TA becomes self defeating??

[dbphoenix]

Quote from jlcarey1:

My trading experience, albeit limited, clearly indicates that the use of TA becomes self defeating. I have read the forums for a while now and it has come to my attention that TA, although useful, becomes self defeating because many traders misuse them. For example, some traders use several TA's on top of each other and it backfires on them because they sort of cancel each other out. In addition, a trader will tend to focus on the TA too much and therefore lose sight of the larger picture for the day.

What are your thoughts?

IMHO, the rule is: Keep It Simple Stupid

If you're defining TA in terms of indicators or patterns, then you're probably right. If you're defining it in terms of how an auction market functions with regard to demand/supply and support/resistance, then no. Understanding why price is moving as it is will give you an edge over those who act only when and because the red line crosses the blue line.

--Db

 

[OPTIONAL777]

Quote from marketsurfer:

no it is can not be self defeating, it only appears to be when improperly used..... example---- a large trend following hedge fund is watching the resistance line at 8777 on the djia. price breaks the line by the funds parameters, the fund begins to purchase large blocks of diamonds, the dow basket, and dow futures, forcing the prices UP. more and more traders jump on board seeing the acceleration of price shattering whatever resistance they have on their technical charts, forcing prices higher. the more people who would buy on a technical signal, the better the signal. there is NO SUCH THING as a FALSE BREAKOUT--- it all depends on your time frame, a false breakout on your 15 minute chart, will earn profits on a 1-3 minute chart. a false break out on a minute chart can earn profits for tape readers, ad infinium.

best,

surfer

A false breakout on the DOW when it ran from the 1987 lows to 11,500?

Now that's a time frame.

Interesting, as in essence TA has become a self perpetuating prophecy due to its dominant use among momo traders and hedge funds, TA could be perceived by a trader as self defeating.

At the end of the bear market, when TA fails all the momo and speculative traders, TA will them become self defeating.

Right now, it is about all that a trader really has to work from.

I am speaking of trading, not fundamentals. In the long run, fundamentals will determine value and price, but the long run can kill both traders and investors when they are wrong.

 

[Tycoon]

Quote from OPTIONAL777:



A false breakout on the DOW when it ran from the 1987 lows to 11,500?

Now that's a time frame.

Interesting, as in essence TA has become a self perpetuating prophecy due to its dominant use among momo traders and hedge funds, TA could be perceived by a trader as self defeating.

It depends on which patterns you're talking about. Moving averages and the like are self-fulfilling, but I would contend that double tops/bottoms, jap. candlesticks etc. are true manifestations of human psychology. They would have predictive value even if no one knew about TA.

Tycoon

 

[OPTIONAL777]

Quote from Tycoon:



It depends on which patterns you're talking about. Moving averages and the like are self-fulfilling, but I would contend that double tops/bottoms, jap. candlesticks etc. are true manifestations of human psychology. They would have predictive value even if no one knew about TA.

Tycoon

I don't know about your definition of TA and FA.

I put chart patterns like double tops/bottoms, etc, into the TA category. If people see a double top, do they look at the fundamentals to confirm a top, or do they look to the chart formation first?

I put financials and trends into fundamental categories. A fundamental investor need never look a chart to discover the asking price for a stock in not in line with the underlying value of a company.

 

[Fluidity]

Quote from dbphoenix:



Understanding why price is moving as it is will give you an edge over those who act only when and because the red line crosses the blue line.

--Db

Do you feel as though you can derive this "understanding" from TA? In otherwords, as a market is moving from point A to B is TA telling you 'why' or just that it is occuring?

 

[Tycoon]

Quote from Fluidity:



Do you feel as though you can derive this "understanding" from TA? In otherwords, as a market is moving from point A to B is TA telling you 'why' or just that it is occuring?

Volume analysis helps, in that regard. After a long uptrend, a narrow-range day accompanied by heavy-volume tells us that supply is catching up with demand. A big rally accompanied by light volume tells us that price is moving higher because sellers have dried up -- as opposed to a huge inflow of buyers.

And don't start with the old tautology that "sellers always equals buyers", so you can't discern anything from volume. That's strictly an ex post condition. At some point in time, buyers must've outnumbered sellers, and the price simply moved up so that the market could clear -- in effect, causing buying volume to equal selling volume.

Tycoon

 

[dbphoenix]

Quote from Fluidity:



Do you feel as though you can derive this "understanding" from TA? In otherwords, as a market is moving from point A to B is TA telling you 'why' or just that it is occuring?

If by "why" you mean all the thoughts that are running through all buyers' heads when they're making their buy decisions, then no.

What I meant by "why" has to do the relationship of demand and supply and how that relates to the relative strength or weakness of various levels of support and resistance.

For example, I can't tell you what was going through every seller's thoughts last week, but I do know that price failed because it tested a level of resistance that had succeeded several times before in turning price back, that volume was less on rallies than on declines (suggesting fewer and fewer people driving price higher, most likely weak hands who would be shaken out at the first scare), that price spent quite a bit of time at the same level with relatively good volume (volume reflecting number of shares traded) and that that implies a fair amount of supply to be dealt with during the next attempt to break through that level (notice that the NYSE pulled back on the 7th and 8th before giving it the old college try on the 10th, 13th and 14th, so even then there was too much supply; now there's even more). This is what I mean by "why".

None of this has anything to do with pattern per se, and even less to do with indicators. It's just basic auction market principles.

--Db

 

[dbphoenix]

Quote from Tycoon:



A big rally accompanied by light volume tells us that price is moving higher because sellers have dried up -- as opposed to a huge inflow of buyers.

Actually, the inflow of buyers needn't be all that huge. There may be somewhat fewer buyers but who are willing to pay higher prices. It's difficult to tell just how many there are or how sincere they are until the first retracement. If new buying doesn't materialize toot sweet p ), then you may be looking down a manhole.

--Db

 

[Kicking]

Technical analysis is about studying charts not the technical analysis books. If you confuse the two,then you may have trouble,you need to know text book TA though just to understand what others are likely to do. Different techniques rarely "cancel each other out" but only reinforce each other that 's the beauty of TA, for ex. if you use fibo #'s, a lot of the levels you'll come up with will be obvious S/R on the charts.

 

[dbphoenix]

Quote from Kicking:

if you use fibo #'s, a lot of the levels you'll come up with will be obvious S/R on the charts.

More than that, if they don't coincide with price S/R, they likely won't hold. i.e., they'll be irrelevant.

--Db