Quote from ChartingMarkets:
Harry, Ok here is one more question for you regarding the subject of whether TA is valid or not.
First a background and some assumptions: Lets assume that Technical Analysis is statistically unproven and is nothing more than random chatter or noise. Furthermore, lets assume that you have developed an econometric model to trade in the markets that has a core reliability on the inherent principles of mathematics. (I am over generalizing your model for the purpose of this post so, yes I am aware of that). Now last assumption, your model was developed for one singular purpose in mind ultimately, and that is to "beat the market", "take money from the market", "out perform other market participants", however you want to phrase it. Furthermore, I believe that the conflict in this thread arises from the fact that TA is more of an art than a mathematical science and the conclusions of TA differ from user to user unlike in Science where the results will maintain consistency for all. Ok...with that said......
We know there are a population of traders who are accomplishing the singular goal of extracting money from the markets consistently over a long sample of time and at a rate of return that surpasses the historical internal rate of return of the stock market itself. Furthermore, if these traders have been relying on TA (or so they have believed) all this time. We assume TA is false for this question....then what would you attribute their success too?
That is the question. Thanks Harry.
Nice post. Throughout this thread people attribute uses for TA. Primarily "prediction" comes up.
This common theme is probably where most people go wrong using any approach.
Another facet of this thread is backtesting and forward testing. The tie in is prediction usually. That is some one thinks up an investing approach and then they try to see if it works.
One alternative that has not been delt with here is the history of TA. It is fairly orderly in terms of the logic of what came first and also the fact that the big pieces were dealt with first and then as science provided convenient support devices more and more refinements were made.
It all went from the general to the specific and at one point branched out into two main streams.
The biggest single shift was from reporting the staus of markets to "predicting. The bracnching occurred when one emphasis became attention to details in a macro context. The other emphasis was a micro focus on making money in individual's portfolios.
I am just an amateur who have used TA for portfolio operations. But I have done this using TA since 1957.
I learned from the general to the specific since many detailly things did not exist when I began. Luckily throughout my investment career I have been in TA whereas most others who invest have not used TA.
My financial forte, academically, is a combo of problem solving an inovation in corporate prowess. By not being employed in the work, job, salary sense, I have stayed out of the conflict of interest and reporting requirement game throughout most of my life. To also stay apolitical and be available to the political arena has also been a goal of mine.
So for about 50 years I have done two basic thnigs: used TA to invest and done anything I wanted to with my time.
Here are the following opinions I have about investing with TA.
1. Historically, the advent of support technology, has screwed the financial industry. They have gone to macro analysis and stuff. This branch has several basic misconceptions that they do not want to prove are wrong. THe consequences are that the big guys cannot beat the averages. historically the averages they can't beat ere the first use of TA and you can check out Dow for that. This is a very difficult situation for the brainpower of the industry. It is approaching a dilemma status.
2. The shift from maintaining a market status effort to a "predictive" orientation, was an unretractable development because of it's orientation to "beating" the competition. There are two major facets of this: "predicting" does not work; aand "predicting" is not necessary. These two items are very difficult to understand by most people. The "history repeating itself" and many other liberal arts things, drive this irrationality.
3. the progress of TA into the financial industry is a slow process. currently we are experiencing MA's for index volumes becoming commonplace. secondly A/D indicators are now being offered on software (see Qcharts' recent inovation). TA is no where as yet in the mainstream. I went through the introduction of TA in one of the major brokerages. They periodically did stuff to turn my selections into theirs for national distribution and as a consequent they added staff in NYC as a TA department. (my personal accounts traded (in a day) 1.89 times Gary smith's largest daily trade as reported in his book (I will not provide the LOC #)) so I was influential at that brokerage house.
To intorduce TA into the financial industry really wrecks much of their operating philosophy. This issue is the key one for what role TA plays in making money. Employees in the industry vis a vis investing are sales people and TA is not a sales asset.
4. To make TA work best you may not use it in a macro manner. As in any science or maths based application, the mor narrowly defined the applicationis the more significance it's results will be. The economic development of the US is reflected in mass production and education. Everyone gets the same and it is called, strangely:"opportunity". In making money the opposite strategy is applied vis a vis "competition". To make money potential investments need to compete for scarce funds. TA affords the best analytical tool for this. Technology finally gave us two TA tools: RS and EPS as percentiles (99 groups, they just missed by one and it is okay). Cullling and selecting a repeatable universe is the first major TA tool for success. TA has two applications: analysis and making investments (Monitoring and Trading). Analysis is as important as any TA factor.
5. Making money with repeatable equities and indexes. TA shows how markets work for selected excellent universes. In the context of the market operating points, you choose the trading strategy. All investments are constrained to making money via change. TA is the only and best method for enabling the two effeiciencies deployed to be optimised: the market efficiency to deliver capital and the trder efficiency to extract it. TA is the bridge that joins the two and this is what is optimized in a strictly micro manner.
You can simply regard this as bullshit. IT isn't. It is 50 years work where the yield is excellent. what makes it most powerful is it's simplicity and transferability to anyone of any potential. there are no special training or brainpower requirements to be successful.
What makes this strange and incomprehnesible is that it is not the mainstream way of thinking. It is uncomplex and logical and based on the market principles of operation just using the logical historical basic theormens that have been laid aside in favor of machinations done by powerful macro machines and maths which try to encapsulate whole markets. No one plays whole markets. People who get rich focus on the places where money can be made most efficiently.
In the next 18 months a lot of people are going to be in a different place. TA is what is going to take them there.
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