the basic flaws in TA

OK, I have to do my homework for tomorrow, so I will just smack this one around first;

TA "exposes" traders to their strengths and weaknesses. Brings them both right up into your face, the same way that an empty canvass does with an artist. TA is the canvass. All the tools are there. All the colors, all the brushes, everything an artist needs to create something. All you have to do is choose the tools, choose the colors, then decide where to start and at the end of the day (if you trade intraday) voila, your "masterpiece" is created.

In my opinion, the reason we see these posts, is that so many of you lack an artist's temperment AND so many of you lack an artists talent. So at the end of your day, the canvass (or your P&L) looks like shit. Frustrated, you decide that its not because you have no talent (no, not you), instead it must be because the tools suck, or it must be because no one else can do any better using these tools. Bottom line....if there are "basic flaws" in TA, then you dont have to come to grips with the possibility that you should be selling insurance or office supplies instead of trading.

Good luck,
Steve
 
Some people just can't paint realistically, so they turn to abstraction to express themselves -- TA is the painting equivalent of form-based abstraction. Those of us without enough salient information about supply and demand in whichever market we are trading have no choice but to turn to more "esoteric" means of gleaning opportunity.

Is this to say all painters of an abstract style cannot paint? Not at all. But there's a big difference between an artist who does what he does because he chooses to, and an artist who has no other choice and settles for what he can. I'd say the vast majority of individual traders fall into the second category, there may nothing most of us can do about it, but recognizing our limitations and initial impetus for using TA in the first place is always something a trader needs to at least investigate.
 
Quote from hans37:

View of a newby.

To me TA must be an art form because if it was objective enough for many traders to use identically the profitability would evaporate.

Kinda like on average a mutual fund manager cannot beat the market average without assuming more risk.
More...

Markets are fairly large.

As most peoploe can observe there is no single approach that dominates market activity.

Fortunately for the individual investor there are very few times when an individual can have any significant influence. Most of these occur when an individual is in the wrong place at the wrong time.

In the context of this thread both of your comments fall into the stupid facts category in turns out. And besides, they are way below the top three tiers of stupid facts.

For your first comment, the salient condition is a bunch of people making money at the same time. Do you know what the effect of a lot of people doing the same thing at the same time is? What is the effect of a lot of people "holding" at the same time? What is the effect of a lot of people buying or selling at the same time?

The considerations of the above are ones used to describe the "herd" behavior of the marketplace. Does profitability evaporate for the herd?

One of the major characteristics of TA is that it is rejected by most because they do not find that it works for them.

Commonly, people learn formally about enough things to be able to be successful at many aspects of their lives. A common aspect for mostly everyone is making money in some manner or other.

So it turns out that considering that a big enough bunch of people could do TA and there would be a consequence is just a stupid fact of TA.

The single most important aspect of TA that can be considered for making money is that it may be applied to a given specific universe and when it is applied, it can easily return over 500% a year in any kind of general market condition. ET has a 100% start up return example for instance.

TA is best applied to a given market universe where the universe is sized up and characterized by the compound interest formula. The effort to secure this pragmatic and extremely high potential trading universe is as important as the skills, knowledge nd experience required to do TA.

Think of your fund manager doing this, for example. No fund managers do this it turns out. Why not? They are capable of getting to this mentl mind set.

Applying TA to unqualified sets of stocks is another of the collection of stupid facts about TA. Fund managers do this by applying what they prefer as an approach to all stocks in the markets; they do not do universe selection it appears.

All businesses that are successful have a way of going about the business. The focus is usually stated in business and marketing terms. Nothing that doesn't fit into the plan is done. This restriction is imposed as a way to assure the most is made of the business.

Write out the compound interest formula and see how lousy the variables have to be for it to simulate the normally expected annual performance of the ET crowd that does TA. Next try to find a suitable set of stocks that meet that level of performance. You will conclude that any stock would pass the test.

What if you chose the best 150 stocks available for trading purposes? What values would you find for the variables of the compound interest formula? What would be the annual return of this collection of stocks when a TA approach was used to trade them?

