Technical Analysis and Common Sense

Helllo All,
Newbie here, thanks for the insights into trading!
Rs7 - I always zone in on your posts - excellent - thanks.
As for T/A, I've went through the (normal?) newbie process of reading a guru's book, thinking YAHOO - THIS IS IT, then the let down upon trying the method. After a dozen or so of these I've come to realize they all work, just not all the time. T/A reminds me of the card counting methods used in gambling - can shift the odds based on the user's skill and experience. Even signed up for crazy Waxie's chatroom thing (2 weeks free). He did make calls that made me money - more than enough to pay for his service. Bailed after the 2 week thing - why? - because I wasn't learning anything by just following his calls. Want to learn how instead of just blindly following a guru (what if he gets hit by a truck?). This website seems alot more geared towards the "how" part.
At first the method seemed the most important thing to learn, but the Waxie experience was the turning point for me - now the mindset and thought process seems most important.
Thanks again,
Smitty
:D
 
Originally posted by bignatty
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.
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Money management is the key not only to technical trading, but to any type of trading, including investing on long term fundamentals.

Unless your fundamental analysis is 100% right all the time, you are gonna face the prospect of having losers. Therefore, how you manage the effect that your losers have on your equity is important to fundamental LTB&H also.

As far as technical anlaysis goes, >95% is a waste of time - if you're objective is to actually make money. If you wanna improve your skills at calling the market's next big move, well, fee free to play games with TA.

I do use some simple technical tools. I look at charts, not to predict where the market is going to go, but to get a glimpse of where the current price is compared to where it's recently been (I have my reasons for this) and to see where REAL support and resistance areas have been. (Not "implied" resistance and support - like projecting that a price will have support at some arbitrary MA level, or "pivot" points and other crap..)

Position sizing has often been mentioned as the real key to making money. This kind of statement used to really confuse me. Sure, I understood the concept of only risking a certain portion on each bet. But I only viewed it as a tool to keep you in the game. In Tharp's book he says something like, "there are as many position sizing algorithms as "something" (can't remember what he said, but the point was they are numerous)". I couldn't understand this at all. I though, well, you can risk a certain percentage of your equity on each trade, you can make that percentage a function of the volatility, there might be a few other ways, but that's about it.

Well, I was really wrong about that. To paraphrase Tharp, "Position Sizing answers the question, 'how much'?, at any point in the trade..". I would say that the decisions you make in regards to how many shares you hold depending on how your position is moving is the real key to making money, eg, when to add to winners, scaling out of losers, averaging down (not recommended!) etc. Obviously with day trading this can be quite difficult, given the speed of price movement; needless to say, it's not something scalpers would ever use. Through my own experience though, varying your trade size depending on how a trade is going is a much more powerful way of making money than simply, for example, buying 1000 shares based on some technical indicator and waiting for a profit target or stop point to be hit. That's not just an opinion, but something that I've quite extensively mathematically investigated (via spreadsheet).

One more bit of "advice". "Paring out" of a position as it moves in your favor is something that's quite popular. Tharp makes mention of it in his excellent book, but I want to reiterate on the point. Set up a spreadsheet and test various scenarios - it should quickly be clear that "paring out" of winners is one of the worst position sizing mistakes you can make. I know it helps psychologically (hell, i used to do it all the time), but that does not mean it is mathematically favorable.
 
Originally posted by gerry875


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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I don't know if I agree....
Yes, it would be somewhat foolish (risky at best) to buy a stock if the MARKET is in a longterm downtrend. I think that is what is scaring people off right now. But all things being equal, no matter what the market is doing, is it not best to INVEST in a company which has strong fundamentals? Or to short a stock with weak fundamentals? If a company has bad management and loses money and has too much competition, etc, etc, what are the chances of it becoming a good investment? And if the company has everything going for it except a cooperating market, should it not be among the leaders in a turnaround? This is not to say that the market is not a major factor in timing investments. It is.

But my original objective of this thread was to learn how to implement TA in day trading. So all the agreement or disagreement about fundamentals as related to investing is really off the subject. But thanks for your thoughts. Hope you can help me out with the TA in daytrading question.
Thanks,
RS7
 
Originally posted by rs7

And if the company has everything going for it except a cooperating market, should it not be among the leaders in a turnaround? This is not to say that the market is not a major factor in timing investments. It is.


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And that is the inherent problem. The market (to paraphrase a popular saying) can price a stock irrationally for a lot longer than you can remain solvent.

