Technical Analysis and Common Sense

R

rs7

OK.... a few weeks back I did my thread on "successful trading", which was essentially about the constructive mind set and emotional approach to trading.

Concurrently, SuperEgo started his thread on how to trade using his foolproof method of technical analysis.

For those of you who participated in those threads, or just passively read them, you will recall that SuperEgo and I butted heads quite relentlessly.

I took a lot of abuse for being too skeptical about his approach. As well as expressing my distaste for his tone. He took a lot of abuse for his demeaning and arrogant style.

But we never really heard the end of SE's treatise. He did however say to me in a PM that his final objective was to inform us all that there is no real "one way" to trade, and that anyone who paid the "gurus" to learn to trade was a fool. His method was apparently to make himself a "guru" and then finish up by telling everyone that they had been "taken". As he felt he had been "taken" by the "gurus" he had paid to learn from over the years.

Now I find it fascinating that the people that took him seriously still are clamoring for him to return to his "lessons". Personally, I think he made his point, and there no longer is any purpose for him to resume. And furthermore, I am pretty sure that he is still with us using a different alias. I hope he is. Though I thought he was offensive in his approach, I appreciated his thought provoking posts, and the level of energy he added to ET.

Now it is my intention to turn from the fundamental basis of my personal trading, which I think I got across in "successful trading". At least it earned me a place in the "Gems" series. For that, I feel gratified that at least some people benefited from what I had to say; which was my stated objective in the very first post of that thread. For this, I am thankful.

Now I will attempt to broach the subject of Technical Analysis. For me, this will be a much greater challenge. I consider myself pretty qualified to talk about the mind set and psychology of successful trading. I do not consider myself by any means to be an expert in technical analysis. So instead of trying to pass on the knowledge I accumulated and refined in my way as I did in "successful trading", I hope to gain knowledge for myself in this thread. This will take interaction and open minds among us all. I hope that this little experiment will work. I hope I don't get too many wise ass interruptions from the usual non contributors. We all know in advance what kinds of brilliant comments they will make. I hope this works!

I will start with a question. I hope the ball will roll in a direction that will benefit us all. And I hope to be able to take a more passive role in this thread and be a student rather than an instructor. But I will start it, and hope it goes the way I know it can if people are willing to share their experience, wisdom and thoughts. Not their negativity and sarcasm.
Thanks,
RS..
 
As I said, I would start with a question.

I have tried for many years to understand the basics of technical analysis.
I have read a lot and listened a lot.

After all this time, it still seems to me that anyone can look at almost any chart and any indicators and come away with what they want to see. I have yet to hear anyone really ever clearly explain what time frames to use or what indicators to look at that work in a universal way.

My question is, has anyone found anything that works consistently over a long period of time? And if so, at what point do they alter what they look at? How does something that seems so subjective to me make sense in an objective way? What are the rules of the road for reading these maps? Do they exist?
Hoping to learn something,
RS7
 
From what I have observed from my two years in the market using a longer term fundamental approach is that things are over done in both directions. I don't feel charts give a trader any indication as to where a stock is headed only where it has been and how it has reacted to news and fundamental events. It is the overreactions that set up great longer term opportunities. Finding a company that has been punished and is trading at very low FY PE seems to have worked as long as the market has been around. Looking at a company's financial position and looking at the speard of analysts estimates can give an trader/investor a good idea as to whether the company has good longer term prospects. The longer your time frame the more time give the stock to find it value. Spread your risk over 20 or so postions, long and short, and you should see fairly good results. I realize buy and hold is not very popular here. The solution is to sell when something becomes overvalued. This would have saved many people during the bubble. Even using the infalted EPS estimates during the bubble the techs were overvalued. Short term trading is more like a sport from what I can tell. You can only teach so much and the rest is just learing the feel and reacting. Longer term investing is more academic and being able to look past short term fluctuations. Both parties support eachother in the bigger picture. Just my 2 cents.
 
