technical analysis quote from Top Trader book

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TradeBlazer

In the book 'Market Wizards: Interviews with Top Traders', the chapter on Bruce Kovner has an interesting passage that reads:

For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is—whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.

Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates a new chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.

Schwager, Jack D.. Market Wizards: Interviews with Top Traders (Wiley Trading Book 73) (pp. 60-61). Wiley. Kindle Edition.
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I do both TA and fundamental analysis and thought it was interesting to compare TA to a doctor taking a patient's vitals before making any further assessment of their current health.
 
My analogy is this. Consider a herd of cattle walking north on a range in Texas. Then the herd turns West. How could you establish that the herd is turning before the rest of the world figures it out. Maybe you observe a few of the cows that seem to be the herds leaders. Maybe you do some backtesting and figure out that 15% of the cows facing west gives a 90% chance that the cows will all turn that way. And if those things don’t happen, maybe there is a great chance that the herd keeps walking north.

Is that magic? Voodoo? Is it silly? Crystal ball fodder? No. Can you determine which direction the cows will be going next week? Also No. And sure, a cowboy could appear at just the right moment and preempt a turn or make them turn. But that’s part of it..and why TA can fail.
 
Smart Money said:
My analogy is this. Consider a herd of cattle walking north on a range in Texas. Then the herd turns West. How could you establish that the herd is turning before the rest of the world figures it out. Maybe you observe a few of the cows that seem to be the herds leaders. Maybe you do some backtesting and figure out that 15% of the cows facing west gives a 90% chance that the cows will all turn that way. And if those things don’t happen, maybe there is a great chance that the herd keeps walking north.

Is that magic? Voodoo? Is it silly? Crystal ball fodder? No. Can you determine which direction the cows will be going next week? Also No. And sure, a cowboy could appear at just the right moment and preempt a turn or make them turn. But that’s part of it..and why TA can fail.
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And I suppose the same analogy can apply to FA as well. Company announces a great earning, and the herds all faces West. But do you go West until the next earnings season? What happens when the cowboy makes his sudden appearance with a surprise announcement that FOMC is raising the interest rate because of high inflation? Broken crystal ball or just prescient voodoo BS? Regardless, I'm sure some of the herds will turn East no matter what.
 
Smart Money said:
My analogy is this. Consider a herd of cattle walking north on a range in Texas. Then the herd turns West. How could you establish that the herd is turning before the rest of the world figures it out. Maybe you observe a few of the cows that seem to be the herds leaders. Maybe you do some backtesting and figure out that 15% of the cows facing west gives a 90% chance that the cows will all turn that way. And if those things don’t happen, maybe there is a great chance that the herd keeps walking north.

Is that magic? Voodoo? Is it silly? Crystal ball fodder? No. Can you determine which direction the cows will be going next week? Also No. And sure, a cowboy could appear at just the right moment and preempt a turn or make them turn. But that’s part of it..and why TA can fail.
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I'm not into price action (candles) alone being sufficient. You aren't saying this but I am leading up to my point. I really think the best TA involves a points system of indicators and signals. I created an 11-pt analysis that I call a diagnostic that I use to guesstimate price action (I trade US stocks). Out of those 11, I need at least five that are all in strong agreement--three of which are critical with the other two being any of the other indicators. Enough backtesting has shown me that reversals and trends almost always have agreement in a host of indicators. I didn't start becoming profitable until i put this together but without FA I would still be lost. TA might indicate which cows are moving and where while FA will tell me the weather, cow sentiment, and conditions on the prairie that might change everything.
 
TradeBlazer said:
I'm not into price action (candles) alone being sufficient. You aren't saying this but I am leading up to my point. I really think the best TA involves a points system of indicators and signals. I created an 11-pt analysis that I call a diagnostic that I use to guesstimate price action (I trade US stocks). Out of those 11, I need at least five that are all in strong agreement--three of which are critical with the other two being any of the other indicators. Enough backtesting has shown me that reversals and trends almost always have agreement in a host of indicators. I didn't start becoming profitable until i put this together but without FA I would still be lost. TA might indicate which cows are moving and where while FA will tell me the weather, cow sentiment, and conditions on the prairie that might change everything.
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I used to do that and found often I was too late to the party for the profits to justify risk. It helps if your indicator for getting out has a hair trigger. Suggest using less and taking smaller losses
 
TradeBlazer said:
In the book 'Market Wizards: Interviews with Top Traders', the chapter on Bruce Kovner has an interesting passage that reads:


I do both TA and fundamental analysis and thought it was interesting to compare TA to a doctor taking a patient's vitals before making any further assessment of their current health.
More...
That's a good take on it.
What is unsaid is that all MDs are thoroughly schooled in
Human health, and what to look for, in maladies.
In other words they are experts on reading the lab results.
***
TA traders s should do the same.
 
There's no such thing as fundamentals in trading. TA is everything and Elliot wave is the big picture... everything else is just snap shots.
 
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