Technical Analysis, from a Quant's Perspective
- Thread starter fatrat
- Start date
mike, these are good points.
one of the reasons TA works is that price patterns form (and have for centuries in all markets) because of people's emotions - price is an opinion, and these opinions are based on hope, fear, greed, panic, euphoria, etc.
TA is also a derivative OF TA. it is also in a sense a second derivative. you want to enter not based on what you think others will do after you enter (since that is the only thing that will affect price), but more precisely what others THINK that others will do, because that is how they will make their decisions. at least, in terms of shorterm timeframe participants. LTFP's are more prone to seek "value", however they perceive it
i think a lot of the criticism of TA **correctly** comes from looking at all these people who think TA is merely the search for the next magick indicator (tm) or crossover, or whatever.
all charts are is a model. they are a visual model of ALL the interactions in the market, that resulted in price at time, and over time - volume.
even IF the only reason TA works is self-fulfilling prophecy (which is certainly PART of it), it does work
i sucessfully trade index futures for a living, and mostly scalps. so, if TA had no utility, i clearly could not have the edge that provides my income
TA can be as simple as simply watching tape.
guys in the pit who are trading off of the order flow they see are also using TA, in that they are looking at order flow. that's TA.
some TA can be tested precisely. like some of my setups have EXACT criteria, and can be backtested. others, *are* somewhat subjective, and there is nothing wrong with that.
i rthink most people who say "TA doesn't work" are either failed traders who couldn't trade successfully *or* egghead academics who have probably never traded.
academics came up with, and shilled the so called efficient market theory for DECADES, which regardless of what one thinks of TA - this is possibly the dumbest idea ever to come out of academia ever. and that's saying a lot.
the way i use TA (in scalping futures. i also use fundamentals for INVESTING) is to have a list of setups that i have backtested and know the expectancies of.
i simply wait for those opp's to present themselves in the market.
i have also found market profile to be a very valuable way of looking at price and market development over various timeframes, and that is another form of TA
works for me
one of the reasons TA works is that price patterns form (and have for centuries in all markets) because of people's emotions - price is an opinion, and these opinions are based on hope, fear, greed, panic, euphoria, etc.
TA is also a derivative OF TA. it is also in a sense a second derivative. you want to enter not based on what you think others will do after you enter (since that is the only thing that will affect price), but more precisely what others THINK that others will do, because that is how they will make their decisions. at least, in terms of shorterm timeframe participants. LTFP's are more prone to seek "value", however they perceive it
i think a lot of the criticism of TA **correctly** comes from looking at all these people who think TA is merely the search for the next magick indicator (tm) or crossover, or whatever.
all charts are is a model. they are a visual model of ALL the interactions in the market, that resulted in price at time, and over time - volume.
even IF the only reason TA works is self-fulfilling prophecy (which is certainly PART of it), it does work
i sucessfully trade index futures for a living, and mostly scalps. so, if TA had no utility, i clearly could not have the edge that provides my income
TA can be as simple as simply watching tape.
guys in the pit who are trading off of the order flow they see are also using TA, in that they are looking at order flow. that's TA.
some TA can be tested precisely. like some of my setups have EXACT criteria, and can be backtested. others, *are* somewhat subjective, and there is nothing wrong with that.
i rthink most people who say "TA doesn't work" are either failed traders who couldn't trade successfully *or* egghead academics who have probably never traded.
academics came up with, and shilled the so called efficient market theory for DECADES, which regardless of what one thinks of TA - this is possibly the dumbest idea ever to come out of academia ever. and that's saying a lot.
the way i use TA (in scalping futures. i also use fundamentals for INVESTING) is to have a list of setups that i have backtested and know the expectancies of.
i simply wait for those opp's to present themselves in the market.
i have also found market profile to be a very valuable way of looking at price and market development over various timeframes, and that is another form of TA
works for me
Attached is a Venn diagram that shows the universe I understand.
I put market signal and market noise in as sky levels and water levels. I see it actually as a ratio where the best is at the top and the worst is at the bottom.
