What is Technical Analysis? Why does it work?

[i am nobody]

Just to be clear, my original post is saying, for a simple example:

Non-random patterns:
123123123
543543543
111111111

Combined in a random way:
123123123111111111543543543111111111...

I understand you, but I see it from a different angle.
The combinded serie can be a part of a non-random pattern in another timeframe. Which makes it non random. In all timeframes exist non-random patterns, and in these patterns the combined serie can be part of a non-random pattern of it in another timeframe.
You make it random by watching it from a wrong point of view.
I see it as non-random because I watch from another perspective.

People always think about mathematical skill in trading. But analytical skills are far more important to me. It finds non-randomness in things that mathematically look random.

 

[userque]

I understand you, but I see it from a different angle.
The combinded serie can be a part of a non-random pattern in another timeframe. Which makes it non random. In all timeframes exist non-random patterns, and in these patterns the combined serie can be part of a non-random pattern of it in another timeframe.
You make it random by watching it from a wrong point of view.
I see it as non-random because I watch from another perspective.

People always think about mathematical skill in trading. But analytical skills are far more important to me. It finds non-randomness in things that mathematically look random.

Ok, I follow you as well. I agree, I just didn't go into in my post. Iow, it has a fractal nature.

 

[profitlocker]

People always think about mathematical skill in trading. But analytical skills are far more important to me. It finds non-randomness in things that mathematically look random.

Strongly agree. To quantify successfully requires at the minimum only basic arithmetic math skills. Knowing how, when, and where to apply this is where the pay dirt is. This skill can't be developed backtesting 100 years of data, without first developing at least 2 years of analytical skills. That's just laziness. You have to pay your dues. Having someone show you would help speed the learning curve.

 

[oraclewizard77]

The main problem with people who believe that the stock market is random is that long term term chart can NOT be replicated by for example a random coin toss. Or one can even look at the series "Billions" where the main actor says he was shorting as the planes were crashing into the towers of New York to make a short term trade. Now you might come back and say the series Billions is fictional so people were not making money. However, in real life traders were executing profitable short term trades based on the news. I believe at times the market is random, which why using more than just TA is useful for example understanding what a report says when it comes out instead of say just not trading during the time it comes out.

Computers are even programmed to read news stories faster than humans and start placing trades. http://www.nytimes.com/2006/12/11/technology/11reuters.html

Now if you believe there will not be a major surprise in a news report and kind of know what will occur based on past reports one can position a buy or sell stop trade to take place after the report comes out. You don't want to do this for a complicated report since you will see whipsaw price action that like random price action can't be traded.

http://www.investopedia.com/articles/financial-theory/09/markets-cyclical-vs-random.asp
"A Random Walk
Random walk proponents do not believe that technical analysis is of any value. In his book, "A Random Walk Down Wall Street" (1973), Burton G. Malkiel compares the charting of stock prices to the charting of a series of coin toss results. He created his chart as follows: If the result of a toss was heads, a half-point uptick was plotted on a chart; if the result was tails, a half-point downtick was plotted. Once a chart of the results of a series of coin tosses was created in this fashion, it was postulated that it looked very much like a stock chart. This led to the implication that a chart of stock prices is as random as a chart depicting the results of a series of coin tosses.

To stock market technicians, this claim is not a true comparison because by using coin flips, he altered the input source. Stock charts are the result of human decisions, which are far from random. Coin flips are truly random as we have no control over the outcome; human beings have control over their own decisions. One well-known example a technician might use to counter this claim is to produce a long-term chart of the Dow Jones Industrial Average (DJIA) demonstrating the 40-month cycle. The 40-month cycle, also known as the four-year cycle, was first discussed by economic professor Wesley C. Mitchell when he noted that the U.S. economy went into recession roughly every 40 months. This cycle can be observed by looking for major financial market lows approximately every 40 months. A market technician might ask what the odds are of replicating that kind of regularity with the results from a series of coin tosses."

Just to be clear, my original post is saying, for a simple example:

Non-random patterns:
123123123
543543543
111111111

Combined in a random way:
123123123111111111543543543111111111...

 

[userque]

The main problem with people who believe that the stock market is random...

I'm unclear. Do you believe, that "I" believe, that the markets are random?