Personally, I have my doubts as to whether purchasing a stock in hope of price appreciation can really be termed "investment". (For a more thorough treatment of investment/speculation, I refer you to Ben Graham's book, "The Intelligent Investor".)
 
Originally posted by daniel_m



Personally, I have my doubts as to whether purchasing a stock in hope of price appreciation can really be termed "investment".
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What would be a better term?
Or what would an "investment" be if not this?
 
Originally posted by rs7
As I said, I would start with a question.



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
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This answer is related to trading the bonds and notes and indexes - but shows promise in all other commodity markets I have looked it over in, but not traded.

I would answer your question as - Yes I believe I have found something that works over a long period of time. I have watched it for 6 months and from whom I have learned it has traded it for many years. And has been consistently profitable.

Don't understand the second part of the question - why alter it if it continues to work.

If one sets and follows the rules, (rules are set by the trader himself, after system analysis and study) there is less subjectivity thus taking out some of the emotion. But it is nearly impossible to remove all of the emotion.

i.e. Today's trading - 9 of 10. All purely technical. Some long some short, but using 1 indicator and price action. Maybe two indicators if you count using the NQ or ES, watching their direction.

Make 'em pretty, Chris
 
No offense everybody...but if a fundamental investor/trader comes to a technical analysis thread to discuss how good fundamentals are or why he prefers fundamentals...

this thread will easily loose the original questions and answers that rs7 asked...

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?

Yes...I and I'm sure many other hardcore TA types have found many technical trade setups that consistently works.

rs7...I don't understand your second question..."at what point do they alter what they look at?"...hmmm...maybe you mean do TA traders at some point see something that's not really there?

If that's what you meant...I would say this...I met some TA traders that still hold onto their "opinions" prior to a trade. Thus, they convince themselves something is there...a pattern...a candlestick that hasn't completed it's interval...and so on...

such TA traders usually get into trouble trades because they anticipated something before it could show its true shape.

Your third question..."How does something that seems so subjective to me make sense in an objective way?"...TA traders that start over-analyzing, start looking at charts based on what's subjective or not...are heading for trouble.

Successful trading isn't rocket science nor does it require a PhD in psychology nor a degree in art.

Your fourth question..."What are the rules of the road for reading these maps? Do they exist?...simple question...

Daytrading requires basic-simple chart reading...mapping the road to profits.

Here are some simple rules that most succssful traders apply relentlessly...regardless if they are full-time or part-time making a living at trading:

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. :cool:

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.

rs7...I can go on and on all night with simple rules of the road to profits...

Many TA traders also get caught up in trying to find out what indicator works the best...is Stoch better than Bollinger Bands...is Flag Pattern BreakOuts better than Ascending Triangle BreakOuts...on and on and on...

they need to stop treating their trading like this and simply pick something...stick with it...learn how to use it successfully and consistently...then take another step forward to master another indicator or pattern.

Further...all the very successful traders I personally know (not some online buddy...but know in person)...that are making 6 figure income via TA while daytrading stocks or the Eminis...are only using a few indicators that don't break the multicolinearity rule.

They know these patterns or indicators better than the back of their hand and NEVER or RARELY hesitate to pull the trigger when a trade setup appears.

Here's another emphasize point...all of them had mentors.

Few traders...only special ones...do not need a mentor. Trading is like a sport. All top athletes had good coaching...a few...just a few...have raw talent.

Yet, even those raw talented ones needed to be cultivated by someone else.

Keep it simple as you possibly can.

NihabaAshi
 
Originally posted by rs7

What would be a better term?
Or what would an "investment" be if not this?
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A trade.

If I bought a company and expected to share in its earnings, that would be an investment. If I bought a company (a business) and could sell its assets, pay its taxes and debts and still come out with more money than I risked, that would be an investment. If I lend money to a certain entity (be it individual, corporation or government) and I expect a return in excess of what I lent, that would be an investment. Buying a "market leading" stock in the hopes that it will go higher, not an "investment". (Probably a good trade though). Similarly, buying a house and enduring negative cashflow, in the hopes of capital appreciation is hardly an "investment". More like Buy and Pray.
 
Originally posted by NihabaAshi
.are only using a few indicators that don't break the multicolinearity rule.

NihabaAshi
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Consider me ignorant...

By this I asume you mean duplicating indicators??

Make 'em pretty, Chris
 
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