Technical Analysis and Common Sense
- Thread starter rs7
- Start date
Hi DblArrow,
Yes...kind'uv.
For example, don't use a buy signal from stochastics to confirm a buy signal in RSI...violation of this multicolinearity rule.
Here's another...don't use a short signal from the 3eMA (price exponential moving average) to confirm a short signal in the 5eMA.
Here's an example of not breaking that rule...Buy signal in Japanese Candlesticks with confirmation via stochastics...
or another good example of not breaking that rule...Short signal in Bollinger Band with confirmation via volume analysis.
NihabaAshi
Let me offer general take on TA that works for me.
Following is the quote from the book.
There is a question you can read in many different forums quite often that asks âDoes Technical Analysis (TA) work?â
It all depends on what you expect TA to do for you. If you want TA to tell you what the future brings, then no, they do not. If you want TA to help in your trading, they sure do.
To me, TA has no PREDICTING value, in a sense that this or that setup or pattern does not allow us to tell in advance which way the price goes. Their value is different. They put structure in what seems to be a chaos of price movements.
Using an analogy, I would illustrate it in the following manner:
Pretend that you observe a car on the road and youâre trying to figure out which way itâs headed. There is a crossroad ahead and until the car reached it, you don't know which way it chooses. When you see the right-turn light flashing you can assume that the car is going to make a right turn. Is it absolutely a certain prediction? No, it isnât. The driver can still change his mind, but the probability of the right turn is high enough. When the car makes a right turn, you can assume with even higher confidence that it goes to the right. Can it stop and back up? Sure it can. But betting on the right direction after the right turn, you have odds working for you. At the same time, you know what signs indicate that your initial assumption is wrong. The car reaches a crossroad going backward and turns left.
This is how trading setups work. They show you road signs. When you have road signs you know what to look for to determine what further direction has a higher probability to occur.
Let's cite a simple example.
A stock is moving in a range between 19.75 and 20. You want to play a break of this range in the direction of a break, assuming that if stock breaks to the upside itâs a sign of strength, and visa-versa for the break to the downside.
Your setup is for a long side trade on the breakout over 20 with support at 19.75. There are two road signs. The break of 20 indicates going upward and the break of 19.75 indicates downward. Having those signs identified you got your set of IF-THEN scenarios. You also got your safety net. If the price moved through 20 and dropped to 19.75 and broke it, oh well, the driver was drunk.
As you can see this example doesnât tell you whether or in which direction the breakout is going to happen. It just gave you an idea of what you should do if and when it happens. That's what I meant when said that TA didn't offer me predicting value. They haven't told me which side was going to be broken. But they did offer me the structure and favorable odds. They offered me indications of the most probable direction.
So, for me "Do they work" is not even a question. Sure they do, as long as you read them to your advantage and do not expect them to just tell you what is going to happen.
End of quote.
Vad
Following is the quote from the book.
There is a question you can read in many different forums quite often that asks âDoes Technical Analysis (TA) work?â
It all depends on what you expect TA to do for you. If you want TA to tell you what the future brings, then no, they do not. If you want TA to help in your trading, they sure do.
To me, TA has no PREDICTING value, in a sense that this or that setup or pattern does not allow us to tell in advance which way the price goes. Their value is different. They put structure in what seems to be a chaos of price movements.
Using an analogy, I would illustrate it in the following manner:
Pretend that you observe a car on the road and youâre trying to figure out which way itâs headed. There is a crossroad ahead and until the car reached it, you don't know which way it chooses. When you see the right-turn light flashing you can assume that the car is going to make a right turn. Is it absolutely a certain prediction? No, it isnât. The driver can still change his mind, but the probability of the right turn is high enough. When the car makes a right turn, you can assume with even higher confidence that it goes to the right. Can it stop and back up? Sure it can. But betting on the right direction after the right turn, you have odds working for you. At the same time, you know what signs indicate that your initial assumption is wrong. The car reaches a crossroad going backward and turns left.
This is how trading setups work. They show you road signs. When you have road signs you know what to look for to determine what further direction has a higher probability to occur.
Let's cite a simple example.
A stock is moving in a range between 19.75 and 20. You want to play a break of this range in the direction of a break, assuming that if stock breaks to the upside itâs a sign of strength, and visa-versa for the break to the downside.
Your setup is for a long side trade on the breakout over 20 with support at 19.75. There are two road signs. The break of 20 indicates going upward and the break of 19.75 indicates downward. Having those signs identified you got your set of IF-THEN scenarios. You also got your safety net. If the price moved through 20 and dropped to 19.75 and broke it, oh well, the driver was drunk.
As you can see this example doesnât tell you whether or in which direction the breakout is going to happen. It just gave you an idea of what you should do if and when it happens. That's what I meant when said that TA didn't offer me predicting value. They haven't told me which side was going to be broken. But they did offer me the structure and favorable odds. They offered me indications of the most probable direction.
So, for me "Do they work" is not even a question. Sure they do, as long as you read them to your advantage and do not expect them to just tell you what is going to happen.
End of quote.
Vad
Publias, as you know, I am a pretty simple minded guy. I do not pretend to know TA "like the back of my hand" as the next guy talks about.
I simply trade on relative strength and momentum.
Simple example (don't take this to mean this is exactly what I do all the time...and I will make the numbers round for the sake of simplicity, even though they are obviously not realistic)
SPX up 1%
NDX up 2%
so NDX is stronger...I am now looking at techs.
NDX up 2%
SEMIS up 3%
now I am looking at semis.
SEMIS up 3%
INTC up 4%
I want to buy INTC..it is showing great relative strength.