The quant PhD's are mostly restricted to big money and the associated constrains that produce results we all know about. Weak at best.
There are a multitude of methods for making money that I characterize as blobs of black paint. I see these mostly as about 80 specific "edges that people use and they are related mostly to entry/exit type practices.
The TA applies as you see in the Venn diagram to methods of edges, high noise systems of quants and other approaches.
I made the Venn universe have two non overlapping sub universes as well. A lot of posting deals with the long established conventional orthodox financial industry foundation.
The quants and the edge trading lies in this realm. Most of TA is used in this place as well.
The paradigm shift OUT of the conventional orthodoxy is not seen by most who are operating inside of the traditional deeply established traditions.
Quants are not going there either.
Quants really work hard on stuff that gives big money the meager edges that are available to big money. They focus on imbalances, anomolies, transaction cost reductions and communication advantages and arbitrage across markets and instruments. So quants do not have any opportunities to beat the averages.
All most all of the space filled with the conventional zone deals with probabilities and forecasting. It is the land of Pascal and Fermat and you see the quants on the fringes of gleening using such math and it's compliments.
It is not possible for most people to see that there is another paradigm available to everyone (quants included.). Why not? Of course, the answer is the strength of the weddedness to the traditional convention. Purveyors of the financial industry perpetuate it.
Will there ever be a possibility of some people moving out of the "box" of the deep traditions that permiate the industry. Not really.
What is happening though is that a lot of people nowadays are not stepping, irreversably, into the traditional box.
Standards are set by tradition and the pool extraction paradigm does not ever operate in that venue of money velocity.
Market data is universibly available and it is there in real time. the pool of capital is very very large and it's movement from one party to another actually is something that can be measured individually and collectively.
In ET it is not going to be possible to post PnL's that are relatable to people who are in the conventional box by people operating in the pool extraction paradigm.
TA is more applicable to pool extraction that it is to conventional orthodoxy. This is best seen by looking at one comparison: entry/exit as compared to hold/reversal.
Entry/exit is like a bird pecking water out of a bird bath. pool extraction is like emptying the pool of the bird bath water by using a valve and running the valve all the time.
Asking a bird to stop pecking and turn a valve is not in the cards.
It is very very clear that the pools of capital are in the markets. It is very very clear that the big money isn't accumulating (percentagewise compared to their ownership of the wealth) much of the pool.
We do know that there are people really acing the markets and they are deemed "unbelievable". The people who use the valve approach are extracting money based upon their views of getting what is available when it is available whether the "long' valve is open or whether the "short" value is open.
For me PVT trading is a crossover style of trading where participation is always where the maximum flow is going on. It is like always being at the faucet that has the most flow.
SCT is leveraged and neutral biased in one market. It is simply continuing to take money out of the market at the rate of price change and switching sides of the market as one side stops providing a flow. Running contracts at the appropriate flow rate (I see 6 flow rates in ES, for example) allows for maximum extraction for an account where the player is seamlessly and continually on the right side of the market.
Why isn't this paradigm, as yet, seeable by the quants? The answer is easy. It is not thier problem. they cannot trade to optimize making money as a pro or amatuer can. A pro is a person who is licensed to make money. Pro's trade to get rich; so do amateurs who do pool extraction.
So the big money places make money handling money and not making money in the markets. They satisfy people who believe in the traditions of the financial industry. Quants get educated and get paid off the net profits of big money handlers.
Individuals who have acquired and cut into stone the precepts of traditional and conventional orthododxy can only see what is in this box. Reflect on all the posts by all the guys who use very sophisticated math to get the traditional Pascal and Fermat based stuff done. They measure betting, risk of betting and rewards fo betting. They "target", "protect with stops" and do Sharpes and R/R's and risk of ruin. Quants are shaving off the fringes of this by looking for "patterns buried in noise primarily.
