the basic flaws in TA

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?
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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.

Quote from Grob109:

Markets are fairly large.
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.
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LOL, I'll bet you are not so cavalier with broacasting your trading edge. Hint Hint get my drift?

The only one posting stupid crap is you.
 
Quote from darkhorse:

Hey Jack,

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

****Most people will agree with you. This is the way the world works regarding these topics.

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.

***** I was pointing out how the P. V relation works in markets. For me it is a basic truths that as volume increases, price trends continue. Looking at the four basic persuasions of traders, the front runners use the herd to make money as do ththe other large group of traders who trade with the trend.

Your comments about the herd above are not true for me. They certainly must be for you. In consideration of trends and turning points and a large group behaving that you mention above, I feel that it is either one way or another and not different mixtures of things at differing times.

You mention cycles and you deal with all portions of a cycle that you feel are a comprehensive description.

My differing view than yours is intended to take into account the whole cycle and I, at this point, am able to recognize that the cycle is divided into many more portions than you do. I feel strongly that the three direct variables of the market complete the cycle in a specific relationship according to the periodicity of each variable. The more important the variable the longer the periodicity, and each is half the next lesser important.

What I get from this is a consistency of the herd's performance at all times and there is a result, therefore, that the market effect of the herd is a smoothing one and one, where because of the nature of market growth, the herd continually builds wealth very inefficiently.

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.

****I like the sequence of how stocks cycle and how price peaks are approached, peaked and the aftereffects. What is particularly interesting with the herd is the first period of accumulation after the peak has passed. It seems to be the most strident for those in the leading trading groups that are not the front runners nor the trend followers. The makeup of the herd does change its completion according to the constituent representaion over time; it is intersting to see which constituency is in control at any given time. It is always the minoriy group, as we know.

Mass exit is another "stupid fact"

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?

****I guess I should have put more effort into making my initial post and its points. Just above you present five "stupid facts" to side with the stupid fact of the the newbie you are in support of.

But to get to the point of the quality of trading of fund managers, I would think that since they are there and hired through a competitive process of some sort, that they may have knowledge skills and experience. This being the case, they should be better than amateurs or anyone else making a lot of money.

For example, I don't believe for a minute the stupid facts that governed the dot com bubble will ever be repeatd by those who now occupy the real estate of the prior dot com residents.

It is unimaginable that a fund manager would do your scenario ever. anyone who has been making money for a while knows how to change gears as wealth accumulates. Some authors have actually run through the normal strategic changes that ensue. Reading a few would be a good idea for anyone.

Were a person to go through constructing a set of viable stock universes for making money as a function of the capital pool, the person never gets to where your fund manager sits in terms of entry, hold or exit.

Making money is simply related to optimizing the agregate money velocity of the given pool of money. You can look at the quantity of issues (this means counts the different names) held and the turnover ratio (this means find the average hold periiod.) of that distributiion and you will never see the three days or the week you mention for any data aspect.

So how is the distribution of risk, optimized money pool money velocity, and the available investment universe maintained? Not by trading. This is a trading thread related to TA. Stupid facts are all that has been posted re fund managers. taking a person's stupid statement and supporting it with more stupid facts is not a god idea.

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?

******Its not a point and no, it is not in the ball park.

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?

*** Several things.

Warren does not do TA trading so lets just find a person who does and give hime the money Warren has to work with and see what the person does.

Better still back up a little and see what a skilled TA trader does as he acquires a lot of wealth.

Use Stevie in Greenwich as a collateral example as well He accounts for more trading in a day than anyother shop does and he is making much more money velocity than Warren.

Your picture is a strange and simplistic one to consider. High money velocity is where TA excells. Or to say it another way, anyone who has little capital needs to use TA to create a high money velocity to get rich. Sooner than later.

The real subject is the use of time and how one chooses to live. Why should making money with TA even take any time out of a person's life and their pursuit of their interests.

I definitely cut is off at 100,000 shares of stock as a position. (think 30 bucks a share). I only trade on the "natural cycle" fractal for equities investments.

No one hops on anything that is an interference of their quality of life. To think up such hoping is to recite "stupid facts".

How would a person handle a 100,000 share trade to make 50% of the natural cycle of a stock from a universe of the best 150 stocks available. Here is the sentence: "Do not favor any account, please. Enter (exit) the market today by doing blocks that are somewhat less than the T&S blocks and also keep the account cummulative volume at 10% of the day's traded volume, please. Fedex me the T and S sheets."

