should most analysis be discarded as it is "too much information"
Yup.
Yup.
should most analysis be discarded as it is "too much information"
- Thread starter sosueme
- Start date
+, um ... 15!
I personally feel that an indicator is only as valuable as the number of people actually using it.
What do I mean? Lets take support/resistance (supply/demand) lines and trend lines for instance. Do they work? To some degree they do. But why? Because so many people and even some automated trading systems also use them. This makes these types of things a self fulfilling prophecy. If 100k people all think a stock is going to rise to a certain price then drop due to a trend line or a prior S/R line, guess what happens? When it gets there all those people start selling. Even if the fundamentals say the stock shouldn't stop there it will at least hesitate or drop some at those levels due to all the people that think it should based on the little lines they drew on their chart.
So to anyone planning on using any sort of indicator you might want to consider how many people are also looking at that indicator.
What do I mean? Lets take support/resistance (supply/demand) lines and trend lines for instance. Do they work? To some degree they do. But why? Because so many people and even some automated trading systems also use them. This makes these types of things a self fulfilling prophecy. If 100k people all think a stock is going to rise to a certain price then drop due to a trend line or a prior S/R line, guess what happens? When it gets there all those people start selling. Even if the fundamentals say the stock shouldn't stop there it will at least hesitate or drop some at those levels due to all the people that think it should based on the little lines they drew on their chart.
So to anyone planning on using any sort of indicator you might want to consider how many people are also looking at that indicator.
"07-23-09 10:51 AM
Reading this thread and it's exchanges between posters, has all the humor and sadness of watching two midgets wrestling.
I never know whether to laugh or cry or do both at the same time.
jjf"
I wrote that on the Volume Analysis thread because I could not believe that a group of people could be so pathetically stupid.
But hey, this is ET.
jjf
A self-fulfilling prophecy does not necessarily mean anything.
This is a continuously published belief, but where is the proof it is true? Where is the strong analysis that after testing thousands of trades on hundreds of different instruments at many different levels (S/R, which was your example), for long time periods, that a STRONG market outperformance was available because the market always did X ????
Ignoring the fact that almost everyone will interpret something, and enter something and act on something in their own particular way and timing...
Generally, for there to be a transaction, there needs to be a buyer and a seller at that moment, or the price will change until there are. If this is self-fulfilling, then very clear market action should happen, that is quantifiable and tradeable.
But "I believe that" is neither evidence, nor proof nor a sound trading method.
Very well put Sir.
There can be no self fulfilling prophecies, only buyers and sellers at price levels as you point out.
We know that shares and contracts change hands but we do not know the reason why other traders buy or sell and so we must discard everything that is not proven and actual.
This leaves us with very little information and so the temptation to add it, subtract it and generally play with it, proves irresistible to most people.
Fast moving cold hard facts have a brutal edge to them.
sosueme
What causes supply and demand levels though? What causes people to repeatedly decide that XYZ stock shouldn't go higher than X level or drop below Y level?
If XYZ has a 52wk high of $65, a 52 week low of $40 and is currently trading between two other S/R ranges at $50 and $60. Yes you will have people thinking that the stock will go up and some thinking stock will go down so traders taking both sides exist. If the stock moves up to $60 though a LOT of people will look at S/R lines and decide that the run is over and will sell to those that think it's still going up to the test the 52wk high so still people taking both sides of the trade but why was $60 important this time? Because it was important last time!
I really see no way to actually test this theory though since there is no way to know what was in the mind of every trader at the time they take a trade of any security. So it will forever remain a theory. However I find it very hard to believe that enough people looked at fundamentals and decided that XYZ stock should be bought at X price and sold at Y price so the charts HAD to play a part of that decision. This is why they only partially work though. Either way what works, works regardless of the why.
You formulate a theory about supp/res, you put at least 500-1000 trades of different instruments over a long time period, and you see if something predictable happens. That is called "statistical validity/significance." Then, you pick a completely unrelated large set, and see if the theory holds up...
Belief in "self-fulfilling" prophecies have no meaning or value in trading. And it is not any kind of proof that they are either worthless or worthwhile. It is a random, unsubstantiated belief many have, like those who believe in aliens against all logic.
Aliens come dozens of light years (which takes MANY MANY years to travel, based on our knowledge of physics) just so they can tease and titillate a small percentage of people, without making any significant contact? Can you imagine our space agencies doing that?