The Science of Technical Analysis

Quote from epetrov:

I think that TA is not only science tool. It is a mixture of science and art.
TA works fine but not in a way described in the books of TA.
It best works with combinations with FA, too.
If you analize TA scientificely you will get to conclusion that TA is pure nonsence. BUT, there a a lot of people making a lot of money with that.
:D
How to explain that?
Cheers.
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What you have posted above is what you conclude.

On the other hand it is possible to use the SM (Scientific Method) and reach a scientific conclusion instead of what you conclude.

Yesterday, I took the trouble to compose a response to the OP on one of his questions. It was 11 single spaced pages long and was a comparison of two trading approaches that were scientifically based. I compared and contrasted the two to be able to make many points while still keeping the writeup based on the application of SM to TA.

ET does not have the capacity to accept posts that involve substantial amounts of critical thinking.

The virtue of the Scientific Method is that it, the SM, allows many people to do the same effort and all of the people do reach the same conclusion from the work that is, in effect, duplicated using the same scientific basis.

Another great thing about the SM is that it can be used improperly and when results of improper use are posted, then the scientific community can make the mistakes public and, then, all parties can proceeed, hopefully, to new ground. That is not now possible on ET either, it turns out.

In my comparison, I was able to show, to my satisfaction, how two scientific approaches had major differences and these scientifically derived differences do point out how the full range of trading results comes about due to the varying viewpoints that lead to conducting efforts that are very diverse yet scientific.

It is too bad for you that you have used science to draw the conclusions you have drawn. It is possible that you and others like you have excused yourselves from using very powerful tools that do yield results that, in the distribution of things, are called fat tails.

The situation, in the realm of science as applied to the financial industry, is even better than the fat tails possibility. for fat tails there, at least, has to be a degree of commonality for comparisions to be made.

As it turns out, scientifically and pragmatically, there is more than one world under consideration and there is little or no overlap of these fertile fields of consideration.

Science does back up and actually provide the foundation for creating very successful TA systems for use in the financial industry. It some cases they are way to one side of the fat tails ordinarily used for the standard.
 
Quote from TSGannGalt:

So how many times do we have to repeat the same conclusion.

Though, I'll bite...

In trading, there is very little observable constancy to base on, for running scientific methods.
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In science and in training to become a scientist, all of the words you stated just above, are commonly spread out on a lab table to be able to begin at step one in order to make a major break through.

It is often siad that doing the same old thing over and over again and expecting a different conclusion is the definition of insanity.

So it is probably a very good idea for you to keep your conclusion handy and use it as you wish.

At the bottom you make a statement that could be the basis for a conclusion that runs along the lines of the top of your statement.

For others, though, it may be possible to sit at the lab table and begin to do work.

I did do three important things this week that allow me to say what I am posting now and here. I mentored for 6 live hours one day from 6:30 to about 13:30 Tucson time. I also sketched out 9 pages as a personal debriefing of the collected ideas I was putting forth mentoring. The third thing I did was retreive a feedback diagram on OODA and write a compare and contrast of OODA and MADA. It was 11 pages single spaced in 10 point.

Both OODA and MADA are derived from and use the Scientific Method.

Originally I was going to post the diagram as a picture insert in the C and C. ET can't handle this level of attachments.

My conclusion is that the markets offer the observable consistency that you demand for doing science on the markets. TA will be your result if you decide to do so.

It is not possible for much of the science community to do science in any part of the financial industry. Often I have been in settings where financial industry employees sit with scientists and/or mathematicians.

There is no place usually to plant a seed much less culture it to get something to come to maturity and bear fruit.

In relation to my long experience in cultivating a trading system that has borne fruit, I discovered more deeply this week that it came from the seeds and the nurturing requirements, primarily. I engaged in a self assessment by doing these things.

Fortunately, you named the required seed and I can add what needs to be done with the seeds to nurture them scientifically into systems that would appear as anomolies in the fat tails.

Unfortunately, in ET, threads entitled with words like "serious discussion" get deleted in their entirety and so do spread sheets that just assimilate the trading results into analysis sheets.

The forte of the Scientific Method, as applied to the financial industry, is that it precludes the induction so common in the finanacial industry.

I do not expect anyone to change their mind about anything but I do feel that it is possible to put what is required on the table so that anyone who wishes could repeat the science and come to the same (different than yours) conclusions first presented by me in the discussion.

Choosing the seeds to do science has run the gamut in scientific fields. I was close to the proceedings at BTL when the transistor was invented. Fortunately, records and visuals were kept that show the intensity of effort and its direction. That brief diversion whne an accident occured actually got the crutial step to occur that led to success. You can see in photographs, etc, just what allowed things to proceed.

It must have been fun in places all over the world when people first tasted cooked game, fruits and vegetables after forest or grass fires caused by lightening.

Raw data is very consistent by a single virtue that is the essence of most science: it is done in relationship to time.

The size of markets cloaks all activity in wonderfully organized boundaries, often in science, called boundary conditions.

Columbus should have had it so good.

It is true, though, when Magallen was informed by Phillipinos, when he arrived from Europe via Africa's southern tip, that they had been to South America before his arrival. Falling off edges of the world was getting more and more remote.

