How to become better at Technical Analysis?

H

hekktor

Hi! TLDR is at the end. :)

I heard about trading way back in 2013, but I only started to invest time, effort, and money last November 2021.

I had everything wrong at the start (and maybe even up to this point). I had no idea about technical analysis, and just placed money on whatever chart looked good (which is obviously a recipe for disaster). I also traded real money immediately ($2000), and lost more than 50% as of writing. I was trading solely in crypto assets on a centralized exchange, which I learned later on to be a more volatile instrument.

I was determined to find a system, and really wanted to make this work for me. I can see myself trading long-term (I imagine trading to be looking at charts and making and testing strategies, and executing them regularly). And so began my learning journey. TA resonated with me so much, because I am not too good at keeping up with the news, and I can see myself making short to medium-term positions in a 24-hour market like crypto.

First I read books about trading psychology. Then, more on trading strategies and risk management from authors like Minervini, Coulling, Murphy. My latest one was from Robert Carver (on systematic trading), and it was the first time I heard about Sharpe ratios, volatility standardization, and how negative skew strategies only take 1 huge loss to wipe your entire capital.

I read forums (Reddit mostly), and people usually mention it will take 1-3 years to become a profitable trader. I am ready for that. Every day I still learn, sometimes also seeing conflicting information here and there. I try dipping my toes with paper trading and trading small amounts once in a while but I don't feel fully ready to put more capital until I have a proper system.

I am not sure where specifically I'm doing wrong.

TLDR:
How do you guys look at technical analysis as a process? How do you test and combine multiple trading rules? I read some threads here saying that technical indicators no longer work, but I feel that I am on that path of looking at indicators, looking at how likely a big move is after a combination of a few of them, and applying some of them when they have a positive expectancy.

Do you use very rigorous backtests?

And I'm not sure if this has an answer -- but what was your "eureka" moment when you finally say to yourself that TA has given you a profitable trading strategy?

Thanks a lot in advance.
 
Probably a good idea to review the research that's actually been done. There's a lot of it, and it's pretty thorough. Example:

"Illusory profitability of technical analysis in emerging foreign exchange markets"
https://www.sciencedirect.com/science/article/abs/pii/S0169207013000964

Also, see Allen and Taylor (1990), Frankel and Froot (1986), Shiller (1989), and others who have pointed out the irrationality of TA. According to Allen and Taylor (1990), the subjectivity of this approach prevents it from acquiring a scientific character. Frankel and Froot (1986) and Shiller (1989) held that the use of technical indicators leads to overvaluation of asset prices, thereby heating up the demand for some assets without good reason.

Or... you could listen to the overheated TA "gurus" here on ET (incoming in 10, 9, 8, 7, 6...) who will scream about how AMAZING it is and how they've made MILLIONS with it. Not a single audited blotter among the whole crowd, though.
 
MarkBrown said:
perry kaufman "smarter trading"

if you don't understand volatility you're forever lost.
More...

Thanks for this! I'm planning to read Kaufman's Trading Systems and Methods next, since Robert Carver mentioned it briefly. I'll have a look at the book you mentioned.

Is there something specific with volatility that you have in mind? One thing I'm trying out after reading Carver's book is to adjust profit targets based on the standard deviation of prices. Before I would usually backtest using previous lows as stop losses, and reward-risk ratios based on them.

In the book, Carver suggested doing 4x price volatility as a stop loss, and it made sense (though I might test out changing 4x).
 
BlueWaterSailor said:
Probably a good idea to review the research that's actually been done. There's a lot of it, and it's pretty thorough. Example:

"Illusory profitability of technical analysis in emerging foreign exchange markets"
https://www.sciencedirect.com/science/article/abs/pii/S0169207013000964

Also, see Allen and Taylor (1990), Frankel and Froot (1986), Shiller (1989), and others who have pointed out the irrationality of TA. According to Allen and Taylor (1990), the subjectivity of this approach prevents it from acquiring a scientific character. Frankel and Froot (1986) and Shiller (1989) held that the use of technical indicators leads to overvaluation of asset prices, thereby heating up the demand for some assets without good reason.

