulling prophecy such as when people see a head and shoulders and react accordingly. There seem to be so many theories on charting that if one theory does not fit simply use another to explain away the one that did not fit. I have yet to find one which will tell me where the market will be in 7 days but there a plently which will explain after the fact why the past share market action had occurred. It almost seems that if one theory does not fit into the slot simply pick another which will, voila they say it goes to show it works. I think not. I want to believe but it seems to be like my baby daughter playing with her shapes toy trying to fit a star into a round hole. Eventually she gets one to work.

 

[Gringotts Bank]

My :

I only use two indicators, and even then, very rarely.

1. If I'm already holding a position, a parabolic SAR can be an excellent stop for strongly up-trending stocks. I curve fit it to the stocks historical data first (yes, this is quite acceptable for discretionary traders).

2. Jurik has a few low-lag indicators. If you really like indicators, that's possibly the way to go. Personally I found very little difference to systems tested with versus without low-lag indicators. And they're expensive.

Other TA stuff: I use trendlines, particularly parallel lines. They seem the most reliable by a long stretch. There's a bit of an art to finding them too, which I like. Use log charts. Patterns (triangles, pennants) also helpful.. See Bulkowski.

Read through some of the threads on volume analysis on here.

Understand that "overtrading" is much less of a risk to your capital than holding onto losers.

The holy grail, IMO, is trading off gut feel. The most powerful and rapid neural network is your subconscious mind. And it's free.

 

[Wysiwyg]

Look at it this way. If you take a technical entry point into a security, it is only after that entry do you know if it worked or not.
All T.A. is hindsight representation. A 50/50 bet. But! There may be certain technical markers that seem to produce more certainty than others. After all, we are looking for repetition of an event to capitalise on. A better than 50/50 bet.

 

[pixel]

I am a newbie to tech analysis and have only studied it for a couple of months.
I would appreciate comments from forum users as to the success or otherwise they have had with tech analysis. Sometimes I wonder if shapes on a chart become a self fulling prophecy such as when people see a head and shoulders and react accordingly. There seem to be so many theories on charting that if one theory does not fit simply use another to explain away the one that did not fit. I have yet to find one which will tell me where the market will be in 7 days but there a plently which will explain after the fact why the past share market action had occurred. It almost seems that if one theory does not fit into the slot simply pick another which will, voila they say it goes to show it works. I think not. I want to believe but it seems to be like my baby daughter playing with her shapes toy trying to fit a star into a round hole. Eventually she gets one to work.

Hi Dragon8,
Your provocative title aroused my interest; I am somewhat relieved to find that it's only used to highlight the dilemma, by which many newbies find themselves confronted. It's also one that a number of dyed-in-the-wool fundamentalists level against T/A, thereby masking their ignorance and/or reluctance to accept a different paradigm.

Fact is: Neither T/A nor F/A can tell you with certainty where the market will be in 7 days. Anybody making that promise, regardless on what basis, is a charlatan. The best a good T/A approach can give you is a set of different probabilities for a set of possible outcomes. A reliable system is based on Statistics, a branch of the science Mathematics. Based on past trading, Statistical Analysis can provide information on the likelihood of -

• continuation of current trend,
• reversal of current trend, and
• possible price targets of support and resistance

Due to the statistical nature of this approach, you will need to analyse the results over a sufficiently large number of trades and compare outcomes of different methods - including random or "dartboard" decisions - under the rules of Statistics. Follow the one that gives you - in the long run - the best outcome, but never swap methods because a single trade went sour because it took off in the direction of lesser probability.

 

[professor_frink]

Re: Tech Analysis - Smoke & Mirrors?

I am a newbie to tech analysis and have only studied it for a couple of months.
I would appreciate comments from forum users as to the success or otherwise they have had with tech analysis. Sometimes I wonder if shapes on a chart become a self fulling prophecy such as when people see a head and shoulders and react accordingly. There seem to be so many theories on charting that if one theory does not fit simply use another to explain away the one that did not fit. I have yet to find one which will tell me where the market will be in 7 days but there a plently which will explain after the fact why the past share market action had occurred. It almost seems that if one theory does not fit into the slot simply pick another which will, voila they say it goes to show it works. I think not. I want to believe but it seems to be like my baby daughter playing with her shapes toy trying to fit a star into a round hole. Eventually she gets one to work.

