Why does technical analysis work
- Thread starter Demarco8
- Start date
Your question is valid but your post confuses me. Certain types of TA work according to the psychology of market participants who buy and sell at certain levels for conflicting reasons. You can recognize patterns displayed by aggressive buyers that differ from fearful or conservative buyers. Same as panic selling or short covering versus unloading.
I don't place as much stock in mathematical derivatives of price, but they work in limited circumstances.
I don't place as much stock in mathematical derivatives of price, but they work in limited circumstances.
So you are assuming that because you could not trade using TA that it doesn't work? I might be a rookie at it but I have been trading with TA for about 13 years with very good results. Not using indicators but simple S/R and basic chartpatterns. If you want evidence go look at the Ferraris and Maserattis around Wall Street. I'll bet the majority of those guys believe in TA.
I love the reaction in these treads when Technical Analysis is mentioned.
"TA doesn't work . . . seems to works at times . . . works till it doesn't". Man using Technical Analysis (use that term loosely) for first time. Technical Analysis used was borrowed, nothing personally tested.
Conclusion: Because the version of TA this person tried didn't work . . . all TA is worthless.
"I drove a car once and it didn't work . . . seems to works at times . . . works till is doesn't" Man driving a car (use that term loosely) for first time. Car was Yugo.
Conclusion: Because the car this person tried didn't work . . . all cars are worthless.
"TA is non quantifiable . . . patterns not definable in a scientific manner . . . no evidence it works". Man using Technical Analysis (use that term loosely) for first time. Technical Analysis used was borrowed, nothing personally tested.
Conclusion: Because the version of TA this person tried didn't work . . . all TA is worthless.
"I drove a car once and it didn't work . . . seems to works at times . . . works till is doesn't" Man driving a car (use that term loosely) for first time. Car was yugo.
Conclusion: Because the car this person tried didn't work . . . all cars are worthless.
[Sub-Response - One far-removed specific type of TA is "pattern recognition" and it is widely considered weak by modern technical traders because of it's inconsistency.]
"TA is the opiate of the trading masses . . . it's an easy fix . . . price mantra leads to an early financial death or disillusion". Man using Technical Analysis (use that term loosely) for first time. Technical Analysis used was borrowed, nothing personally tested.
Conclusion: Because the version of TA this person tried didn't work . . . all TA is worthless.
"I drove a car once and it didn't work . . . seems to works at times . . . works till is doesn't" Man driving a car (use that term loosely) for first time. Car was yugo.
Conclusion: Because the car this person tried didn't work . . . all cars are worthless.
[Sub-Response - Nothing about good Technical Analysis is easy. Just like the Yugo there is crap in every field or product environment. Most people can't grasp the intense positive side of TA because it takes a great deal of focus, determination and patience and only a small segment of this industry wants to devote that much effort into it. The demise of those applying old inconsistent versions of TA are no different from anyone looking at trying to find a shortcut to success. THERE ISN'T ONE, which, I assume, pretty much explains the posters rationale regarding his own experience with TA.]
"TA doesn't work . . . seems to works at times . . . works till it doesn't". Man using Technical Analysis (use that term loosely) for first time. Technical Analysis used was borrowed, nothing personally tested.
Conclusion: Because the version of TA this person tried didn't work . . . all TA is worthless.
"I drove a car once and it didn't work . . . seems to works at times . . . works till is doesn't" Man driving a car (use that term loosely) for first time. Car was Yugo.
Conclusion: Because the car this person tried didn't work . . . all cars are worthless.
"TA is non quantifiable . . . patterns not definable in a scientific manner . . . no evidence it works". Man using Technical Analysis (use that term loosely) for first time. Technical Analysis used was borrowed, nothing personally tested.
Conclusion: Because the version of TA this person tried didn't work . . . all TA is worthless.
"I drove a car once and it didn't work . . . seems to works at times . . . works till is doesn't" Man driving a car (use that term loosely) for first time. Car was yugo.
Conclusion: Because the car this person tried didn't work . . . all cars are worthless.
[Sub-Response - One far-removed specific type of TA is "pattern recognition" and it is widely considered weak by modern technical traders because of it's inconsistency.]
"TA is the opiate of the trading masses . . . it's an easy fix . . . price mantra leads to an early financial death or disillusion". Man using Technical Analysis (use that term loosely) for first time. Technical Analysis used was borrowed, nothing personally tested.
Conclusion: Because the version of TA this person tried didn't work . . . all TA is worthless.
"I drove a car once and it didn't work . . . seems to works at times . . . works till is doesn't" Man driving a car (use that term loosely) for first time. Car was yugo.
Conclusion: Because the car this person tried didn't work . . . all cars are worthless.
[Sub-Response - Nothing about good Technical Analysis is easy. Just like the Yugo there is crap in every field or product environment. Most people can't grasp the intense positive side of TA because it takes a great deal of focus, determination and patience and only a small segment of this industry wants to devote that much effort into it. The demise of those applying old inconsistent versions of TA are no different from anyone looking at trying to find a shortcut to success. THERE ISN'T ONE, which, I assume, pretty much explains the posters rationale regarding his own experience with TA.]
there are two things involved with surfers comments.
TA and surfer.
Proflogic commented on the TA part.
There is a surfer part too. I do not track surfer any more.
To make money a trader connects and has a relationship to the markets.
Most traders never get to see the markets in the first place. There are lots of reasons for this.
Were a trader to be able to see the markets, then there has to be a division of responsibilities. And it is important to get this right and it is important to not abrogate roles nor step over a line to ursurp.
To carry out the relationship takes a routine and the routine is based upon a vast array of knowledge, skills and experience.
