Hypothesis: Technical Analysis only works in the immediate short-term

I

Investor

Disclaimer: I'm a (relatively) fresh graduate with a major in Finance, so as might be expected, I primarily learned about fundamental analysis and corporate finance for the last four years of my life. Therefore, there might be some bias in what I say. TL;DR at bottom.

For the last few months, I've been exploring into the territory of utilizing technical analysis (TA) and price action theories to explore trading Forex (and to a less extent, equities). One of my issues with technical analysis is that while some components are easy to understand the logic behind (such as support and resistance levels or momentum), other components seem (keyword "seem" - this is strictly my opinion) less logical such as Fibonacci levels. However, I can simply disregard indicators or chart patterns that I do not feel comfortable with.

Where I feel I differ from most people is where I believe the best time-frames are for utilizing TA. I see many traders and investors alike utilize it to identify long-term trends and intermediate trends. While I agree these trends are common, I do not understand the logic behind extrapolating such trends with a method like TA.

Prices are driven by supply and demand. In the long-run, fundamental changes in the investment vehicle in question (or its environment) are what will cause the largest shifts in supply and demand. Technical analysis cannot predict surprises (nor can fundamental analysis for that matter, although I believe it can prepare you for them better by identifying specific risks and allowing you to calculate for them accordingly). Given this knowledge, why do so many use TA in their long-term analysis of the future?

I feel TA is best suited for environments where the chance of fundamental surprises to the underlying security is low, or for identifying sentiment following a surprise. Therefore, my thought is that TA is best suited for the immediate short-term (approximately a month or less) instead of the long-term future. It feels erroneous to extrapolate on price and volume alone for the long-term.

Tell me why I'm wrong - I would love to hear from other people who have more experience on the subject. Thank you.

TL;DR: My hypothesis is that TA works best in the short-term because in the long term, fundamental surprises are what drive shifts in supply and demand. Hence, when we extrapolate on the basis of price and volume alone, we are exposing ourselves to dangerous beliefs that could instantly be eradicated by fundamental changes in the underlying security (while this can also happen in short-term, it is less likely).

P.S: This thread is about the use of using TA by itself. I believe TA can only be used standalone in the short-term, whereas it requires assistance from FA in the intermediate/long-term to identify and prepare for specific risks.
 
Actually you have it backwards - TA was never intended to work in the short term, hence classic TA is centered primarily around weekly charts , keeps an eye on the monthly & quarterly charts, to fine tune the entry uses daily charts. It works today just like it did in 1925.

Most new traders are trying to use TA on 1 -5 minute charts which is mostly just noise, - patterns do occur in the 1-5 zone but are very unreliable in that time frame. Been a student of TA since the mid 90's. Keep in mind that TA is by no means perfect, it works less than half of the time - but that is fine, it is still a powerful tool in the right hands.
 
I've used TA to anticipate the reversal of multi-year trends. One who understands how prices move understands that prices move the same on a 5-minute chart as it does on a weekly chart. It's the imbalance of buying and selling pressure that you're looking for, not "patterns."
 
comagnum said:
Actually you have it backwards - TA was never intended to work in the short term, hence classic TA is centered primarily around weekly charts , keeps an eye on the monthly & quarterly charts, to fine tune the entry uses daily charts. It works today just like it did in 1925.

Most new traders are trying to use TA on 1 -5 minute charts which is mostly just noise, - patterns do occur in the 1-5 zone but are very unreliable in that time frame. Been a student of TA since the mid 90's. Keep in mind that TA is by no means perfect, it works less than half of the time - but that is fine, it is still a powerful tool in the right hands.
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I'm happy to accept this if given the logic behind why it is valuable in the long-term. I feel it is a dangerous tool to use in the long-term because it vindicates traders into believing price will likely go a certain direction (due to volume changes or shifting sentiment) when I feel price in the long-term is better predicted with fundamental analysis for aforementioned reasons (which I am by no means happy about, given how much work it takes lol).

Why does volume and price action provide insight on the future when the primary drivers behind these in the long-term is fundamental news events (unless you feel differently)? In other words, I feel like TA is best adapted towards dealing with "noise" because "noise" (which I define as price fluctuations with no easily discernible cause) can be understood better with TA while FA has no hope of explaining it (hence why I think TA favors and is superior in the short-term).
 
Thats just not true - show me one classic TA book that looks at intra day price action - even the new school top techs like Bulkowski only goes down to the daily charts.

People that chant this mantra of 'it must work in all time frames' are those that never studied it, I was there a long time before this crowd showed up -sure you get a lot of noise/unreliable patterns on a 5 minute chart that attract the 99% of newbies that never lifted a finger to truly study TA. I can tell you for a fact the only single day price action that matters are blow off tops & key reversals, big hammers - even than they have little weighting without further confirmation. Classic TA cares about the closing price - not intra day action. price.

Here is one of the best of all times - trades futures,commodities for decades using classic TA. He considers intra day, as does the other original wizards that are chartists, to be nothing but noise. The big players know how to exploit short term charts 1-5 minute by causing false breakouts on patterns to lure in the small fish to drop the axe.

 
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I feel like semantically, "noise" is an inappropriate term. Signal noise is when interference or something else is obstructing the desired signal. But, whether the time frame is 1 minute, 1 tick, or 1 month, all that data is true data.

However, it is difficult to practically make sense of any of that data, since you must calculate faster, and the lower volumes lead to many false signals.

Participation and volume are highly important to TA, all of which are proportional to longer timeframes.