So now it becomes about timing. If the stock is trading in a range of being up (for the sake of argument) between 1.5 and 2 pts, I will wait for a pullback if it is up 2 pts. If it continues up, and I miss the trade, I will wait for a pullback of 20-30% of it's intraday gain. So if it goes to being up 3 pts, I will buy it on a dip of 60 to 90 cents.
The only time I really use charts (because I am a TA retard) is to look at intraday action and be able to get a graphic image of where the pullbacks and run ups are.
I know this is an over simplification, but I hope it answers your question in a basic way as far as how I get into a position. As far as exiting, I just get out when the position no longer looks like I should be in. If I am up in it, I will hold it with "mental trailing stops" (say 20% of profit disappears). As long as I don't have a real reason to exit, I will hold. If the trade goes against me, I will get out fairly quickly unless I think that the stock is still holding up relatively well to the market. I try to NEVER let a winner turn into a loser. If I am up in a trade, and the profit goes to zero, I will get out no matter what I think...knowing I can always get back in sometime later in the day.
Hope this helps!
Best to you my friend!!
RS7
Actually,
All points are TA related...regardless whether directly or indirectly. Most daytraders use TA...not all...but most.
For example...How can a trader effectively apply TA if he/she is stressed out from their trading and has not gotten a good nights worth of sleep for many consecutive nights?
Most know what a flag pattern is...what a descending triangele is...what a Doji candlestick is...what stochastics overbought means...
but many don't understand they need a good night's rest to apply and make good mental decisions. Therefore...a good night's rest (via this example) is indirectly related to having the ability to make wize trade decisions via technical analysis...yet, it is related.
TA traders or any type of trader often forget that they themselves are the key...thus, they must take care of themselves.
You ask...what is TA purpose?
I'm a chart trader...here's my answer as that as a chart trader: I realize there are enough traders out there using charts also...I realize charts maps the flow of supply/demand...I realize that I need technical analysis to be able to exploit this supply/demand for income (profits).
Thus, it's purpose to me is it's my tool to do my job. Just like wrenchs to a auto-mechanic, scalpel to a surgeon, football plays to a quarterback...it is my tool to accomplish my goals in life.
It pays my bills, supports my family and allows me to do my job effectively knowing there are possible other methods to accomplish my job.
Some more re-editing...
Remember this...there are many and different paths to profits...
no matter what path we as individuals travel to those profits...we have two choices...to continue traveling that path to profits...or get off and travel another unfamiliar road.
NihabaAshi
âDoes Technical Analysis (TA) work?â is not even a very good question to be asking. What does that question mean?
If it means, "is it possible to make money based on decisions made using technical analysis?", then the answer is an unequivocal "yes".
If it means "can technical analysis tell me whether a price is going to go up or down after a certain period of time", the answer is, possibly. In my experience, such technical analysis hasn't really shown me anything that gives much better reliability than mere chance. Also, even if a certain TA "technique" does have a high "reliability", there are still many questions as to whether one can actually make money using it.
Threei...very nice explaination.
Good night and hope all have a good weekend.
NihabaAshi
Ahhh.. Keep it simple...this is what I am trying to do. But I am having a hard time keeping it simple and trying to understand "violation of this multicolinearity rule" and such. Why stochastics and not MACD or RSI (put these in any order you wish)Originally posted by NihabaAshi
Successful trading isn't rocket science nor does it require a PhD in psychology nor a degree in art.
1) Have a trading plan prior to each trade position.
2) Trade with a small amount until your consistently profitable after many months (not days nor weeks)...before increasing your trade size.
3) Get a successful mentor with a verifiable trading record and pay him/her well to teach you.
Trial-n-error is the most expensive school to attend and will cause the most psychological trading damage. Further, it takes the longest path to profits and most cannot endure the length of such a road.
4) Maintain a daily in-depth journal of every trading day that includes annotated charts, trades, notes...mental and physical state.
5) Trade one financial instruments or just a few...learned how they move...know them better than the most intimate parts on your body or spouses body.
I'm serious about this.
6) Treat your trading like a business. This is not a game.
7) Know the weakness and strengths of your indicators...when to use it and when not to use it.
8) Learn and practice stress management techniques...you'll sleep better at night and so will the person next to you.
Keep it simple as you possibly can.
NihabaAshi
As far as your 8 rules, thanks for the pointers. However, I have been doing this for a long time and in a lot of capacities. I have traded on the floor of the CBOT and CBOE and AMEX. I have traded as a market maker, a firm trader, a prop trader, and a money manager. I have been successful at all of these endeavors. I know you had no way of knowing this, and I appreciate your points (though for me, they are not new revelations). They are great for any trader to be aware of. So thanks for taking the time.
What all my years trading have NOT yeilded is an understanding of Technical Anaylysis. This is why I have tried to get a dialogue going about it in this thread. But so far, I have yet to get the answer I am looking for...which is "STATEGY X WORKS ALL THE TIME (I will gladly settle for more times than not). So far, all I have heard is disagreement. To this point, this confirms my suspicions that TA is just too subjective. I have lived without it for a long time. I sincerely hope I can learn something about it that I can incorporate into my trading. But so far, I am not getting any clearer on it than I have been.
As for your numbered points....they are well worded and make a great deal of sense. Other than #4, I have done all of the above. #2 is way too far in the distant past for me now. Unfortunately for me, #3 does not apply as I am supposed to be the mentor (or at least I get paid to be). But I believe that I can learn something from everyone. I will often learn something from a new trader. This is why I have always made my meetings an open forum. I don't think I have done a "lecture" type of meeting ever.
Thanks for your response....I am really trying to learn and understand. Maybe I am just not capable, but I will not stop trying.
RS7