How could a person even chose the 150 best stocks?

Obviously the most important variable in the compound interest formula is the exponent of the binomial as simply based upon the postion it holds in the maths of the formula.

Initial capital is the least important, meaning anyone can be rich in a short time.

I set the value of the exponent by letting the market tell me what it is as I look at the list of the best 150 stocks.

So there are a lot of stupid facts being used as reality by most pseudo TA practitioners.
 
Quote from Grob109:

Markets are fairly large.

As most peoploe can observe there is no single approach that dominates market activity.

Fortunately for the individual investor there are very few times when an individual can have any significant influence. Most of these occur when an individual is in the wrong place at the wrong time.

In the context of this thread both of your comments fall into the stupid facts category in turns out. And besides, they are way below the top three tiers of stupid facts.

For your first comment, the salient condition is a bunch of people making money at the same time. Do you know what the effect of a lot of people doing the same thing at the same time is? What is the effect of a lot of people "holding" at the same time? What is the effect of a lot of people buying or selling at the same time?

The considerations of the above are ones used to describe the "herd" behavior of the marketplace. Does profitability evaporate for the herd?

One of the major characteristics of TA is that it is rejected by most because they do not find that it works for them.

Commonly, people learn formally about enough things to be able to be successful at many aspects of their lives. A common aspect for mostly everyone is making money in some manner or other.

So it turns out that considering that a big enough bunch of people could do TA and there would be a consequence is just a stupid fact of TA.

The single most important aspect of TA that can be considered for making money is that it may be applied to a given specific universe and when it is applied, it can easily return over 500% a year in any kind of general market condition. ET has a 100% start up return example for instance.

TA is best applied to a given market universe where the universe is sized up and characterized by the compound interest formula. The effort to secure this pragmatic and extremely high potential trading universe is as important as the skills, knowledge nd experience required to do TA.

Think of your fund manager doing this, for example. No fund managers do this it turns out. Why not? They are capable of getting to this mentl mind set.

Applying TA to unqualified sets of stocks is another of the collection of stupid facts about TA. Fund managers do this by applying what they prefer as an approach to all stocks in the markets; they do not do universe selection it appears.

All businesses that are successful have a way of going about the business. The focus is usually stated in business and marketing terms. Nothing that doesn't fit into the plan is done. This restriction is imposed as a way to assure the most is made of the business.

Write out the compound interest formula and see how lousy the variables have to be for it to simulate the normally expected annual performance of the ET crowd that does TA. Next try to find a suitable set of stocks that meet that level of performance. You will conclude that any stock would pass the test.

What if you chose the best 150 stocks available for trading purposes? What values would you find for the variables of the compound interest formula? What would be the annual return of this collection of stocks when a TA approach was used to trade them?

How could a person even chose the 150 best stocks?

Obviously the most important variable in the compound interest formula is the exponent of the binomial as simply based upon the postion it holds in the maths of the formula.

Initial capital is the least important, meaning anyone can be rich in a short time.

I set the value of the exponent by letting the market tell me what it is as I look at the list of the best 150 stocks.

So there are a lot of stupid facts being used as reality by most pseudo TA practitioners.
More...

You couldn't believe what I've done - I just finished reading this Whole post, almost without recognising this is your writing. :D
 
Quote from hans37:

View of a newby.

To me TA must be an art form because if it was objective enough for many traders to use identically the profitability would evaporate.

Kinda like on average a mutual fund manager cannot beat the market average without assuming more risk.
More...


Quote from Grob109:


For your first comment, the salient condition is a bunch of people making money at the same time. Do you know what the effect of a lot of people doing the same thing at the same time is? What is the effect of a lot of people "holding" at the same time? What is the effect of a lot of people buying or selling at the same time?

The considerations of the above are ones used to describe the "herd" behavior of the marketplace. Does profitability evaporate for the herd?

...The single most important aspect of TA that can be considered for making money is that it may be applied to a given specific universe and when it is applied, it can easily return over 500% a year in any kind of general market condition.... Think of your fund manager doing this, for example. No fund managers do this it turns out. Why not? They are capable of getting to this mentl mind set.
More...



