What Do Hedge Funds Think of Technical Analysis?
- Thread starter SunTrader
- Start date
Only one of the guys is legit, and yeah sure at the end of the day if you can make money good for you. Vast majority of hedge funds do not use technical analysis in a meaningful way like retail (e.g. trade ideas, price targets, etc.). While certain technicals are valuable (skew, positioning, momentum), in real life the amount of liquidity you’re seeing on screens is chump change and no hedge fund or large investor (ex-hft, which is also non-technical) is trying to squeeze for pennies lol.
That was the point of my posting the link - to those who point out hedge funds don't for the most part use TA, as reason why retail traders should not either.
And my thought exactly why we should ... is because we are not hedge fund traders.
In the same way if I had had the opportunity to play a round of golf against Tiger Woods in his prime I absolutely would not try to play like him. Of course what I mainly would be focused on is not embarrassing myself too much. But next would be using what I found works for me best. Since I don't have 10's, 100's, 1000's of millions AUM and staffs in the dozens or hundreds.
And my thought exactly why we should ... is because we are not hedge fund traders.
In the same way if I had had the opportunity to play a round of golf against Tiger Woods in his prime I absolutely would not try to play like him. Of course what I mainly would be focused on is not embarrassing myself too much. But next would be using what I found works for me best. Since I don't have 10's, 100's, 1000's of millions AUM and staffs in the dozens or hundreds.
Several years ago I helped create a quant hedge fund management company and I personally developed systematic strategies that used some fairly popular technical analysis techniques.
Even though the TA elements were quite common, properly developing, tuning and optimizing the systematic strategies demanded some of the most intense software and algorithm development of my life.
The strategies I developed ultimately delivered a 3-year Sharpe ratio ~2 return for our fund investors. We won multiple hedge fund industry performance awards, accumulated over $500m AUM and a billionaire bought a stake in the management company to gain access to the strategy technology I invented.
That original family of strategies lost most of its edge. By then the company had grown considerably, overconfidence was high and competition for research funding was creating too much stress. I left the company convinced I could make better research progress developing systematic strategies on my own.
Based on 25 years of conversations with many traders and quant hedge fund people I can safely say technical analysis provides a large body of very strong trading and market prediction ideas that many quant hedge funds consider all the time, along with many other modeling approaches, ML, AI and many types of input factors (economic, equity fundamentals, news, social media, web, etc).
Fun fact - Many of my technical analysis ideas came from Elitetrader. I've been a member here for 20 years.
Even though the TA elements were quite common, properly developing, tuning and optimizing the systematic strategies demanded some of the most intense software and algorithm development of my life.
The strategies I developed ultimately delivered a 3-year Sharpe ratio ~2 return for our fund investors. We won multiple hedge fund industry performance awards, accumulated over $500m AUM and a billionaire bought a stake in the management company to gain access to the strategy technology I invented.
That original family of strategies lost most of its edge. By then the company had grown considerably, overconfidence was high and competition for research funding was creating too much stress. I left the company convinced I could make better research progress developing systematic strategies on my own.
Based on 25 years of conversations with many traders and quant hedge fund people I can safely say technical analysis provides a large body of very strong trading and market prediction ideas that many quant hedge funds consider all the time, along with many other modeling approaches, ML, AI and many types of input factors (economic, equity fundamentals, news, social media, web, etc).
Fun fact - Many of my technical analysis ideas came from Elitetrader. I've been a member here for 20 years.
Good post, but perhaps expand it.
If a trader/investor wants to make clear, independent decisions, which is a better way to go?
Fundamentals or TA?
Which of these can block the outside "background noise".
e.g. you want to buy a beverage company.
PEP looks great, but then you hear an advert that tells you COKE will make your life right.
Buy either, but the seed is planted.
On the other hand, TA has nothing subliminal.
There are no ads anywhere touting the chart of KO, or chart of anything else.
You decide.
If a trader/investor wants to make clear, independent decisions, which is a better way to go?
Fundamentals or TA?
Which of these can block the outside "background noise".
e.g. you want to buy a beverage company.
PEP looks great, but then you hear an advert that tells you COKE will make your life right.
Buy either, but the seed is planted.
On the other hand, TA has nothing subliminal.
There are no ads anywhere touting the chart of KO, or chart of anything else.
You decide.
The point of TA is to piggyback on the activity of institutions, so why would institutions use TA in any major way?
That’s fair, but what you’re not getting is that the basis for technical analysis — that it is predictive of future flow or price — is wrong, unless you believe other retail traders like you drive a stocks price through a day, overtime, etc. In real life, retail day traders make up a fraction of dollar value trading, which means price impact is minimal (except pink sheet stocks etc.).
Now, on the other hand, it is absolutely a great idea to study the pain-points for institutional investors, such as adv% requirements for trading, the usage of open or close auctions to find liquidity, and holdings. Pairing that with thesis analysis (what makes the stock great for an institutional investor) allows you to front run them. Just like how small-time home flippers can get in front of Zillow and blackrock…
A trader and investor aren't even necessarily related. I have not seen one person on these boards who is an ACTIVE DAY TRADER and says they use fundamentals as their primary tool. It's so ridiculous, haven't even seen someone try and pretend that they do that. If you're looking to make a career out of active day trading, than it isn't even a conversation. TA is by far the more consistent and profitable path.
Right that's the importance of context and making sure there's sponsorship in the direction you're looking to trade.