Or... you could listen to the overheated TA "gurus" here on ET (incoming in 10, 9, 8, 7, 6...) who will scream about how AMAZING it is and how they've made MILLIONS with it. Not a single audited blotter among the whole crowd, though.
More...

Thanks for this! I appreciate the fair warning. I do kind of gravitate towards TA.. Given the constraints of my current research and how my brain works. :banghead:

So maybe I will need a hard bang on the head to get myself out of it (at least for now). I am very much open to other ideas, most likely later down the line.
 
What is it you want to trade? You mentioned crypto when you started.
Are you trading Crypto, forex, futures or equities?

As far as indicators go, they indicate what price has done. Take any indicator you want and plot it yourself. You'll find that price moves the indicator not the other way around. Focus on price.
 
deaddog said:
What is it you want to trade? You mentioned crypto when you started.
Are you trading Crypto, forex, futures or equities?

As far as indicators go, they indicate what price has done. Take any indicator you want and plot it yourself. You'll find that price moves the indicator not the other way around. Focus on price.
More...

I'm planning to stay on crypto for now, primarily due to the 24/7 nature of it (I'm a little too far for US time zone). And with more frequently traded coins, hopefully, I am more likely to execute automated stop losses.

I also haven't looked at shorting, I have only studied long trading for now. With the current market state, I have no plans of entering just yet.

I'm looking at MA/EMAs, price breakouts on ranges, and price changes in %. My initial trading strategy is to trade on confirmed breakouts, usually on the daily time frame.

My last roadblock, is that the trading rules don't often apply to all. I backtested 222 active coins (those that were still on the exchange). It was too much manual calculation but I think that gave me a good idea that the same rules will have varying win rates and R/R depending on the asset.

As a new trader, how many instruments do you advise to hold at any given time? Assuming that I do not diversify into other markets, so purely crypto, but I will try to hold instruments with low correlation as much as possible (on price change %)?
 
I also try to test ideas on earlier time periods, and validate them in a different period. For example, I use 2021 data to formulate trading ideas, and then test them on 2022 Q1 data. It usually performs bad on the new data.
 
hekktor said:
How do you guys look at technical analysis as a process? How do you test and combine multiple trading rules? ... Do you use very rigorous backtests?

And I'm not sure if this has an answer -- but what was your "eureka" moment when you finally say to yourself that TA has given you a profitable trading strategy?

Thanks a lot in advance.
More...


Hi hekktor,

When I was learning, I remember there was a period of time where I really wanted to see examples of strategies/systems designed by others so I could start to understand what goes into their design.

It wasn't important if they didn't actually work well in the markets and time frames I traded. I thought that simply seeing what some of them looked like would allow me to start creating my own systems. Also, maybe I could learn to modify or troubleshoot weak systems to turn them into ones with a more consistent positive expectancy.

You asked about rigorous backtests - I am a big supporter of this, even if done manually by simply scrolling charts back to a past date and then scrolling forward one candle at a time. Even though such tests don't guarantee future results, they indicate that the system has at least worked during some period in the past. I won't trade a system that hasn't shown good results in backtests.

Two sites where you can find lots of published trading systems are shown below. The rules are described in great detail for some strategies but not for others. Most are not very good as written, but some of them can be tweaked with rule adjustments and/or new filters to make them better.

Hopefully, reading about them will give you ideas on how to build your own original systems.

Good luck to you,

Site 1 - click on links for Basic, Simple, Complex and Advanced strategies and see lists of different strategies.

http://forex-strategies-revealed.com/intro

Site 2 - there are actually a few good ones in here, along with many that just never tested well. Also, many of them aren't completely rules-based and therefore, as written, require discretionary decisions to be made. I prefer rules-based systems, so I like to change the discretionary parts to become defined rules for deciding when to enter and exit trades.

https://www.forexfactory.com/forum/71-trading-systems
 
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