Technical Analysis = CRAP

[Neenisti]

Quote from zdreg:

Do boys prefer to play with toy soldiers or play house with dolls?

Both, most play with toy soldiers but older boys that want to win the favors of the girls tolerate playing with dolls and don't tell their friends they did.

We are having a reasonable discussion. Differences of opinion happen all of the time. Most reasonable adults handle differences of opinion better than children.

 

[Maverickz]

 

[plyka]

Quote from Frits:

It surprises me that some traders still have the illusion that by using technical analysis they are able to predict the direction of the market.

Let's say for the sake of the subject that today some brilliant mind came up with an indicator that indeed is able to predict the market. Let's call this indicator "moneymaker" ! Now don't go running to the fridge to get that bottle of Dom Perignon just yet...

A) At a certain point in time (let's call this "T") the moneymaker signals that the market is about to go up!

You buy and with that you enter a long position. Smart move because the moneymaker signals a rising price.

B) At T+11 (or 19, 37 or 76) the moneymaker signals that the market is about to go down again.

You sell and with that you close your long position and collect your profits. Smart move since the moneymaker just signals a falling price. Profits in the pocket open that Dom Perignon the sabrage way (with a sword)! Or...

All seems very logic right?
Now I have two questions for you:
1. Who is dumb enough to sell in situation A? Would you sell? Who the f*ck is going short while the moneymaker, the brilliant technical indicator indicates that prices are going to rise!? So you can buy all you want, but there is no seller!
2. Who is dumb enough to buy in situation B? Would you buy? Who the h*ll is going long while the moneymaker indicates that prices are falling!? So you can sell all you want, but there is no buyer!

If, yes IF technical analysis is able to predict the market, that same magical ability would kill the ability to predict the direction of the market by itself.

Whenever you enter the market you have a 50% that it goes up and a 50% chance that it goes down. The trick is to limit your losses and ALWAYS let your profits run.

Quit following the advice on the use of TA that all the scammers on the internet try to give you in return for hundreds or thousands of dollars. They are the ones that failed in becoming profitable by trading. And now they are trying to make money by teaching you about technical indicators. Apart from the fact that it is useless, the info on TA is also to be found for free on the internet.

Shaka !

Frits Altenburg
P.s. this advice was for free

You're not looking at this like an experienced trader would.

1) This is not a mathemaical forumula, things do not replicate exactly, like history, it's not the same verse but it rhymes. I doubt you will ever have exact same formations, there will be things which are different.

2) Things don't work the same for each event. Assume that you see a signal A which resulted in a conclusion Z. It doesn't mean that every time you see an A, it will result in a Z. It doesn't even mean that MOST of the times, this will be the result. It's more like, when you see A you can create a risk/reward ratio for yourself which is positive. So perhaps it hits your stop which is X% away 90% of the time, but 10% of the time it goes in your favor and hits your profit target which is Y% in the positive. And Y > 9X.

3) Things change all the time. What works today may not work tomorrow, but something else will work. It is the underlying characteristics that you must learn. Those will be there in different vessels.

 

[Maverickz]

Quote from plyka:

You're not looking at this like an experienced trader would.

1) This is not a mathemaical forumula, things do not replicate exactly, like history, it's not the same verse but it rhymes. I doubt you will ever have exact same formations, there will be things which are different.

2) Things don't work the same for each event. Assume that you see a signal A which resulted in a conclusion Z. It doesn't mean that every time you see an A, it will result in a Z. It doesn't even mean that MOST of the times, this will be the result. It's more like, when you see A you can create a risk/reward ratio for yourself which is positive. So perhaps it hits your stop which is X% away 90% of the time, but 10% of the time it goes in your favor and hits your profit target which is Y% in the positive. And Y > 9X.

3) Things change all the time. What works today may not work tomorrow, but something else will work. It is the underlying characteristics that you must learn. Those will be there in different vessels.

While most of this is true, I still say that the reason that proper technical analysis works is because enough people believe that it does. This includes ALL of the automated trading systems out there. I highly doubt it would be possible to build a fully automated, high-frequency, intra-day trading system (such as those used by large institutions) based on fundamental analysis. The key is to try and figure out where those system will be setup to buy at and where they will be setup to sell at. Since these systems have to be using tech analysis you can bet they are based on some sort of historic supply/demand levels to determine high/low points.

Now, not all of the systems use the SAME indicators so this is why they sometimes work and sometimes don't. The more systems (or higher volume systems) that identify the same area as a "buy point" the more likely the price will go up. The fewer systems (or lower volume) that identify the point, the less likely it will be correct.

You then have to take into account fundamentals as well. If the news is good enough or bad enough it can override the technicals, just as strong technicals can also override fundamentals.

Imagine if a stock has been slowly trending down, but is now at the bottom of a channel as drawn from lowest lows, at the same time it is reaching the bottom of a bollenger band, at the same time it is reaching a historic demand area as drawn from horizontal S/R lines, AND just released a good earning statement. What do you think the likelihood of this stock going up is? Take the same stock but only one of the prior conditions is true, now what are the probabilities? What if the good earnings comes when the stock is trading up into a historic supply area, while also at the top of the channel and top of the BBands?

