Patterns that don't work anymore
- Thread starter Jordan
- Start date
I think we have to remember basic probability theory when answering this question.
It should therefore be "Patterns that work 70% or better of the time over a large sample". Therefore arguably no patterns have ever been better than random in any given decent sample.
Time and again you see TA books getting excited about a pattern that "can work up to 50-60% of the time". That is still random. You might as well flip a coin!
The same argument applies to MACD. In fact why complicate matters by dressing up your chart with all these different indicators unless you produce something that is right better than 70% of the time in, say, 1000 consecutive cases.
Also FWIW I have noticed that the order of the day in my own trading in this bear market has been pattern failure. Look for head and shoulder bottoms/top, flags, cups and saucers and look for it to move sharply the OTHER way after it has suckered a few people in by moving the right way/breaking out for a few ticks. Not that it is necessarily good for 70% + of the time, of course!
It should therefore be "Patterns that work 70% or better of the time over a large sample". Therefore arguably no patterns have ever been better than random in any given decent sample.
Time and again you see TA books getting excited about a pattern that "can work up to 50-60% of the time". That is still random. You might as well flip a coin!
The same argument applies to MACD. In fact why complicate matters by dressing up your chart with all these different indicators unless you produce something that is right better than 70% of the time in, say, 1000 consecutive cases.
Also FWIW I have noticed that the order of the day in my own trading in this bear market has been pattern failure. Look for head and shoulder bottoms/top, flags, cups and saucers and look for it to move sharply the OTHER way after it has suckered a few people in by moving the right way/breaking out for a few ticks. Not that it is necessarily good for 70% + of the time, of course!
This seems to be the crux of the debate, but just as some will hear only what they want to hear when they "listen", some will see only what they want to see when they "read".
Anyone who believes that the task of TA is to predict price action may have difficulty understanding those who believe that the task of TA is solely to determine the current state of the demand-supply dynamic, and that, further, it is the task of the trader, not the pattern or the indicator, to decide what to do with that information.
Rookies commonly want to know - particularly if they have or used to have a fundamental bent - if TA "works". They have difficulty understanding that this is the wrong question, that TA doesn't "work" or "not work"; TA simply expresses the state of balance or equilibrium, if you like, so that the trader can make a more informed decision as to what to do with the information presented.
A coil represents, among other things, indecision. It has to. There's no other way to achieve the coil. Therefore, the coil "works", i.e., it does what it's supposed to do, flash a signal that momentum has slowed or stopped and that something is up. And the coil will always do that.
But that's not enough for the rookie. He wants to know out of which side of the coil price will emerge. Further, he may also want to know how far price will go once it has emerged, what the probabilities are that it will be faded, what the probabilities are that the fade will be a fake, etc, etc, etc.
But none of that is the coil's problem. The coil can't make any of these predictions. Making those predictions is up to the trader. So, does the coil "work"? That depends on what one expects of the coil. Does the MACD "work"? Depends on what one expects it to do.
One response to all this, of course, is what good are any of these patterns if they don't necessarily predict or if they don't tell the trader what to do? To my mind, the good of them is that they give me a sense of what traders in the aggregate are doing, and possibly even thinking. Once I know that, I can then begin to make some contingency plans, i.e., plans that are each contingent upon any of a variety of possible outcomes when the pattern resolves itself, each of which has its own probabilities. Otherwise, I'd simply be making random entries.
--Db
The MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts.
-MarketScreen
MACD "sell" signals are particularly reliable when they follow what the gauge's inventor, Gerald Appel, calls "negative divergences."
-MSNMoney
Developed by Gerald Appel, Moving Average Convergence Divergence (MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator...
StockCharts.com
The moving average convergence/divergence (MACD) is a momentum oscillator developed by Gerald Appel in the early 1970s.
Tradingsmarts.com
I'm sorry what was that again about fooling ourselves.
bert, ever time i see one of your "MCAD works for me"posts i take another look at it BUT, it seems to get you IN & OUT too late. (and when things get choppy...OUCH)
how are you dealing with this?
When the market is choppy you are going to get drawdown, but the remainder of the time the profits more than make up for the drawdown. I use 15 minute MACD. And I am trading the following 5 stocks. ELX KLAC MXIM VRTS XLNX. If you have eSignal give me your email address and I will email you the backtesting EFS.
Bert
how are you dealing with this?
When the market is choppy you are going to get drawdown, but the remainder of the time the profits more than make up for the drawdown. I use 15 minute MACD. And I am trading the following 5 stocks. ELX KLAC MXIM VRTS XLNX. If you have eSignal give me your email address and I will email you the backtesting EFS.
Bert
skeptic123
Guest
Well, not really, but do not take my word for it:
"Technical Analysis is the study of market action, primarily through the use of the charts, for the purpose of forecasting future price trends..."
Technical Analysis of the Finanical Markets, John Murphy, Pg 1.
I guess it makes John Murphy a rookie, right?
Quote from u130747:
bert, ever time i see one of your "MCAD works for me"posts i take another look at it BUT, it seems to get you IN & OUT too late. (and when things get choppy...OUCH)
how are you dealing with this?
When the market is choppy you are going to get drawdown, but the remainder of the time the profits more than make up for the drawdown. I use 15 minute MACD. And I am trading the following 5 stocks. ELX KLAC MXIM VRTS XLNX. If you have eSignal give me your email address and I will email you the backtesting EFS.
Bert
Bert, i turned on my email, looking forward to receiving the info. thanks.
Also, what MACD settings are you using? How are you interpreting the MACD signal?
Your view of the causal effects of investor psychology on price is too simplistic. If what you suggest is so easy to isolate, there wouldn't be a market. You are trying to simplify the polygon "fear & greed" to fit into a round TA hole, but it is far from simple.... and btw it is only a small component of what affects price. I addressed some of this in my earlier post.
