the basic flaws in TA
- Thread starter marketsurfer
- Start date
hi infintis,
the problem is the basic concepts of TA --trend, patterns, etc are not only not defined, when tested to the best of our abilities( to test undefined constructs) show no correlation to non-randomness. do i use charts--sure-- to monitor price and analysis prior action, since i prefer graphical representation of price/time. do i predict or make trades on the basis of traditional TA? no, i prefer to find statistical edges for entry.
best wishes,
surfer
ps.. i was a hard core TA guy once upon a time, this is where my evolution as a trader has led me thus far.... am i keeping an open mind--yes-- i am totally open to whatever works..
What I meant about crowd sentiments is that indicators when used together, will show when the crowd is getting more hesitant about buying or when the public has gotten on board ie that final blowoff in way overbought territory. These types of thing show fear greed panic etc. As for chart patterns --I dont use them at all --they are way too subjective--one may see an asecending triangle while another sees a head and shoulders. I disregard any patterns and only use indicators, they are much more objective.
thanks! do you mind sharing what indicators work for you? i guessed from you name that you are an option trader..... correct?
surfer
Sometimes trade options. Always sell premium when I do using Bollinger, MACD and RSI to define market peaks and troughs. I will occasionally look at the DMI as a confirm to whether or not the existing trend has more room. DMI looks good to trade as well, but I usually don't initiate those positions in the direction of the trend as it would usually just be adding to my position that the other indicators have already gotten me into. Also, DMI is an extremely laggard indicator. By the way, one could get by with just Bollinger if using a tight stop. Eventually that trade would be a winner. --Just don't Martingale the thing.
The former Prime Minister of Iraq during Sadam Husseins dictatorship, publically compared Americans to a herd of cows...
Quote from marketsurfer:
Hi,
As a reformed heavy TA trader, having seen the light of the basic flawed logic at the core of TA, I am starting this thread to see what will develop. Perhaps, I will come back into the fold of TA traders..... keeping an open mind.
1. I often hear newtonian physics referenced when TA is discussed, generally, it goes like this--- " an object in motion tends to remain in motion, untill acted upon by an outside force" obviously the TA practioner is refering to price-- price will continue in the same direction that it is traveling untill acted upon by an outside force. This is absolutely insane ! price is not an object in motion, regardless of what it looks like on a chart. I have heard the gurus of TA and trendtrading refer to this analogy. If the basic analogy contains serious flaws, how can the rest of the concept support itself??
2. All factors are reflected in price, therefore all one needs is the price to make succesful trades. Once again this commonly stated "fact" by TA practioners is serious lacking when examined. price is but one aspect of true analysis and understanding, The TA practioners handicap themselves by repeating mantras such as this.
can anyone add to the list of plain stupid TA "facts" ?
more to come.....
surfer
I've heard this said before and wondered if it were true. Here's another reason I have to possibly doubt it:
Using EnsignSoftware, I have the capability to use a random-generated data feed to test strategies on. The concept is that it would closely mimic market behavior enough to be useful outside of market hours or in the absence of actual price data to practice with.
While I felt that the random-generated feed was smoother than the time frame I personally trade with eur/usd, it did essentially behave similarly to the live price action I see during busy market hours. I also think there were differences due to the 24 hour nature of forex, which leads to different levels of volatility throughout each 24 hours in a way that is different from what one sees on stocks or indexes between opening and closing bells.
That said, my observation led me to consider that rather than TA being a self-fulfilling prophecy, it is simply good at at forecasting price behavior which is essentially random. Perhaps the main differences we see wherein one instrument will find support at a 200ema and another at 150ema has more to do with volatility and volume than traders enmasse reacting to a certain level.
Again, THAT said, I have read studies that deal with the cascading stoploss phenomenon, which at times leads to very quick large scale moves in forex, that indicate a force in operation beyond random price behavior.
Perhaps it's most accurate to conclude that TA operates in response to randomness in faster time frames, and in response to the behavior of traders on a large scale during major market moving events.
Even then it's interesting how one is able to go out to slower time frames and see that price behavior smoothed into a pattern than once again resembels a random-generated data feed.
Kali
This is exactly opposite of what I do. I disregard indicators and use patterns only. But it is not the triangle or h&s or anything of that sort. I buy or sell into extreme momentum days or late day reversal. If there is no follow through in the first half hour, I'll reverse. So far working like a charm. Current position short ES on 1/30 @ 1288.75. I do look at technical indicators that may people pay attention to. I usually like to fade those moves. As a group(not individuals) I beleive technical analyst are the one who loose the most. So I like to bet against them.
We saw a typical late day reversal on Friday. I'll add to my short on open on Monday. If the market doesn't break in the first half hour, I'll exit and if it still doesn't break in an hour I'll go long.
the other difference in our trading is the timeframe. I hold positions for days , weeks or months, so I would not be paying attention to first hour reversals. I might pay attention to indicators in those time frames if the longer term charts have shown that I may need to get out or initiate new positions. I think if I remember correctly --hourly charts on the Globex Wed night started hinting of a sell off using the indicators that I mentioned. I was already short, so I left it alone.
When you try to use something you don't understand you take a gamble, be it either weight loss or TA.
When you recommend working out and eating a balanced diet you're right, but you have to learn what kind of workout and what kind of balanced diet (as nutrients and calories) will really make you healthy and control your weight. Then you'll have to consistently follow them for the rest of your life.
With TA is the same: you have to build a menu of TA tools that you understand how and why they work to make you money. Then you'll have to consistently use them for the rest of your trading life.
When you recommend working out and eating a balanced diet you're right, but you have to learn what kind of workout and what kind of balanced diet (as nutrients and calories) will really make you healthy and control your weight. Then you'll have to consistently follow them for the rest of your life.
With TA is the same: you have to build a menu of TA tools that you understand how and why they work to make you money. Then you'll have to consistently use them for the rest of your trading life.