The final take away here is the more agreement from multiple technical analysis concepts AND from fundamental analysis you have the greater the probability of being correct. It still may not be 100% but you will be way ahead of someone that is just buying/selling on a whim, instinct, or a "hot tip".

 

[Maverickz]

Quote from Frits:

Whenever you enter the market you have a 50% that it goes up and a 50% chance that it goes down.

I do agree with you that money management is probably the most important aspect of trading. However, the quoted sentence is probably the most quoted but completely WRONG statement about the market that has ever been said.

While it is true that at any given time the market can only go up or go down giving the illusion that the probability of either outcome was 50% this is false. In the case of a coin toss outside factors do not influence the probabilities of the coin flip. Where as in the stock market there are LOTS of outside factors that influence the market.

I can promise you that no one wanted to buy Enron stock after seeing Ken being let out of the building with his shiny new chrome bracelets. If what you said was true then that would not have mattered. Enron stock would have still had a 50% chance to go up...right? I know that is an extreme example and would be considered fundamental not technical analysis but it gets the over all point across.

The same is true for technical analysis. A coin flip doesn't care what the person calling heads or tails wants. If you gathered 1 million people together for a coin toss and had them all call heads or tails, and they all called heads the coin would still have exactly a 50% chance of coming up heads. If the same 1 million people suddenly wanted to buy 100 shares each of a stock with an average daily volume of about 100k shares the price would definitely go up. The key as I was trying to point out in my prior post is that while there is no way to get a 100% guarantee of the right direction, you can use certain factors to help yield a better guess than 50/50. You just have to learn what the outside factors are and which way they are leaning.

 

[Magic8]

Quote from Maverickz:

I do agree with you that money management is probably the most important aspect of trading. However, the quoted sentence is probably the most quoted but completely WRONG statement about the market that has ever been said.

While it is true that at any given time the market can only go up or go down giving the illusion that the probability of either outcome was 50% this is false. In the case of a coin toss outside factors do not influence the probabilities of the coin flip. Where as in the stock market there are LOTS of outside factors that influence the market.

I can promise you that no one wanted to buy Enron stock after seeing Ken being let out of the building with his shiny new chrome bracelets. If what you said was true then that would not have mattered. Enron stock would have still had a 50% chance to go up...right? I know that is an extreme example and would be considered fundamental not technical analysis but it gets the over all point across.

The same is true for technical analysis. A coin flip doesn't care what the person calling heads or tails wants. If you gathered 1 million people together for a coin toss and had them all call heads or tails, and they all called heads the coin would still have exactly a 50% chance of coming up heads. If the same 1 million people suddenly wanted to buy 100 shares each of a stock with an average daily volume of about 100k shares the price would definitely go up. The key as I was trying to point out in my prior post is that while there is no way to get a 100% guarantee of the right direction, you can use certain factors to help yield a better guess than 50/50. You just have to learn what the outside factors are and which way they are leaning.

Except for the fact that some put on risk so high... that at 5:1 odds... of being "right" when they are wrong - they can lose HUGE amounts of capital, due to excessive leverage, high risk, low rewards.

That's what wipes people out; and why day traders are destined for ruin. You can have a 90% probability of being right... but if that 1 out of 10 chance that you're wrong materializes... you could lose over 80% of account value, or more. Maybe not all at once... but little loss, after little loss... over time... death by a thousand cuts.

Game over, man. Game over. 50-50 odds. 90-10 odds. Doesn't really matter in the end. You'll give it all back.

 

[Maverickz]

Quote from Magic8:

Except for the fact that some put on risk so high... that at 5:1 odds... of being "right" when they are wrong - they can lose HUGE amounts of capital, due to excessive leverage, high risk, low rewards.

That's what wipes people out; and why day traders are destined for ruin. You can have a 90% probability of being right... but if that 1 out of 10 chance that you're wrong materializes... you could lose over 80% of account value, or more. Maybe not all at once... but little loss, after little loss... over time... death by a thousand cuts.

Game over, man. Game over. 50-50 odds. 90-10 odds. Doesn't really matter in the end. You'll give it all back.

Which is why my first sentence was about money management. As long as you only risk a small % of your total account per trade, risk as close to the SAME % as possible per trade, only take trades with a 3:1 reward:risk ratio, and take the higher probability trades, you will come out on top. This allows you to LOSE 2/3 of the time and still break even. So any win/lose rate better than that and you will profit.

 

[marketsurfer]

Quote from Maverickz:

Which is why my first sentence was about money management. As long as you only risk a small % of your total account per trade, risk as close to the SAME % as possible per trade, only take trades with a 3:1 reward:risk ratio, and take the higher probability trades, you will come out on top. This allows you to LOSE 2/3 of the time and still break even. So any win/lose rate better than that and you will profit.

How do you specifically define a 3:1 risk ratio?

thanks, surf

 

[Maverickz]

Quote from marketsurfer:

How do you specifically define a 3:1 risk ratio?

thanks, surf

Distance from entry point to exit for profit target price should be 3x the distance between entry point and stop loss exit point.

 

[marketsurfer]

Quote from Maverickz:

Distance from entry point to exit for profit target price should be 3x the distance between entry point and stop loss exit point.

Ok, makes sense in theory. But how do you know the trade has a 3 to 1 ratio prior to entry? thanks