My heritage dictated that I see this all as a candy store. the market told me the P, V relationship. this is the basic fundamental description in boolean algebra of how the variables of the market relate as FLOW of the market operates. This is the MAIN EVENT of making money. PRICE CHANGE over time according to the market rule. The two boolean parts say :HOLD and REVERSE. So I hold as long as money is being made; At the point where the price stops moving I take profits and get on the right side of the market for the next move which I hold through.
Price is the lagging variable of the market compared to the leading indicator of the market according to the P, V relationship. This creates "unbelievable, unpostable prints and blotters according to those who sit in the box of convention and traditional orthodoxy. Quants are not concerned with this approach to making money because they are in the big money place where money cannot be made in this manner. Waht quants do for me is smooth out the market so there is less noise and more order to the markets.
Pool extraction involves "repeatability" and "reliability" of the instruments of extraction: stocks and indexes. I want quants quanting and I want the traditional torch to be carried by the vaste majority of traders. I know that the market is controlled by the minority which faces the majority.
Scarcity is what controls and moves price. trading and exchanges are understood to a T by the academics and they have said it all. There is a belief system in place that is almost invincible and it does not make any money.
One must be in an orientation to extract the flow of the markets as price changes. People who abide by convention as Steve 46 says and a lot of others too: " Over the years I have learned......" Osmosis is a great biological formula and it puts the osmosisee right in the middle of the conventional wisdom and puts the person in an entry /exit edge strategy forever.
Search "entry" and search "exit" to make a list of people in ET who operate in this manner. PVT trading is a trading based on the cycle of price. Early on, people just trade stocks long. As intermediate and expert trading is introduced, then a more neutral bias appears. For now, x-over trading to jump from the end of one long to the beginning of a new long is what happening. SCT is expert trading Neutral biased and in the market all the time) of the futures indexes. It is not possible for me to have a thread on this stuff as yet because of the manner of participation. That is the way it goes for paradigm shifts. Traditional conventions are used to measure a different paradigm and as a consequence the manner of participation voids the possibility of concurrent paradigms running so far. Tradition is dominant and it rules the discourse.
I put market signal and market noise in as sky levels and water levels. I see it actually as a ratio where the best is at the top and the worst is at the bottom.
The quant PhD's are mostly restricted to big money and the associated constrains that produce results we all know about. Weak at best.
There are a multitude of methods for making money that I characterize as blobs of black paint. I see these mostly as about 80 specific "edges that people use and they are related mostly to entry/exit type practices.
The TA applies as you see in the Venn diagram to methods of edges, high noise systems of quants and other approaches.
I made the Venn universe have two non overlapping sub universes as well. A lot of posting deals with the long established conventional orthodox financial industry foundation.
The quants and the edge trading lies in this realm. Most of TA is used in this place as well.
The paradigm shift OUT of the conventional orthodoxy is not seen by most who are operating inside of the traditional deeply established traditions.
Quants are not going there either.
Quants really work hard on stuff that gives big money the meager edges that are available to big money. They focus on imbalances, anomolies, transaction cost reductions and communication advantages and arbitrage across markets and instruments. So quants do not have any opportunities to beat the averages.
All most all of the space filled with the conventional zone deals with probabilities and forecasting. It is the land of Pascal and Fermat and you see the quants on the fringes of gleening using such math and it's compliments.
It is not possible for most people to see that there is another paradigm available to everyone (quants included.). Why not? Of course, the answer is the strength of the weddedness to the traditional convention. Purveyors of the financial industry perpetuate it.
Will there ever be a possibility of some people moving out of the "box" of the deep traditions that permiate the industry. Not really.
What is happening though is that a lot of people nowadays are not stepping, irreversably, into the traditional box.
Standards are set by tradition and the pool extraction paradigm does not ever operate in that venue of money velocity.
Market data is universibly available and it is there in real time. the pool of capital is very very large and it's movement from one party to another actually is something that can be measured individually and collectively.
In ET it is not going to be possible to post PnL's that are relatable to people who are in the conventional box by people operating in the pool extraction paradigm.
TA is more applicable to pool extraction that it is to conventional orthodoxy. This is best seen by looking at one comparison: entry/exit as compared to hold/reversal.
