Quote from dbphoenix:
The purpose of musical notation, however, is to enable one to sing or play the music. Notes as to tempo and/or feeling are appropriate. But the purpose of price bars is not to enable the trader to determine other traders' assessment of the importance of news to the price. If so, that would imply that every single trader acts solely on the basis of news.
One can try to look for reasons why price moves up or down, but the fact is that a thousand traders will have a thousand reasons for doing what they do, and not all of those reasons will have anything to do with news.
While I think it's an over simplification to state that every trader has a different reason for being in a trade, I will concur that due to variance in risk tolerance, profit expectations, and the timeframes that participant's use, there is
conflict inherent in the market. Those conflicts are what cause
trades. Though trader's may enter the market for a myriad of reasons, they will only act in a force great enough to impact prices in a meaningful way
if a majority of contracts are traded at previously disadvantaged prices creating new value. Initiative buying or selling so to speak. Naturally over a short duration an event as mundane as a trendline being broken, or a moving average being penetrated can induce traders to enter and exit positions and thus have an effect on the market's equilibrium which manifests itself in changing prices. I will agree with you DB that merely looking at the last quotation does give you the market's "temperature" at that brief snapshot in time.
However, for the market to induce participants to continuously bid or offer prices away from a previously defined area of value, and for those buyers or sellers to overwhelm other participants who are "responding" by fading trades beyond value, a fundamental change in the expectation of future prices must take place. Whether that belief is real or illusionary is of course not important at the moment of rotation, but is paradoxically of paramount importance after positioning has occur. For in order to facilitate trade the buyers will bid to a level that sellers will find attractive, when those sellers factor the appropriate risk premium built in. That is how trade is induced.
To closely examine news and it's effect on TA let's look at a commodities market. Grains are an easier example than stock index futures. Index pricing covers a wide basket of stocks and includes complex variables such as the anticipation of future earning prospects as well as the capitalization of those earnings, which are dependant on many factors including returns vs.competing investments ect. Grains are a little cleaner for this illustration.
If I were to make an absolute statement "Nothing in the world of Corn as known to the majority of participants will change" then we could assume that other than the random jockeying of positions around value that nothing much would change the price of Corn. However if the perception "It looks like we may have a drought!"was allowed to override my prior absolute but now obsolete statement than one could logically expect that those who need Corn in the future would be buyers today. Now of course that buying would set off some technical buying and an adroit chartist would get long "not on the news" but because his system generated a buy. And as the threats of our drought become more real and the expectations of a bountiful normal supply of Corn decrease, the price will continue to shoot up as the shorts fear that they won't be able to deliver Corn at any price. So this huge rally in Corn was entirely
News Driven. Does that mean that our chartist who buys breakouts didn't prosper. Handsomely I'm sure. Just as another guy who sells an overbought RSI or an extension through a Keltner band blew out. And maybe during the course of this rally there was false forecast of rain here and there that got our chartist out of his longs as pre-rain profit takers took the market below his trailing moving average.
To me the guy who nails this hypothetical move is the trader who thought days before the move began in earnest "Gee it's been awfully dry." And then after getting long said "I'm not getting out until I see evidence that we're going to have a harvest that makes current prices look high." He may use a "technical' framework within his fundamental view, but the saying ignorance is bliss is
never apropos to the world of trading. You're not just trading prices and formations, you're trading conditions.