If I only leave 200K on the table that day (which I did for this example), I still netted 17 points a share it turned out. reason: the trades did not match the 10% cummulative problem.


Your picture is Warren paying off the natiional debt of something all based on making 500% a year on the universe of stocks any person can have at their finger tips. Because a person does have the ability to make 500% and he can have the universe at his fingertips, he also has other things that form his picture. The most important is the desire to perform to get the results and keep the cash ploughing. Sooner or later that income becomes productive for him in terms of the life he lives. The capital is put to work in other words to make his environment a better place.

Warren is on the board of coca cola. Good for him. Where I am coming from I rather prefer slipping the money into a pile that is going to where the year's life time award winner of the national women in healthcare thinks it will help out. It is especially nice to see the newspaper pics too of what the rural hospital is doing with the cash.

Your picture is made of stupid facts; thats what is wrong with your picture.
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Quote from Grob109:

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Jack, my I suggest rather than "stupid facts" you replace that with "misperceptions".

That would be more palatable and reduce verbally induced defense mechanisms that cause barriers to learning....

Best Regards
Oddi
 
The biggest basic flaw in TA is........

INCONSISTENCY!!!!!!

There is not a single indicator in public existence that works with anything resembling consistency.

This fact is only ascertained in real time, on the hard right edge of the chart.

Delayed data will always show that this MACD crossover worked, or that Stochastic divergence works.

Funny how this is usually not the case in real time, which is why most guru's cannot make real time calls.

Even if that guru makes his call 30 seconds later, it is still DELAYED data!!

Furthermore, often the guru enters his position, makes his call and hopes that enough acolytes push HIS position into the black on a very short term horizon.

Three ticks is more than enough to make this strategy profitable.

So guru gets out, the acolytes get gunned.
 
http://www.nber.org/papers/w7613

Read it, and weep.
For those who don't want to read it, let me summarize.
Some geniuses from MIT did a study on technical analysis within Nasdaq.

The results were startling. The most bullish signal, the inverse head-and-shoulders pattern, produced an average 4% increase in the price of a stock on the third day after the pattern's completion. The most bearish signal, broadening bottoms, produced an average 6.2% decrease (charts). The authors also looked at other statistical measures such as standard deviation and skew and found that they also were significantly different from those of a randomly chosen day in the market.

Let me add that I don't believe Technical Analysis is a crystal ball. In fact lots of times it's wrong. It's the way technical analysis allows you to control your emotions in respect to the stop loss that makes technical analysis so very sucessful imo.
 
Quote from ansiman:

http://www.nber.org/papers/w7613

Read it, and weep.
For those who don't want to read it, let me summarize.
Some geniuses from MIT did a study on technical analysis within Nasdaq.

The results were startling. The most bullish signal, the inverse head-and-shoulders pattern, produced an average 4% increase in the price of a stock on the third day after the pattern's completion. The most bearish signal, broadening bottoms, produced an average 6.2% decrease (charts). The authors also looked at other statistical measures such as standard deviation and skew and found that they also were significantly different from those of a randomly chosen day in the market.

Let me add that I don't believe Technical Analysis is a crystal ball. In fact lots of times it's wrong. It's the way technical analysis allows you to control your emotions in respect to the stop loss that makes technical analysis so very sucessful imo.
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I agree with the person who commented that my use of stupid facts is not a good descriptor. It was used to start the thread and I just wanted to go with the flow at my initiative. Not too good.

So for the above posted comment, my view is that MIT did what they did and got the result they got. this is an example of using a data base (NASDAQ) that is ill chosen to do anything in particular.

It suggests that the MIT team was looking at a few formations that were known to produce results and they went into a study to find out something that appears to be price changes that have some relation to the formations (completed ones, maybe) and what happens afterwards.

This all fits under the heading of a book entitled "How to Lie with Statistics."

Were they to sharpen their pencils and get down to repeating the approach of W. J O'Neil who endeavored to "discover" "patterns"and go further to determine their distribution in the spectrum of possibilities using percentile groupings of things like EPS and RS where these are percentiles of earnings and price performance respectively.

So the "cup and handle" came into being from this.

Well here we are in misconception land again regarding the MIT post. Where do the patterns and formations appear in the MIT study. For sure we know that WJO was working the EOD turf and the C&H is an intermediate term pattern or formation. It is usful on EOD data and the C&H takes about 13 weeks to form. The BO out of the handle takes an intermediate term trend to fulfill its result.

Mr Market used to post here on stuff. One of the alternativesin the same sector to one of his unsuccessful picks was a stock that was recommended to him for consideration. That IT run up on that stock was from 10 to 80 over the run in about a year.