I agree a lot of it is pretty well useless.

In regards to where the market will be in 7 days time, no form of analysis will tell you that. Nothing is perfect.

Having said that I do trade using charts and have support and resistance levels and some moving averages on it. Every now and then I make enough money to buy a sack of goon and some 2 minute noodles, which makes me happy, so I guess you could say that considering my trading activities make me happy, that I am successful

 

[dragon8]

In regard to odds and trends I guess it is similar to how I bet at the casino on red or black. Wait for a series of reds to come up then bet black with the law of averages being that a black is likely after say a series of 5 reds.
Unfortunately I have done this and 13 reds have come up in a row. Ouch!!

Is using TA really increasing your chances of a better than 50/50 bet? or would the price movement have happened anyhow.

 

[dragon8]

Is using TA therefore really only appropropiate for an indication of the next days trading as looking further forward has too may variables?

 

[Wysiwyg]

Unfortunately I have done this and 13 reds have come up in a row. Ouch!!

That is like counter-trend trading. Betting the share price will reverse after for example a 100% share price increase.

Again, it is only after you placed your bet that the result was 13 in a row. The next result would probably be different. Plot that strategy 1000 times and you would have an equity curve showing profitable or not profitable in the longer term. That is testing a strategy for longer term results.

 

[captain black]

In regard to odds and trends I guess it is similar to how I bet at the casino on red or black. Wait for a series of reds to come up then bet black with the law of averages being that a black is likely after say a series of 5 reds.

http://en.wikipedia.org/wiki/Gambler%27s_fallacy

 

[Wysiwyg]

Is using TA therefore really only appropropiate for an indication of the next days trading as looking further forward has too may variables?

I use Amibroker to test strategies using historical prices. The results, although not 100% accurate, are either profitable or not for the tested historical prices. A hint I will give you is that the position size and exit are more important than the entry. That is cut the losers and let the winners ride. These concepts need to be understood and practiced.

 

[Wysiwyg]

Here is an example of Technical Analysis from July this year. Analysis projecting the ASX200 to be around 2700 by first half next year (2011). Another traders analysis would be completely different and THAT is why T.A. should be taken with a grain of salt. T.A. is simply an interpretation based on experience and (LOL) agenda.

 

[pixel]

In regard to odds and trends I guess it is similar to how I bet at the casino on red or black. Wait for a series of reds to come up then bet black with the law of averages being that a black is likely after say a series of 5 reds.
Unfortunately I have done this and 13 reds have come up in a row. Ouch!!

Is using TA really increasing your chances of a better than 50/50 bet? or would the price movement have happened anyhow.

Hi Dragon;
what you describe is precisely the fallacy that non-technicians fall into. Even after 50 times Red, the odds for the next 50:50 bet are exactly the same, 50:50! Nothng you do can and will improve the odds for you, no matter what some non-Mathematicians may claim.

When I talk about an edge in picking the next move, I am talking price momentum, which is NOT solely dependent on chance, but will follow certain laws of probability. These laws, properly applied, will work on any time scale, be it daily, weekly, monthly; but you have to react to changes.

PS: I notice Captain Black has already said essentially the same, in pure, indisputable Scientific terms.
PPS: The same fallacy is exploited by promotors of Lotto numbers, who "sell" you tables, how often each number has been drawn, not drawn, or how long it's been since a number has come up last time. Those lists and their underlying "assumption" that a high frequency means it's favoured, or a long time since last drawn means it's due to come up soon, is just the same kind of bulls'***. But people buy the dream...

 

[dragon8]

Thanks for everyones input. Seems like most believe it is beneficial in some way. I'll keep following this thread with interest and continue reading my next TA book from Amazon. Just wanted to make sure I wasn't wasting my time and ensure that TA wasn't all hokus pokus and a waving of magical wands.

