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

[Trader13]

With this noise thing...the same can be said for any time frame. You may have a position trader who says that the daily chart is just noise. You may have a long-term value investor who says that anything less than a weekly chart is noise. We can go on and on about what qualifies as noise. What these guys should probably say is that...depending on one's trading style and holding time, certain time frames aren't taken into consideration.

If you really study this topic extensively, you will find one camp that claims market prices are "fractal" in all time frames, just as Apophenia indicates above. IOW, the same technical patterns occur in multiple timeframes, so all timeframes are equally valid for TA.

There is another camp that claims the most meaningful prices are based on the daily close, because that's the logical end of a trading session and reflects the actions of institutional traders adjusting their positions for that session. By comparison, an intraday price bar is just a price print at an arbitrary time during the trading session and reflects nothing more than random order flow.

In fact, many years ago I had a personal conversation about this with Greg Morris, an associate of John Murphy, at a trading conference just after he published his book on Japanese Candlesticks. He told me that candlestick patterns are only valid on daily bars for this reason. He kept his voice low because he didn't want to agitate any intra-day traders who might overhear our discussion.

 

[comagnum]

Not trying to be a know it all - if TA works for you on a 1 -5 min chart than great. But keep in mind the HFTs and hedge funds are very well aware of the patterns on the 1-5 charts and they are experts at creating false breakouts to trap the twitchy day traders by swinging price violently the other way. The wider time frames minimize this gaming since it brings IN a whole different set of players - the swing & position traders/investors. There are a few very successful pattern traders will go down to a smaller time frame to laser in on an entry - but even than they will say that the smallest time frame has far less weighting than the larger time frame due to the noise & trickery.

 

[comagnum]

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."

Hate to be all over you but there is no way an intra day chart holds equal weighting to price crossing a previous quarters high which is a signal nearly every hedge fund and institution is monitoring world wide. Intra day is noisy - arbitrage, day traders, hedging, etc. Only the closing price reveals the players that are holding.

 

[Apophenia]

Markets are fractal but relative signal to noise ratio decrease as the TF decrease.

It's relative on your own TF. If you swing trade then 5m data bars will bring more noise than signal. But if you day trade 5m data bars will bring enough signals and a better signal to noise ratio than 1m data bars.

HTF aren't more noisy for day traders than Soros breaking the BOE (Or Icahn deleveraging HLF) is for Investors.

See ? It's also fractal ...
HTF are noisy for Day Traders
Day Traders are noisy for Swing Traders,
Swing Traders are noisy for Investors ...
While each's surfin on the higher TF.

 

[comagnum]

WOW, lack of knowledge big time here. Just cause you don't trade or can't trade using TA intraday doesn't mean it doesn't work, it doesn't work for you, and that is ok.
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I can tell you know nothing about the market auction, how the higher time frames bring in a whole new set of players that can really move the market.

I think it's you that can't trade, right back at you since you made it personal.

 

[Apophenia]

WOW, lack of knowledge big time here. Just cause you don't trade or can't trade using TA intraday doesn't mean it doesn't work, it doesn't work for you, and that is ok.
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I can tell you know nothing about the market auction, how the higher time chart time frames bring in a whole new set of players that can really move the market.

What the hell are you talking about ?!
He says TA works on small TFs.
That's it ... No more, no less.
Auction is another topic.

So you better learn to read, first.
Then apologize for being a bitch with him.

 

[Investor]

I appreciate everyone's input - I'd also appreciate if this didn't devolve from where it is now. So far, there has been a lot of meaningful information in this thread and I've seen enough threads go from this to wars quickly lol. By the way, Apophenia / comagnum, thanks for reminding me of the fractal market hypothesis. I hadn't heard of it in years and forgot what it meant, so it's a nice subject to review.

 

[comagnum]

TA has always incited a wide array of theories from those that never have bought a book on it and truly studied it. That is why I refereed to it as 'classic'. If you follow the classic TA there really is no debate. Today's traders are more likely to be day traders, with a 96%ish failure rate. If you follow them you get the same results, most of them are using intra-day TA while you have some classic TA's not using intra-day charts with decades of mind boggling profits and minimal draw downs - you be the judge.

 

[Apophenia]

I appreciate everyone's input - I'd also appreciate if this didn't devolve from where it is now. So far, there has been a lot of meaningful information in this thread and I've seen enough threads go from this to wars quickly lol. By the way, Apophenia / comagnum, thanks for reminding me of the fractal market hypothesis. I hadn't heard of it in years and forgot what it meant, so it's a nice subject to review.

You're welcome. Mandelbrot is the best read on this topic. Edward Throp is another one I'd suggest you to read (even if he's off-topic here).

As every tool in Finance, TA or FA have their Pros & Cons, Uses and Limits. Don't fall in love with none, see if and how they can help you make better decision even if none has the right answers.

 

[eurusdzn]

On the topic of pricing already factoring in fundamentals, could one not argue that price also factors in technical analysis? It's paradoxical in a way, but I think it sort of supports the old adage that it is a self-fulfilling prophecy. I tend to think in both cases, it is the lack of consensus that leads to profitable opportunities (e.g: the market priced fundamental information incorrectly or investors are viewing the same price action incorrectly). Of course, I tend to think the process of predicting it correctly even with a minor edge is a ridiculous challenge and is why index investing is so enticing...

Anyway, I really like your mention of charting by hand. Although I do not know if I will go to this extent, I could see myself creating the charts in Excel using my own inputs instead of simply using charting software - I agree completing tasks yourself helps you learn better, both in terms of speed and retention. Thanks for your input regarding noise too, which seems to be a hotter topic than I thought lol.

I think concensus is always there to some degree , there is pressure, otherwise price would be sustained noise without drift.
I think it is the frequent , constant , incorrect discounting of the future price in your timeframe
that creates opportunity. Yet, this may have little effect on the correct discounting of future events in a higher timeframe. Just look at treasury prices between fed meetings and long term treasury prices for example.
TA can work like inertia if little opposes it and when something does,you can see that TA defines limits to price action. Sometimes without apparent new inputs TA can itself impose the price inertia. Or so I've read.