TA performance is very very significant when it is done in a purposeful context. When it is studied as MIT did is is just something done on the misconception level. MIT's misconception is that you can apply TA to the NASDAQ. You can't. TA really makes money for people if they chose an excellent quality universe for applying TA. MIT missed the boat. W. J. O'Neil on the otherhand did an excellent job of creating a pattern or formation and then went about defining the universe to which it best applied.

It turns out all patterns that have names follow the P, V relationship, which in itself is not completely expressed mathematically. The addition correlary fixes that.

when one has a set of patterns that all follow a rogorous statement, then the person is in a place where he can begin to find an application that makes a lot of money.

Having the specific narrow application arena down cold, then the person can begin to address when to make money with the application. This is the issue of "rotating" capital through the sequentially appearing investment opportunities that cycle along for the trader.

If the three primary market variables cycle with periodicities that are low integer multiples, how can it be that a TA practitioner cannot understand what is going on? From this there is no viable argument that prediction is a requirement of making money. Why would anyone work on algorithms for making money?

Its like someone had the misconception of looking at potential annual ROI's and concluded that one person would soon take in all the money out there. For traders, there is no connection between one and the other. Its like the miconception that markets are not changing in size.

What was the fastest growing financial factor that Warren Buffet dealt with in his career? It sure wasn't his ROI.
 
Quote from oddiduro:

The biggest basic flaw in TA is........

INCONSISTENCY!!!!!!

There is not a single indicator in public existence that works with anything resembling consistency.

This fact is only ascertained in real time, on the hard right edge of the chart.

Delayed data will always show that this MACD crossover worked, or that Stochastic divergence works.

Funny how this is usually not the case in real time, which is why most guru's cannot make real time calls.

Even if that guru makes his call 30 seconds later, it is still DELAYED data!!

Furthermore, often the guru enters his position, makes his call and hopes that enough acolytes push HIS position into the black on a very short term horizon.

Three ticks is more than enough to make this strategy profitable.

So guru gets out, the acolytes get gunned.
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With regard to using TA in a non lagging manner(and this includes indicators) it is best to show the future on your display.

No one should have the forming bar on the very right side of their display. There is a wonderful use of the space on the right side of the display. It is the best place to do annotations of price, volume, indicators and general verbal comments.

1/3 of a chart is a good portion.

If you use horizontal rays on volume, you get a nice picture of the possibility of price movement. Three rays are a possibility. One could represent the "peaking" volume that is contemporary.

You could also chose a volume that represents the inability of the market to "operate" using its rules.

Another volume in between could be used to signal to you that failure of the paterns are imminent because volume is not at a "sustaining" level.

More commonly used annotations that are very helpful are the ones that are set up for price to fill.

Making money with high velocity depends upon using the long diagonal of a trend parallelogram. Why not draw it in in advance so that price can fill up the formation. As long as you are at it, put all the pattrns and formations in place ASAP in the blank space to the right of the forming bar. you will really like the three types of pennants once you catch on to annotaing in the future.

Indicators, most people think are lagging. Annotations of indicators are easily done to turn them into leading indicators. This applies to both kinds of indicators. Oscillators are the easier of the two it turns out.

One of the worst misconceptions of TA is that the forming bar on the chart is on the very right of the display. Only people with the misconception that annotaing TA is done after the fact. Why would anyone take the time to draw lines on the past?? the only useful pattern and formation anotations are the ones where the end of the formation is composed as far as necessary to the right of the presently forming bar.

What good are candesticks? Do they form just after the bar is finished?

Did you ever see volume rising and getting to the annotated level for price BO before price BO's? LOL, the BO of price is always after the critical volume is established for the BO.

Like someone said: what if everyone had the right third of their screens annotated ahead of price bar formation? They probably think the market would stop following its rules...LOL.....and all the profits would go away... LOL....

PUT a MARK on the MACD where the crossover will occur....really is there anyone out there using the original MACD defaults???...LOL....Do you use as an signal where the lines go from divergence to convergence??? (What does that mean???) Are you still waiting for the cross over to come up. Do you know which line is always horizontal at the time of crossover??

We all know that no one is going to think about any of these comments.......LOL... Why think about them??

I just post something that you have never read before in each post I make in order to let your guys know that you have something (a lot) to look forward to.

Everyone neutral biased yet????

Have some eggnog...

see if your software lets you move the forming bar off the right side of the chart...LOL.... Who would have screwed that programming function up if you couldn't?
 
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