Quote from whitster:
"EVERYBODY uses charts to get a graphical perspective of whatever they are trading."
false. pit traders FOR YEARS didn't use charts. most still don't
any graphical perspective they have, if any, is in their head. they gauge order flow, and remember key levels to gun for, fade, etc. based on what they see in the pit.
also, pit traders devised floor trader pivots as a way to quickly and simply calculate inflection points to gun for and fade against and this has been taken advantage of by other chart traders from home who at least understand these levels and their significance to the pain/pleasure cycle of pit trading.
"In quantitative analysis the charts do not drive the trading in any way...
But rather provide an overview that might be used for longer term strategy."
at a minimum, chart drive trading to some extent because people THINK they have importance, and certain patterns/levels etc. have importance, and thus AT A MINIMUM it becomes a self fulfilling prophecy
"This is entirely different from using charts to manufacture mythical things like "waves", "formations", "resistance levels", etc, etc...
Figments that are then used to drive statitically fallacious trading "systems"
resistance levels are hardly "mythical".
pit traders, who don't even (generally) use charts are well aware of resistance and support.
heck, i know people who have traded indexes SOLELY with tape and pit noise, and any good tape reader can see resistance levels generate in the tape. for example, at resistance levels, you will see the dynamics of the order flow change and you will see a change from net buying on the ask, for instance, to net selling on the bid. these are hardly mythical.
you don't have to even know what a chart is to recognize that the dynamics of a two way auction system naturally result in levels of resistance and support being developed.
it has a lot to do with the "break even" theory (people holding on to a loser until it comes back to break even), with how people set stops, etc.
for example, in an up market, if people see a level was a reversal point previously, many who are long will have limit orders to sell near that level. similarly, others will even have reversal orders (net long to net short there), and consequently will set stops above these levels. if there is enough buying pressure (for whatever reason) to take out all the offers at that level and push price higher, then stops start getting hit, which further fuels an upward rise. then, you will see all the "indicator traders" getting in late to the game and trying to catch the momo, and the smart traders selling into that strength, and fading the late movers, and then you see a move back to the prior resistance, which now becomes support, as the losers hand back control to the smart money who is now buying the weakness, etc.
there is nothing mystical or magical about this. it is simply psychology, and market dynamics (which is based on psychology).
two way auction markets are simply a result of an aggregation of opinion/action by market participants. this naturally results in excesses when fear, greed, panic euphoria sets in. any individual who has traded has done dumb stuff when the emotions start kicking in. we have all experienced this. other traders are no less immune to this, and this is why certain things happen over and over again in the markets.
all sorts of TA principles apply. for example "the bull market climbs a wall of worry". this is hardly mystical. when a market declines, late comers jump in to short, and set stops at "logical" (lol) levels above their shorts. when bulls take over and push through these stops, many shorts are faced with stops, and often - margin calls- which fuels the buying even more. TA would call this a "breakout", but there is nothing mystical about it. markets don't move cause they want to. they move cause they have to.
similarly, institutions (who are generally long time frame participants in the markets) tend to buy weakness and sell strength. this sets up support and resistance levels too, because of all the limit /stop orders set at various market points. people wonder "why did the market reverse there?" . whatever TA term u use (or don't) to describe it, it happened because of a reversal of order flow/opinion/dynamics based on orders. nothing moves a stock (or index) up except demand outstripping supply at any given price level. period. nothing moves it down except the opposite.
TA just helps to model these principals into a framework, a MODEL (and all models are necessarily a compromise , an approximation and not a perfect science) that people can use to help to manage trades.
on the breakouts, to borrow a TA term, the dynamics are that the smart money (the institutions that bought on weakness) will be handing off their (now profitable positions) to the momo players to essentially let the momo players take a risk to test the strength of the trend. sometimes, given sufficient demand, the market will push through to new levels (confirmed breakout) where the market (the two way auction process) now finds "acceptance" of new price levels. the valuation may be out of whack (lord know it happens in every bubble certainly), but as long as there continues to be demand, there is (to use a TA term) support.
there is nothing magical or mystical about TA. it is merely a model to help explain recurring actions that happen when behavior is AGGREGATED in the two auction process. there are all sorts of participants - your "value dip buyers", your "smart money", your speculators, your hedgers, your "dollar cost averagers", etc. all with different opinions as to what is value, what is a place to buy, what is a place to sell, and with various profits or losses locked in at any given level, and diverging time frames to realize profit.
the aggregation of these opinions, and these opinions subsequently resulting in ACTION (buy or sell) is simply seen in a pattern of price action. a chart. TA merely models this action
this action may be many things. it certainly has chaotic elements (to borrow a chaos theory term), and certainly can appear random at times. but certainly, since human behavior is involved - it is not random.