Hey Jack,

I think you are short-changing the guy. His observations aren't exactly original, but nor are they "stupid."

Profitability does indeed evaporate for the herd -- when it's time to get out. Is the herd always wrong? No. The public routinely racks up paper profits in the midst of an extended trend. Is the herd always wrong at turning points? Yes. Always and everywhere Yes. If you try to get out when everyone else is getting out, what happens? On the other hand, if you get out before everyone else, you are no longer part of the herd.

So his first point has validity in that, if a large body of traders were acting identically, profits would deteriorate at the point of mass exit. Just as they do with the public.

Re the second point, mutual fund managers disregard TA for a salient reason: most of 'em are too big and / or too style restricted to use it. If it takes you three trading days to enter or exit a typical position -- and a week or more for a big position -- how much use will you get from a 30 or 60 minute chart?

The ability to make triple digit returns is highly correlated to size. The long run may be open ended, but the short run is zero-sum. This is an obvious point, no? If Warren Buffett could hop on the TA train and make 500% a year, in just a few years he could pay off the national debt as a favor to Uncle Sam. What's wrong with this picture?
 
Traders who focus on distinctions between "technical" and "fundamental" indicators miss the point: at the end of the day, there are only winning indicators and losing indicators. Traders who unthinkingly trade off any indicator are net losers. Note how often day lows get taken out. Also note how often "head and shoulder" pattern followers lose huge: recent examples include both gold and sugar. To take money from other traders, one must get in the heads of traders who move markets: one must anticipate or front run hedge funds. Never assume a successful fund manager knows nothing of simple "technical" indicators or can't read a supply-demand report. In other words, if a trader is aggressively selling the day low on no news, you'd better know what the guy is thinking before fading him.
 
Quote from darkhorse:

Hey Jack,

I think you are short-changing the guy. His observations aren't exactly original, but nor are they "stupid."

Profitability does indeed evaporate for the herd -- when it's time to get out. Is the herd always wrong? No. The public routinely racks up paper profits in the midst of an extended trend. Is the herd always wrong at turning points? Yes. Always and everywhere Yes. If you try to get out when everyone else is getting out, what happens? On the other hand, if you get out before everyone else, you are no longer part of the herd.

So his first point has validity in that, if a large body of traders were acting identically, profits would deteriorate at the point of mass exit. Just as they do with the public.

Re the second point, mutual fund managers disregard TA for a salient reason: most of 'em are too big and / or too style restricted to use it. If it takes you three trading days to enter or exit a typical position -- and a week or more for a big position -- how much use will you get from a 30 or 60 minute chart?

The ability to make triple digit returns is highly correlated to size. The long run may be open ended, but the short run is zero-sum. This is an obvious point, no? If Warren Buffett could hop on the TA train and make 500% a year, in just a few years he could pay off the national debt as a favor to Uncle Sam. What's wrong with this picture?
More...

as a trend following believer--- sounds like a song---- i am surprised to read the above from you. at what percentage size of the traded volume do you believe TA becomes non relevant?

thanks
 
jack hershey's idea of technical analysis is to go back after the day has ended and draw lines and make notes of the places one should have made a trade. Look at the charts he shows and notice that the last price on the right price axis never changes from chart to chart i.e., 1092.75. Thats because he is using cut and paste in paint to create an illusion that he annotated the charts "live". what a piece of work! Oh and surprise, his analysis called every turn that day !!!


http://www.elitetrader.com/vb/attachment.php?s=&postid=910084
 
Quote from Chicken Little:

jack hershey's idea of technical analysis is to go back after the day has ended and draw lines and make notes of the places one should have made a trade. Look at the charts he shows and notice that the last price on the right price axis never changes from chart to chart i.e., 1092.75. Thats because he is using cut and paste in paint to create an illusion that he annotated the charts "live". what a piece of work! Oh and surprise, his analysis called every turn that day !!!


http://www.elitetrader.com/vb/attachment.php?s=&postid=910084
More...

Excellent moniker and coordinated visual analysis.
 
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