If, during the day, volume changes drastically for some reason, it should throw off or invalidate any action that happened before, as many players have either newly entered or changed their own strategies. There could be any number of players waiting on the sidelines during the day before swooping in to cause new action.

But, over the course of weeks or months, you will see a good picture of how generally all the players are moving, which lends more credibility to analysis over longer timeframes. There will be fewer upsets of large movers spoiling certain price action, simply because nobody is big enough to move the accumulated action of several months by themselves. But, a large mover can do that on a small timeframe if they so desired.

Big news events, Fed talks, Oil meetings, Brexits; they are enormous movements on small time frames but on larger time frames are much smaller blips, since, by definition, everything moves slower.

Overall, I think Technical Analysis can hypothetically work in smaller timeframes, but you'd have to account for the surprise players jumping in or out whenever they want. Perhaps non-time-based charting, which is no longer traditional TA, but whatever works.

comagnum said:
The big players know how to exploit short term charts 1-5 minute by causing false breakouts on patterns to lure in the small fish to drop the axe.
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How profitable could this be? Don't "small fish" comprise such a small percent of the overall dollar volume that it's mostly other big players? And hypothetically, how many big players? Are they splitting these profits? I could only assume they fight for it. Overall, I am skeptical of the big game hunters narrative that people seem so fond of. Anything that is simple enough to profit off of will be arbitraged away, and I think that works for all players big and small.
 
You can just say price and volume. TA is price and volume analysis. Direct analysis on what may be profitable, instead of indirection. Some people prefer that. Anybody meaning something else by "TA", I'd challenge them to put forth a precise definition.

If price is really high, are you interested in buying? Now it's really low, are you interested in selling? Why, why not, is beginning of "TA". Ie. if volume is virtually non-existent, are you interested in trading at all? You can make your own "TA", and really should. If you fail, you could always publish a book about it!

Parameters for trade is defined by the trader/investor, which is more important for performance and risks. That something works for someone, is no guarantee it will work for someone else, and vica versa. So what works best, short-term or long-term, can be individual. General consensus is that long-term is easier to exploit. This harmonises well with fundamental pricing mechanisms as well, since ie. companies need to prove themselves over time in order to be priced much higher (ie. double up many times).

Be very wary of "schools of thought", as this is often condensed second-hand facts to be regurgitated, not practical, evolving knowledge and direct experience. So there's no need to accept "TA" at face value (whatever one mean by "TA"). Be constructive and investigate yourself. Same for fundamentals and other ideas. That people share is what's important, not what some dead person said a lifetime time ago - to be put on repeat indefinately. At all times people love the comfortable answers, because thinking yourself is frowned upon and to be repressed in our societies. It's much less risky to pick on others, blaming vendors and externalities, than taking responsibility and own up to mistakes, but will not yield any meaningful value or progress.

So instead of waiting for someone to give you their homework, you could investigate this yourself impartially and present your findings.
 
Simples said:
You can just say price and volume. TA is price and volume analysis. Direct analysis on what may be profitable, instead of indirection. Some people prefer that. Anybody meaning something else by "TA", I'd challenge them to put forth a precise definition.

If price is really high, are you interested in buying? Now it's really low, are you interested in selling? Why, why not, is beginning of "TA". Ie. if volume is virtually non-existent, are you interested in trading at all? You can make your own "TA", and really should. If you fail, you could always publish a book about it!

Parameters for trade is defined by the trader/investor, which is more important for performance and risks. That something works for someone, is no guarantee it will work for someone else, and vica versa. So what works best, short-term or long-term, can be individual. General consensus is that long-term is easier to exploit. This harmonises well with fundamental pricing mechanisms as well, since ie. companies need to prove themselves over time in order to be priced much higher (ie. double up many times).

Be very wary of "schools of thought", as this is often condensed second-hand facts to be regurgitated, not practical, evolving knowledge and direct experience. So there's no need to accept "TA" at face value (whatever one mean by "TA"). Be constructive and investigate yourself. Same for fundamentals and other ideas. That people share is what's important, not what some dead person said a lifetime time ago - to be put on repeat indefinately. At all times people love the comfortable answers, because thinking yourself is frowned upon and to be repressed in our societies. It's much less risky to pick on others, blaming vendors and externalities, than taking responsibility and own up to mistakes, but will not yield any meaningful value or progress.

So instead of waiting for someone to give you their homework, you could investigate this yourself impartially and present your findings.
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This thread was a result of my investigations thus far. I understand your point, and I know a lot of people suffer from the pitfall of not thinking for themselves, but that's not the intention here. I just acknowledge there are people more experienced than me in the field who may be able to address this from perspectives I've not found yet. I believe part of the purposes of forums like these is to share knowledge, and I hope to be clear I am not crossing the boundary into the group of people who ask questions that Google or Investopedia could answer in a few minutes lol.
 
Fundamental analysis (the kind you've been studying) is useful for determining the valuation of a company. That might be useful if you are buying or selling a company outright.

A company's share price traded as stock on a public exchange is a different matter. It has three components 1) broad market, 2) sector, and 3) company-specific. So the stock price is more than what's just happening with the company.

TA is great for historical analysis. Not very useful to predict future prices. That's why it's called Technical Analysis and not Technical Forecasting. Of course, that doesn't stop many traders from attempting to use it to forecast. And there is a temptation to think that if you just shorten your time frame a little more, your accuracy will improve. Unfortunately, that doesn't work.
 
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