 

[captain black]

PPS: The same fallacy is exploited by promotors of Lotto numbers, who "sell" you tables, how often each number has been drawn, not drawn, or how long it's been since a number has come up last time. Those lists and their underlying "assumption" that a high frequency means it's favoured, or a long time since last drawn means it's due to come up soon, is just the same kind of bulls'***. But people buy the dream...

Everybody wants the easy way out without understanding the mathematics of positive/negative expectancy. I've been trading full-time for quite a few years and still get called a "gambler". When I show people what I do with regards to system design in Amibroker etc. the most common response is "that looks too hard".

My neighbour was an expert in designing systems for growing almonds, he devoted his (short) life to scientific testing of various methods of drip irrigation and fertigation to achieve maximum production. I ran him through the whole system design process for trading one day thinking he would be someone who would "get it". I got the same response... "gee, that looks complicated". A few months later he told me he'd invested all his savings in a mining company because he knew someone whose cousin worked as a secretary in the company. I was dumbfounded.

 

[dragon8]

To Captain Black,

You've really done my head in with your link to "The Gambler's fallacy, also known as the Monte Carlo fallacy". Now I'll have to also reavaluate my gambling methods.

 

[captain black]

You've really done my head in with your link to "The Gambler's fallacy, also known as the Monte Carlo fallacy".

Now I'll have to also reavaluate my gambling methods.

Google "Positive Expectancy" and have a good read.

 

[wayneL]

Google "Positive Expectancy" and have a good read.

If there is such a thing as the Holy Grail, understanding positive expectancy is the path to achieving it.

Nooooobs start reading about technical analysis and believe it is a way to predict the movement of stocks. Maybe there are some methods that increase the probability of predicting short term moves, but even these are worthless without understanding positive expectancy.

For me, t/a is about establishing boundaries, not predicting movement. That is taking so-called low risk entries and taking exits that give me the best chance of having larger wins than losses, in sufficient proportion to ensure long term profitability.

I can show you a system (using options) with a statistical 80% probability of winning. Yet this is useless if the 20% of losses are larger than the 80% of wins.

In short, technical analysis is just a tool one can use in an overall system of trading, but it isn't the whole picture.

 

[tech/a]

As with pretty well every discussion I see on any topic of analysis the KEY ingredient is missing in every thread.

APPLICATION

Any analysis on its own is not worth the paper its written on if it isn't applied
correctly.
Correct application will give you the opportunity of positive expectancy which as Wayne points out is an absolute must in getting to a consistent profit.

A very high % of those who use technical analysis have no idea (Or very little) in its application to trading.
If you don't know that Extreme High Volume often indicates weakness rather than strength in( for instance ) certain circumstances-----Learn what and when they are.

Then chances are your applying your Technical analysis incorrectly.

Some of the posts here clearly show that.

AND

If you are you dont have a Hope in Hell of constructing a positive expectancy
Trading method.

Most analysis in the hands of an in experienced practitioner is next to useless.(50/50 would be an excellent outcome.)

So to is a Jumbo Jet in the hands of a Cessna pilot.

APPLICATION

 

[robusta]

As with pretty well every discussion I see on any topic of analysis the KEY ingredient is missing in every thread.

APPLICATION

Any analysis on its own is not worth the paper its written on if it isn't applied
correctly.
Correct application will give you the opportunity of positive expectancy which as Wayne points out is an absolute must in getting to a consistent profit.

A very high % of those who use technical analysis have no idea (Or very little) in its application to trading.
If you don't know that Extreme High Volume often indicates weakness rather than strength in( for instance ) certain circumstances-----Learn what and when they are.

Then chances are your applying your Technical analysis incorrectly.

Some of the posts here clearly show that.

AND

If you are you dont have a Hope in Hell of constructing a positive expectancy
Trading method.

Most analysis in the hands of an in experienced practitioner is next to useless.(50/50 would be an excellent outcome.)

So to is a Jumbo Jet in the hands of a Cessna pilot.

APPLICATION

Make a man a fire, you keep him warm for a day. Set a man on fire, you keep him warm for the rest of his life.
””Terry Pratchett

 

[tech/a]

Set a man on fire,

He's dead!!!