Entry/exit is like a bird pecking water out of a bird bath. pool extraction is like emptying the pool of the bird bath water by using a valve and running the valve all the time.
Asking a bird to stop pecking and turn a valve is not in the cards.
It is very very clear that the pools of capital are in the markets. It is very very clear that the big money isn't accumulating (percentagewise compared to their ownership of the wealth) much of the pool.
We do know that there are people really acing the markets and they are deemed "unbelievable". The people who use the valve approach are extracting money based upon their views of getting what is available when it is available whether the "long' valve is open or whether the "short" value is open.
For me PVT trading is a crossover style of trading where participation is always where the maximum flow is going on. It is like always being at the faucet that has the most flow.
SCT is leveraged and neutral biased in one market. It is simply continuing to take money out of the market at the rate of price change and switching sides of the market as one side stops providing a flow. Running contracts at the appropriate flow rate (I see 6 flow rates in ES, for example) allows for maximum extraction for an account where the player is seamlessly and continually on the right side of the market.
Why isn't this paradigm, as yet, seeable by the quants? The answer is easy. It is not thier problem. they cannot trade to optimize making money as a pro or amatuer can. A pro is a person who is licensed to make money. Pro's trade to get rich; so do amateurs who do pool extraction.
So the big money places make money handling money and not making money in the markets. They satisfy people who believe in the traditions of the financial industry. Quants get educated and get paid off the net profits of big money handlers.
Individuals who have acquired and cut into stone the precepts of traditional and conventional orthododxy can only see what is in this box. Reflect on all the posts by all the guys who use very sophisticated math to get the traditional Pascal and Fermat based stuff done. They measure betting, risk of betting and rewards fo betting. They "target", "protect with stops" and do Sharpes and R/R's and risk of ruin. Quants are shaving off the fringes of this by looking for "patterns buried in noise primarily.
My heritage dictated that I see this all as a candy store. the market told me the P, V relationship. this is the basic fundamental description in boolean algebra of how the variables of the market relate as FLOW of the market operates. This is the MAIN EVENT of making money. PRICE CHANGE over time according to the market rule. The two boolean parts say :HOLD and REVERSE. So I hold as long as money is being made; At the point where the price stops moving I take profits and get on the right side of the market for the next move which I hold through.
Price is the lagging variable of the market compared to the leading indicator of the market according to the P, V relationship. This creates "unbelievable, unpostable prints and blotters according to those who sit in the box of convention and traditional orthodoxy. Quants are not concerned with this approach to making money because they are in the big money place where money cannot be made in this manner. Waht quants do for me is smooth out the market so there is less noise and more order to the markets.
Pool extraction involves "repeatability" and "reliability" of the instruments of extraction: stocks and indexes. I want quants quanting and I want the traditional torch to be carried by the vaste majority of traders. I know that the market is controlled by the minority which faces the majority.
Scarcity is what controls and moves price. trading and exchanges are understood to a T by the academics and they have said it all. There is a belief system in place that is almost invincible and it does not make any money.
One must be in an orientation to extract the flow of the markets as price changes. People who abide by convention as Steve 46 says and a lot of others too: " Over the years I have learned......" Osmosis is a great biological formula and it puts the osmosisee right in the middle of the conventional wisdom and puts the person in an entry /exit edge strategy forever.
Search "entry" and search "exit" to make a list of people in ET who operate in this manner. PVT trading is a trading based on the cycle of price. Early on, people just trade stocks long. As intermediate and expert trading is introduced, then a more neutral bias appears. For now, x-over trading to jump from the end of one long to the beginning of a new long is what happening. SCT is expert trading Neutral biased and in the market all the time) of the futures indexes. It is not possible for me to have a thread on this stuff as yet because of the manner of participation. That is the way it goes for paradigm shifts. Traditional conventions are used to measure a different paradigm and as a consequence the manner of participation voids the possibility of concurrent paradigms running so far. Tradition is dominant and it rules the discourse.