 

[Robert Modd]

The main problem with people who believe that the stock market is random is that long term term chart can NOT be replicated by for example a random coin toss. Or one can even look at the series "Billions" where the main actor says he was shorting as the planes were crashing into the towers of New York to make a short term trade. Now you might come back and say the series Billions is fictional so people were not making money. However, in real life traders were executing profitable short term trades based on the news. I believe at times the market is random, which why using more than just TA is useful for example understanding what a report says when it comes out instead of say just not trading during the time it comes out.

Computers are even programmed to read news stories faster than humans and start placing trades. http://www.nytimes.com/2006/12/11/technology/11reuters.html

Now if you believe there will not be a major surprise in a news report and kind of know what will occur based on past reports one can position a buy or sell stop trade to take place after the report comes out. You don't want to do this for a complicated report since you will see whipsaw price action that like random price action can't be traded.

http://www.investopedia.com/articles/financial-theory/09/markets-cyclical-vs-random.asp
"A Random Walk
Random walk proponents do not believe that technical analysis is of any value. In his book, "A Random Walk Down Wall Street" (1973), Burton G. Malkiel compares the charting of stock prices to the charting of a series of coin toss results. He created his chart as follows: If the result of a toss was heads, a half-point uptick was plotted on a chart; if the result was tails, a half-point downtick was plotted. Once a chart of the results of a series of coin tosses was created in this fashion, it was postulated that it looked very much like a stock chart. This led to the implication that a chart of stock prices is as random as a chart depicting the results of a series of coin tosses.

To stock market technicians, this claim is not a true comparison because by using coin flips, he altered the input source. Stock charts are the result of human decisions, which are far from random. Coin flips are truly random as we have no control over the outcome; human beings have control over their own decisions. One well-known example a technician might use to counter this claim is to produce a long-term chart of the Dow Jones Industrial Average (DJIA) demonstrating the 40-month cycle. The 40-month cycle, also known as the four-year cycle, was first discussed by economic professor Wesley C. Mitchell when he noted that the U.S. economy went into recession roughly every 40 months. This cycle can be observed by looking for major financial market lows approximately every 40 months. A market technician might ask what the odds are of replicating that kind of regularity with the results from a series of coin tosses."

It is difficult to trade based on fundamental information for example a news story because like you mentioned computers are already processing and positioning based on that news. What that means to me is that the news is already baked in before you can trade based on it.

Also even if you knew the news ahead of time it doesn't always guarantee a certain direction.

If you were to use the 40 month cycle to pick market lows I think that would be difficult. When was the last market low? I think 7 years ago in 2009.

Maybe on Billions he placed his trade after the first plane hit and it was possible that it was pilot error and maybe he would have shorted at the low. Then the second plane hit and his bet was a home run. He didn't know anything in advance unless of course he had a visual (like insider info).

I guess my point is that I believe the markets are random and if you profit by picking a direction it has more to do with good money management than being right about the direction.

 

[Robert Modd]

I'm unclear. Do you believe, that "I" believe, that the markets are random?

I do believe as you. Markets are random.

 

[userque]

I do believe as you. Markets are random.

I guess I need to clarify.

I believe the markets contain components of both patterns and randomness. A noisy sine wave contains both randomness, and a pattern, for example.

A basic example:

Pi is a number whose digits are random. Take a portion of this random series:
1415926

Repeat it:
141592614159261415926141592614159261415926

It this number also random? It depends on your perspective.

My system finds patterns in the markets. So yes, I believe their are patterns...of randomness--and randomized patterns.

 

[i am nobody]

I do believe as you. Markets are random.

Random is not market related but person related. Those who have the knowledge see non random markets, those who don’t have the knowledge see random markets.

Scientists who try to find a medicine to threat a disease, first have to understand how this disease works. Until they find a cure the behavior of the disease looks like random. Once they find what causes the disease, the behavior is not random anymore and a new medicine can be developped. The disease never changed from random to non random, but the knowledge changed and by that it changed the opinion from random to non random.

 

[userque]

Random is not market related but person related. Those who have the knowledge see non random markets, those who don’t have the knowledge see random markets.

Scientists who try to find a medicine to threat a disease, first have to understand how this disease works. Until they find a cure the behavior of the disease looks like random. Once they find what causes the disease, the behavior is not random anymore and a new medicine can be developped. The disease never changed from random to non random, but the knowledge changed and by that it changed the opinion from random to non random.

Would you consider a coin flip (H or T) a random result?