the basic flaws in TA
- Thread starter marketsurfer
- Start date
Share how it's done correctly... I'll share how I do it...I don't know if it's correct but I know it's correct for me...
First, I think people have a tendency to trade one or two stocks, or markets and this is a sure way to volatile and inconsistent returns and losses. There is a saying, diversification is the only free lunch on wall st and now I really believe it now. I have never seen anyone on here talk about diversification. Maybe it's not as sexy as entries and exits...... Not exciting ...Maybe people feel it will diminish returns. The truth is ... it isn't sexy and it's not exciting. Heck, it will probably even hurt your returns if you knew where to put your money to maximize your return on market advances and declines. Me, I never know what sectors will be leaders until it's too late let alone what 2 or 3 stocks will be the huge movers....so if you do, My hats off to you... I am a mere mortal.
Diversification has remained an unspoken subject but I think it is one of the most important factors in successful and consistant trading. Now this ain't your fathers diversification... the buy and hold and forget type... This is where you trade with the trend but in a diversified manner. Don't overdiversity either or you might as well be trading the index itself.
I diversify to the point where I don't need stops on individual issues. Sounds crazy right..? believe or not using stops has been shown to actually hurt my performance. I simply look at my portfolio as one position.
I now have three models that attempt to time the nasd. Basically, trying to catch trends as they develop. One model has been trading for nearly two years now. I believe since april of last year. The two new models have not started trading yet but once they start trading the older model will be retired as one of the new ones is the really the same with some tweaks for reentering after getting whipsawed out etc.....
I then try and identify trends in the nasd as best I can. Once it signals a buy, I jump in with a group of at least 25 positions. The positions are picked using various scans. No one scan will work all the time so I enter with 4 different scans when long and 2 scans when short. In essence, I have diversified the scans as well and with the new model going online, I have diversified the models also.
The theme here is diversification. Could I make more if I was to enter in one or two positions or a few positions. Sure, if I was correct and they went my way. IMO it's much harder to pick stocks that will rally then it is to follow the markets lead. Plus I wouldn't be able to sleep at night in a few positions.. Trading could be halted and a position could opened up 50 % lower. You think it can't happen to you.. It will.
I used to dream about 200% returns and scoffed at the idea of diversification all while never making any money on a consistant basis. Once I lowered my expectations and started experimenting with the dreaded D word I finally brought consistency to my world.
Since 4/04 the account is up 86 % . 2005 has had a 41 % gain so far. past month has helped immensely for the year.... And considering the market has been flat compared to recent years I think the returns are pretty good. Hopefully we will have big moves in the market in the future..up or down.
The timing of the entries and exits are purely based on TA and I use no leverage at all and all trades are based on end of day information . Trades are executed at the open.
So IMHO, TA does work...and to answer... uninvited guest...Before you ask... No I will not start a journal.. I hate typing and that would involve mucho typing, plus I have a life outside of trading.
So surf... Trendfollowing should not be discounted.... Neither should TA. Neither will predict... they will allow you to cinsistently follow.
Nick
uninvited_guest:
>> â36 pages, 100's of paragraphs on TA, and no live trades to backup the talk. Where is the proof that TA works?â
I gave you proof on page 8 of this thread. The study analyzed 96,326 trades made by 15 proprietary day traders who were using a momentum strategy, which is by anyone definition, is TA. They were trading the firmâs capital. If the strategy was losing money (which the study shows that they weren't) I suspect that they wouldn't have lasted six months.
Hereâs the link to the study if you care to read it.
https://content.putnam.com/panagora/pdf/crowell_submission01_15.pdf
>> â36 pages, 100's of paragraphs on TA, and no live trades to backup the talk. Where is the proof that TA works?â
I gave you proof on page 8 of this thread. The study analyzed 96,326 trades made by 15 proprietary day traders who were using a momentum strategy, which is by anyone definition, is TA. They were trading the firmâs capital. If the strategy was losing money (which the study shows that they weren't) I suspect that they wouldn't have lasted six months.
Hereâs the link to the study if you care to read it.
https://content.putnam.com/panagora/pdf/crowell_submission01_15.pdf
hi wolfe, hi nick------
What some figure out immediately, and others never seem to get acting like i am the antichrist---- IS.......
i ask these questions and start these controversial threads to deepen my understanding of the subject, to get a handle on what traders are thinking NOW, not last week but NOW, and to stimulate the overall progression of trading knowledge. Being able to understand exactly how other traders view the market in its present state is key to understanding the market itself. i use all tools, yet remain flexible and am not sold on any one.
thanks for the most excellent posts!
best,
surfer
What some figure out immediately, and others never seem to get acting like i am the antichrist---- IS.......
i ask these questions and start these controversial threads to deepen my understanding of the subject, to get a handle on what traders are thinking NOW, not last week but NOW, and to stimulate the overall progression of trading knowledge. Being able to understand exactly how other traders view the market in its present state is key to understanding the market itself. i use all tools, yet remain flexible and am not sold on any one.
thanks for the most excellent posts!
best,
surfer
Unfortunately both Aesop and his fox are dead ... 