The absolute level of a stock is the best indicator of the fundamental strength of a business. A company whos stock has risen 50% over a given period is fundamentally in better shape than a company whose stock has dropped 50% over the same period.
Of course the "market" can overreact and present a pricing inefficiency for a short period, but the price will eventually adjust to reflect the true fundamental strengthof that business.
Who is in better shape in their business space, Google or Sarah Lee?
Of course the "market" can overreact and present a pricing inefficiency for a short period, but the price will eventually adjust to reflect the true fundamental strengthof that business.
Who is in better shape in their business space, Google or Sarah Lee?
marketsurfer is wrong, TA is NOT subjective.
A bull flag is a bull flag, if support is broken it is broken. TA is not subjective, the problem arises in interpreting what is basic common everyday patterns, setups, pivots, trendlines, triangles, reversal setups, etc, etc on and on.
Once a trader utilizes his/her interpretation of all the basics within TA they are ready to rock and roll. The skill required to thus not subjective, it is a well honed skillset that is used in the same manner and with consistent timing relative to what the mind (intuition) says should be done.
That being the case, it makes further sense to my mind that the quants are the ones that are beating their heads against the wall in attempting to BEAT the mkt. Quants are always on the hunt for another niche to crack, they are always trying to unwrap the next angle. More power to them, some find temporary dodads to exploit, however the nitch will fall away as profitable as others also use it .
The beauty of non-subjective TA is simply that the simple stuff works, always has always will. WHY? Because it takes time to realize how simple it really is and since trading has such a high rate of turnover..............newbies that have yet not found the EASY fork in the road. They keep feeding those that have done the grunt work.
KISS
A bull flag is a bull flag, if support is broken it is broken. TA is not subjective, the problem arises in interpreting what is basic common everyday patterns, setups, pivots, trendlines, triangles, reversal setups, etc, etc on and on.
Once a trader utilizes his/her interpretation of all the basics within TA they are ready to rock and roll. The skill required to thus not subjective, it is a well honed skillset that is used in the same manner and with consistent timing relative to what the mind (intuition) says should be done.
That being the case, it makes further sense to my mind that the quants are the ones that are beating their heads against the wall in attempting to BEAT the mkt. Quants are always on the hunt for another niche to crack, they are always trying to unwrap the next angle. More power to them, some find temporary dodads to exploit, however the nitch will fall away as profitable as others also use it .
The beauty of non-subjective TA is simply that the simple stuff works, always has always will. WHY? Because it takes time to realize how simple it really is and since trading has such a high rate of turnover..............newbies that have yet not found the EASY fork in the road. They keep feeding those that have done the grunt work.
KISS
Your "P,V boolean relationship" is a bunch of crap.
The attached document is from one of your websites where you actually claim it's like having tomorrow's paper today. LOL!!!
http://sputnick5.www8.50megs.com/
On the last page, you show buying the 0 to 7 turn so I did it on 1000 S&P stocks from 2000 to 2005 -- a total of 5000 stock-years. How did it do? See next post...
The attached document is from one of your websites where you actually claim it's like having tomorrow's paper today. LOL!!!
http://sputnick5.www8.50megs.com/
On the last page, you show buying the 0 to 7 turn so I did it on 1000 S&P stocks from 2000 to 2005 -- a total of 5000 stock-years. How did it do? See next post...
Buying the 0 to 7 turn of the "P,V Boolean relation" (which you have claimed is at the heart of TA) and exiting 5 days later* produced the attached equity curve when tested on 1000 S&P stocks over five years. So much for having tomorrow's paper today!
* 5 days worked better than 1,2,3, or 4 days.
* 5 days worked better than 1,2,3, or 4 days.
LOL.
imo, the poor performance of the trading system would be mainly due to the system designer didn't study or/ and understand the following document properly which has been claimed the best TA system on ET.
http://www.elitetrader.com/vb/attachment.php?s=&postid=1278985
Andrew Lo's papers might be of your interest, e.g. http://web.mit.edu/alo/www/Papers/techanal.html