How do you know if your method is right? How do you know if TA is valid?

[-EntropyTrader]

FA – Fundamental Analysis
QA – Quant Analysis
TA – Technical Analysis

Many people believe that FA and QA have more validity than TA as they have a firm rooting in mathematical theories. This is true.
But the common denominator of all three approaches is that when used profitably, then all three are essential trend following approaches. Profits can only be associated with trends – bigger trends generate bigger profits.

BTW: Buffet and Soros don’t use TA as Bubba asserted. Look at the 500 richest people list and almost all of them are businessmen who more or less use fundamental analysis to guide their investments. But even they are essentially trend followers, they make an investment and they stick to it for decades – IOW they never cut their profits short. Bill Gates is probably the ultimate trend follower (and skilled at eliminating competition). He rode the PC OS trend all the way till he had a monopoly on it. But you can’t ignore the role chance plays: you have to be at the right place at the right time (for good entries).

Quote from FishSauce:
Perhaps the word "cause and effect" might be a bad usage of words.

I think "underlying assumption" might be apropos. Everything we act on must have some LOGICAL assumption guiding it.

Going back to my original question, if you use TA, how do you know if the method is valid? What assumption are you assuming? Most trader believe that just by Backtesting, one can translate and interpret that into validity. It does not!

In one of the article I posted, one of the underlying assumption of TA is the mere fact that RANDOM WALK produces TRENDS. I think it's hard for some people to swallow this. All those trends: MA, RSI, MACD might be byproduct of Random walk. A harsh conclusion indeed. But the bright side is that random walk does not eliminate the possibility of TA.

The other article deals with psychological tendency, which I think is a haphazard assumption at best.

 

[dbphoenix]

Quote from -EntropyTrader:

FA – Fundamental Analysis
QA – Quant Analysis
TA – Technical Analysis

Many people believe that FA and QA have more validity than TA as they have a firm rooting in mathematical theories. This is true.

Depends on the notion of validity. If validity is determined by whether or not the desired result is achieved, TA can be just as valid as FA, if not more so.

 

[ramora]

Quote from dbphoenix:



Depends on the notion of validity. If validity is determined by whether or not the desired result is achieved, TA can be just as valid as FA, if not more so.

I agree with dbphoenix. On MarketWatch.com on July 16 there was an interesting article by Mark Hulbert titled "Many roads to riches".

The article asks the question 'is fundamental analysis better than technical analysis, and is market timing possible'?

According to the Hulbert Financial Digest over the past 23 years the top of the list recommends buy and hold. The second place newsletter used both fundamental and technical analysis, and the 3rd and 4th place position was technical analysis.

Now at the bottom of the rankings were also a buy&hold, fundamental, and TA newsletters.

According to Hulbert, "I am now inclined to believe that almost any of the major approaches to investing can - in the right hands - be successful. Yet in the wrong hands, those same approaches can be big disappointments.....discipline is the key to long-term investment success."

The TA or FA debate will never be resolved because at the end of the day it is only the discipline of the trader and not the approach that is important. A disciplined trader will master his emotions and understand the strengths and weaknesses of his approach to make the best of a game that gives up points reluctantly.

Pick an approach, they all suck, and then stick with it. Do not combine approaches or jump from one method to another.

As long as you have money in your account you get to pick your hell!

ramora

 

[bubba7]

Quote from ramora:



I agree with dbphoenix. On MarketWatch.com on July 16 there was an interesting article by Mark Hulbert titled "Many roads to riches".

The article asks the question 'is fundamental analysis better than technical analysis, and is market timing possible'?

According to the Hulbert Financial Digest over the past 23 years the top of the list recommends buy and hold. The second place newsletter used both fundamental and technical analysis, and the 3rd and 4th place position was technical analysis.

Now at the bottom of the rankings were also a buy&hold, fundamental, and TA newsletters.

According to Hulbert, "I am now inclined to believe that almost any of the major approaches to investing can - in the right hands - be successful. Yet in the wrong hands, those same approaches can be big disappointments.....discipline is the key to long-term investment success."

The TA or FA debate will never be resolved because at the end of the day it is only the discipline of the trader and not the approach that is important. A disciplined trader will master his emotions and understand the strengths and weaknesses of his approach to make the best of a game that gives up points reluctantly.

Pick an approach, they all suck, and then stick with it. Do not combine approaches or jump from one method to another.

As long as you have money in your account you get to pick your hell!

ramora

Personally in equities, I use FA as the front end for TA.

I cited buffett and Soros primarilybecause buffett is an OPN guy who does use FA, I agree, and he also tends to use trend analysis as well.

Soros and ed Seykots are both EE's and physics guys who commonly use TA as part of their decision making.

For trading I use SCT approach.

 

[bubba7]

I think that you know a method works because it makes a lot of money. Methods that do not work do not make money.

TA makes a lot of money. See below for some details I follow.

I am only an amateur but I do notice I need a cap on # of shares and I also have to regard how I would affect the market if I were to not go in and out without considerations.

I never hold over 100,000 shares in any money stream (think 30 dollar stock). And I never enter or exit in partial fills that exceed the T&S blocks going through. I do not ever exceed 10% of the cummulative shares traded for a day that I am entering or exiting. The ratio of entry to exit blocks for 100,000 shares is about 20 to 30.

This is a TA viewpoint.

 

[maxpi]

Quote from bubba7:



8. Use of time. I have spent my life doing as I wish as a consequence of being free so to do.

I sure hear you on that one. I have my own models for economic things and was led to ignore the educated experts who predicted inflation all through the 90's. I got a variable rate mortgage and saved thousands. Now they want to tell me that TA doesn't work, and they really can't be persuaded otherwise. Perhaps that is due to the fact that they have held to the random theories so long it will be embarassing for them and probably it is just embarassing to them that a lot of non-quants invented all this stuff that, in the right hands, works fine. Everytime they speak I recall what my pappy told me; "If the dog stopped to squeeze out a steamer he would never have caught the rabbit"