Originally posted by bignatty
From what I have observed from my two years in the market using a longer term fundamental approach is that things are over done in both directions.
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I agree with every word you said. But this is about day trading...fundamentals really play no part in a day trade. They really are crucial in investing, but not in trading. Thanks for the input though. You are right, but I think your response isn't relative to what we are trying to do here.
Good luck and good trading, and good investing!
RS7
 
originally posted by bignatty
[The solution is to sell when something becomes overvalued. This would have saved many people during the bubble. Even using the infalted EPS estimates during the bubble the techs were overvalued. Short term trading is more like a sport from what I can tell. You can only teach so much and the rest is just learing the feel and reacting. Longer term investing is more academic and being able to look past short term fluctuations. Both parties support eachother in the bigger picture. Just my 2 cents. [/B][/QUOTE]...snipped


during the bubble years you would not have made money using fundamentals....it was all about momentum...besides like the Enrons and Wcom....fundamentals in these cases would have killed ya ( fake numbers ),,,looking at the chart would have been better...

getting back to what rs7 is talking about I have found success in trading by following my rules ( stop and profit targets ) not by looking at the chart....
 
I suspect most beginners use ta from the perspective of it being the holy grail, and continue the search for the 'right' combination of indicators in the hope of ta making them successful. As we progress we realize the answer is within each of us, i.e. it is the mental/emotional/psychological aspects of trading that determine our success. However even the most successful put some indicators on their charts, I suppose as filter to assist them to act and/or interpret the data so to speak, even though looking at pure data through a ta filter does color the data to fit what we want to see.

Hence I try to keep it simple, with pure data and only a MA or a combination of MAs. I find that other indicators only work well in hindsight and hurt me real time. I try to get my edge by specializing in 2-3 vehicles and getting to know the price action well; and use the MAs as an assist in getting me to pull the trigger. On EOD data I will use boll bnds as a tool in the eve studies.

What period MAs I use depends on the time frame.
 
Well let me say this. By its nature technical analysis is an art form. I believe that those who get good at it subconciously apply fundamentals, past experience, and intution. It becomes less about seeing the chart and more about sensing it. It has been argued that the key to technical trading is almost totally money management. (i.e. cutting losers short, or averaging down constantly taking more and more risk with greater chance of being profitable if the movement occurs). In short no one pattern or indicator will work all of the time. Successful traders seem to develop a sense of when things need to be modified. Tiger woods cannot teach someone to see the green the way he does. A lot of his success is just intangible. Due to the seemingly random short term behavior of the market nothing in the market is consistent for very long. This probably explains why so much trading literature focuses on the mental aspects of the profession and learning to adapt. This also explians why academic studies can successfully disprove the validity of TA. One could likely do a study proving why Tiger Woods cannot possibly consistantly attain the scores he does. He continues to prove otherwise, as do many traders. They can't explain it, they just perform. Short term trading has little to do with intellect and more to do with instinct, which is why it is frustrating for many. More academic types, myself included, are not comfortable with a method that defies a quantifiable explaination. Its fine while its working, but when it doesn't the "why" is difficult to explain. With fundamentals you can usually find a reason, while with TA you just didn't sense the chart the right way. If this happens in a cluster, many begin to doubt their abilites and this in turn clouds their judgement. Again this all a mental thing. Again an explaination as to why daytrading firms care less about GPA and more about how you handled the pressure of being Capt. of the football team during the state finals when you were doen by 6.
 
Fundamental analysis can be reached by studying the numbers ( financials, p/e, etc.etc.etc) . If those numbers are not correct (fake, manipulated or fraud whatever you want to call it) how can one determine what is true about said company to make a call in either direction.. example.. Company looks good on paper, just posted great earnings, and they even guided higher...you would think it may go higher only to end the day below water....later u find out they are being investigated for fraud...
 
I don't think anyone would disagree that fundamental analysis is the most important thing in investing. And if the numbers you are working with are falsified, well then there you are pretty screwed. But what I am trying to learn here is how to use TA in daytrading; since fundamentals really don't mean much in this kind of trading.
Thanks to all,
RS7
 
Originally posted by rs7
I don't think anyone would disagree that fundamental analysis is the most important thing in investing. RS7
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i think i would. why not invest based on tech. analysis? buy when market is in uptrend - set stop loss - wait. price action over everything else. what benefits do you have of excellent fundamentals if the market (stock) is in a longterm downtrend and you bought just because of those fundamentals and watch market continue going down (for whatever reason)?
 
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