With boundaries and time based raw data, any scientist has the seeds to go to work. I will focus on two models that emerge from science: OODA and MADA. Look them over and see how each concludes that science works as the basis for modelling, designing and operating science based systems that are profitable in markets.

I do not think the average person who may be assessing markets and trading goes about it scientifically.

When I began, I did not have a choice. I was simply surrounded by science and scientists and no one knew anything about markets except that you did not need a salary as a faculty member because so much money was available from investing.

Today, on about every campus there are investing clubs and Timmay and Cramer are very popular trader models to emmulate.

Applying science to the WSJ back page daily is how it began for me. I made a veluum master chart and printed brownlines as copies to work with. MADA happened. Darvas was my contemporary. John Boyd's OODA was applied the same way at a later time when the markets had become electronic.

I am not discussing the results per se. That is a sidetracking issue since the results are in a different paradigms and comparisons of results is not practical or possible. What is possible is to compare how applying science or not using science gets different people to differing conclusions about markets and trading.
 
Quote from cd23:

I attached a reference to answer your Q about OODA a while back.
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Thanks cd23 for the reply. :) Wow! To think that a military strategy could be applied in so many ways! :eek:
 
Quote from cd23:

The science of Technical Analysis (TA) involves the normal five step process of the Scientific Method (SM)

To hypothesize about TA takes a mind that is able to use the SM properly. This means that probability is not involved because probability is not part of the SM.
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Hold your horses... Since when could probability not be included in the scientific method. There are an infinite number of hypotheses that are probability related. See Mendel, Darwin
 
But how do you define a trend? Therein lies the technical analysis. You see it is actually quite unavoidable.

As for your KISS philosophy of trading, if you are not using a technical indicator, and instead relying on your brain to recognize visual patterns and to make rough estimations to base your trades, THAT is a actually a much more complex system.

Quote from Tucker Robinson:

I think there are enough technical indicators to drive you crazy. I keep it simple and tell myself 'the trend is your friend' and go with it. Long term or short term its worked for me. Fib numbers sound facinating however I have never unlocked their secret.
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Quote from bellman:

Hold your horses... Since when could probability not be included in the scientific method. There are an infinite number of hypotheses that are probability related. See Mendel, Darwin
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Were I you I would stick with your viewpoint.

The "since when....." statement is a key thing to consider or ask. I would say most people would conclude that probability could always be included and that would mean that it would be available or, perhaps, by some, considered a necessity.

I was focused on two things, each systems and the connection of the systems as a larger operating system. One system was the market and the other system was a trading system.

We can each go our separate ways and have knowledge, beliefs and behavior that reflects our paths.

I am used to doing science without probability as a condition of completing work. Others are doing as they wish.

The OODA and the MADA represent the using probability and not using probability, repsectively.

If there is a choice, which there is for you, then you may use OODA or MADA and I am restricted to only MADA.

As you can see OODA created a WOW for some readers. I find making a decision and construing it as a hypothesis and THEN backing it with action as a test of the hypothesis as not good use of the SM. In trading, as in being a fighter pilot, while using OODA must be some darn experience to put one's self in.

It may be possible that repeating creating such situations can be harmful on occasion.

In a deleted thread, a person said that his warm up drill for getting to the beginning of learning to trade inflicted 200 to 300K of losses. This didn't really count since he did not have a trading edge during that time. He had no decision hypotheses to use to determine a test action up to that point. He became a super trader, by his standard after he added and used the 12 golden edges in combination with the discipline, risk management and all that goes into good trading. Using one the golden edges was his hypothesis decision and he tested it by acting according to the choice of golden edge. There are probabilities involved I would imagine. If data is accumulated using this approach, after a while, this trader has laid the foundation, through induction, for what we all know is possible. See Taleb.

What applications of the SM exclude this sort of induction?

This leads to another area of concerns.

Returning to OODA and the person, is it a good idea to trade using a hypothesis as the decision mechanism? Is taking actions as "tests" of the selected hypothesis a reasonable strategy?

The unheld horse viewpoint is YES. So is the fighter pilot situation up to the time when the other fighter pilot has a better hypothesis under test.

By holding my horses and recognizing how the future comes into the present in trading (making what is offered), the door is closed on probability as related to its use in the Scientific Method as applied to making money.

What are the primal seeds that allow this horse holding to be reasonable?

I'm not the OP of this thread and he is WOW'ed by things. Unfortunately, my posts may lead to the deleting of the entire thread.

Knowledge can lead to beliefs which, in turn, can lead to behavior. Seeds allow knowledge to grow. Most often the seeds that are selected lead to what mostly everyone winds up doing.

Observe Orient Decide Act Is a building process through feedback and seeing the interaction of the test with what the market is obsrved to being doing.

The rep rate may be at a human level of 100 milliseconds per rep or it may be "fast" by an extension of the human through the use of what cannot be seen. One humorous limit is parties and counterparties losing the ability to mark to market because of the illiquidity of the markets. Crays operating near absolute zero to cut friction are backing this up. A new meaning for "freeze frame" has been found in the upper stories of tall buildings.

Probability is in these pictures throughout. Bad seeds.

I did not hold my horses. And I have a different view and it was optained by doing science.
 
The top of the market was on Oct 11, 2007. But the nasty drop did not really begin until Sep 22, 2008. Any trend following methodology would have had you out of the market or short the market by that time.
 
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