The burden of proof is with those that think TA doesn't work, and can't find a way to make money. Those who make money don't need to prove anything (except to IRS ... )
The burden of proof is with those that think TA doesn't work, and can't find a way to make money. Those who make money don't need to prove anything (except to IRS ...
)Quote from NKNY:
Care to prove those Grapes are sweet...with a journal
I sit comfortable on my porch sipping from my favorite wine and contemplating the beautiful sunset. An uninvited guest pops up in front of me and shouts: "You're drinking vinegar!". A little intrigued, I politely reply that I'm drinking wine, and that it's really great. He shouts again: "Prove that it's wine! Start a journal!". I take another sip from my favorite wine, while erasing from my mind the unpleasant interruption ...
But you don't, Dave. If you were really interested in discussion, you would ask a SPECIFIC question about TA, and not an incredibly broad one (as a few of us already pointed it out). The way you asked the question made this thread worthless, although maybe entertaining.
You could have asked this way: Which part of TA has been proved profitable? or When Bollinger bands are working? (answer: when the market/stock is going sideways)
But asking the question in a "Are blondes all stupid?" way, you
simply set yourself (and us) for disappointment.
Oh yes, and even if I would start a live journal using TA and make profits, that would be just pure survivorship right, so what's the point of doing it??
I know I'm late with this, have not read all 38 pages in this thread so far and this is my first posting. If someone has already covered this ground already, I apologize.
In reference to the 1st 2 posts,
(1) Newtonian physics falls apart in the real world. It works fine in a frictionless world between 2 bodies but the moment friction is introduce and / or a 3rd party is involved, the it falls apart. I hate to use the word "chaos" to describe the market because so many people have exploit it to sell books, systems and such. But IMO, that's the best way to describe the markets. Because the markets have a feedback loop, it's a nonlinear dynamical system, ie chaos, .
Most TA tools were developed in the early 80s where there was limited computing power ("stochastics", RSI, Bollinger Bands, CCI, etc.) and calculations were needed to be done fast either by hand or mentally. There were essentially rough drafts of ideas that needed further development.
(2) Equilibrium is a concept expounded by economists and academics who have never traded for a living. The markets do not seek equilibrium. If it does, the prices would be static. It seeks momentary stability but the fact that it is inherently unstable allows prices to move suddenly.
So, what does this mean? We can't use DSP, Fast Fourier Transform or anything based on an assumption of a continuous price/time series (markets are discontinuous due to gap openings, price shock, etc.). Same thing for Arima, garch, VaR, CAPM, etc. Moving Averages are nothing more than low bandpass filters (DSP - Digital Signal Processing).
What we can do is seek out the point of temporary stability (trading ranges), monitor it for the onset of instability (breakouts / breakdowns) and trade accordingly.
What we can't do is predict prices. What we can do is look at current market conditions and look for changes in those conditions.
Markets are like weather systems. We can't predict with certainty what the weather will be like 3 years or 3 weeks out but we can do it for the next 3 days or so. We can't be precise in this prediction (ie, "the temp will be 84 degrees Fahrenheit at 2:54 pm EST on Friday") but we can be accurate if we keep it rough (ie, " a high pressure system is moving in, driving out the low pressure system that was responsible for the rain of the last 4 days. Expect sunshine with some clouds, temperatures in the 80s during the day, 60s at night, etc."). Same thing with the markets.
In reference to the 1st 2 posts,
(1) Newtonian physics falls apart in the real world. It works fine in a frictionless world between 2 bodies but the moment friction is introduce and / or a 3rd party is involved, the it falls apart. I hate to use the word "chaos" to describe the market because so many people have exploit it to sell books, systems and such. But IMO, that's the best way to describe the markets. Because the markets have a feedback loop, it's a nonlinear dynamical system, ie chaos, .
Most TA tools were developed in the early 80s where there was limited computing power ("stochastics", RSI, Bollinger Bands, CCI, etc.) and calculations were needed to be done fast either by hand or mentally. There were essentially rough drafts of ideas that needed further development.
(2) Equilibrium is a concept expounded by economists and academics who have never traded for a living. The markets do not seek equilibrium. If it does, the prices would be static. It seeks momentary stability but the fact that it is inherently unstable allows prices to move suddenly.
So, what does this mean? We can't use DSP, Fast Fourier Transform or anything based on an assumption of a continuous price/time series (markets are discontinuous due to gap openings, price shock, etc.). Same thing for Arima, garch, VaR, CAPM, etc. Moving Averages are nothing more than low bandpass filters (DSP - Digital Signal Processing).
What we can do is seek out the point of temporary stability (trading ranges), monitor it for the onset of instability (breakouts / breakdowns) and trade accordingly.
What we can't do is predict prices. What we can do is look at current market conditions and look for changes in those conditions.
Markets are like weather systems. We can't predict with certainty what the weather will be like 3 years or 3 weeks out but we can do it for the next 3 days or so. We can't be precise in this prediction (ie, "the temp will be 84 degrees Fahrenheit at 2:54 pm EST on Friday") but we can be accurate if we keep it rough (ie, " a high pressure system is moving in, driving out the low pressure system that was responsible for the rain of the last 4 days. Expect sunshine with some clouds, temperatures in the 80s during the day, 60s at night, etc."). Same thing with the markets.