Most often traders with long low performance track records are just repeating their initial experiences while not advancing in skills and knowledge.
Most traders never establish a routine as part of their experience. Those that do, make a point of speaking in detail about their routine.
I look for four elements in those routines proferring by these types of traders. I look for the sequence (over time) in which they iteratively refine their routine elements.
The body of knowledge and skills that relate to TA is found in two of the four parts of superior trader's routines. TA is found in all of these trader's commentaries without exception. It is also true that fundamental analysis (FA) is present in these commentaries.
People learning to trade may only get so far in the process. One of the markers is whether or not they get things straight in FA and TA. If they do not, then there is a gradual degredation as they further and further mess things up. There is a concurrent hardening of their viewpoints regarding what they have tossed on their personal junk pile. Rarely does a person go to the junk pile and resurect something he has made a mistake in learning about. It is a one way street.
Learning correctly and knowing what you know is correct is a challenge in trading, However, there is an unusual opportunity to take advantage of an available process for doing selfchecking as a quality assurance effort.* Those who are repeating their initial experiences ad nauseum do not use self checking processes of any kind. There is a common reason for this. Their experiencing of markets and trading does not invlove any regular routine. A routine is absent.
When you read people who "talk" about "reaction", you are experiencing with them their lack of a routine. The line in the sand between being reactive and pro active is well defined and has a strong set of critria for assessing which side of the line the given trader operates on. It is important to be able to assess how long ago in the past the trader crossed the line as part of his progress. The line is crossed going in only one direction it turns out.
So TA appears in only two places in the parts of routines excellent traders follow. first it is coupled with the ont part of the routine that involves the senses: the monitoring of the market. The negative emotions associated with the market are in direct proportion to WHAT the trader is NOT seeing. The more that is not seen the broader the range of NEGATIVE emotions. This is the basis of proflogic comments on why people drop TA from their monitoring. If a person isn't able to even see the market, he isn't going to be able to use TA and he is going to have a braod range of negative emotions associated with the markets.
If a person monitors and gains the ability to collect data sets only as a peart of his routine, then the emotional component becomes most closely associated with HAVING GOTTEN A SUFFICIENT (COMPLETE) DATA SET FOR THE NEXT STEP OF HIS ROUTINE. What does it feel like, emotionally to have a complete or sufficient data set as you turn away from the screen to do the rest of your routine (put on a blind fold accasionally to stop sensing while you do it). The emotions are positive ones; ones associated with accomplishing the m0onitoring task.
Look at a person who has put TA on the junk pile. Does he have a chance to perform as do those who have TA and use it totally to get complete data sets? A common example in ET is the person who does not do trendlines or if he does he doesn't do channels by using a parallel line (remember dbphoenix who would not draw channels and could not see exits on the left line; he would rather believe a BO of the trendline was his supply demand model). Think of those who feel it is only possible to draw a tendline after the fact and channels after the fact.(they are drawn and projected from two consecutive bars ASAP as it turns out. Imagine using a platform for charts that does not let you have future blank space to project into on the right side of the chart. You can't do TA without having the future in the picture. All of this can lead to negative emotions while trading in a handicapped manner.
TA allows a person to successfully collect sufficient data sets that are conveyed to the second part of the routine: analysis.
analysis is conducted blindfolded so to speak while your chair is rotated to a position opposite and away from the screen. Put your log on a table that is behind you when you are monitoring. Turn to it to put down the results of your analysis. Fill in the observations after you have filled in the analysis column. Or do it the other way round.
How does TA fit into analysis? It is where the conclusion set comes from. analysis takes a data set and paris it with the conclusion that fit the data set. A trader has a finite set of monitoring data sets and he has a finitie set of conclusions that can be associated with data sets. Leaf back though your logs and hilight them now. Use yellow for conclusions and heliotrope for data sets. I green ball point number the conclusions from 1 to n. In red bal point number, correspondingly, the data set that corresponds to the appropriately numbered conclusion. When done you are an advanced beginner.
Load the two lists in to excel. You now have an automatic lookup table. Notice the TA as it appears on each list.
Do you have too much TA or too little. Do you notice that the leading TA indicators are the best ones for the best and more important conclusions?
My lists are in my sports memory at this point in time. I don't use them in my personal RAM anymore.
It turns out TA is the science of trading. What is the liberal arts of trading. LOL, we all know he answer to that one.
TA is left behind for the rest of the routine. Mark the log with green hiliter for the decisions that relate to the conclusions of analysis. You see five elements in the green hiliter set. None of them say anything TAwise. There is no TA in decisions. It would be OT to continue to go through the routine further as we see.
What is in the data dests of the "reactors". Usually single elements of date. "I just saw______.(fill in the blank. Is there ever a conclusion that can be draw from a single data element? No there isn't. are any of these things that are seen related to TA? Nope, they are not. There is NOTHING in TA that deals with a single element of data. who uses these single elements that have no conclusions? People who see a single element and skip analysis and go directly to decion making. What is the name of this set of traders? They are called losers, generally speaking.
All losers do not use TA. Not using TA is THE common characteristic of losers if there is one.
*The routine is self checking once it is begun. as items are added to the data sets set corresponding conclusions are added to the conclusion set.
TA and surfer.
Proflogic commented on the TA part.
There is a surfer part too. I do not track surfer any more.
To make money a trader connects and has a relationship to the markets.
Most traders never get to see the markets in the first place. There are lots of reasons for this.
Were a trader to be able to see the markets, then there has to be a division of responsibilities. And it is important to get this right and it is important to not abrogate roles nor step over a line to ursurp.
To carry out the relationship takes a routine and the routine is based upon a vast array of knowledge, skills and experience.
Most often traders with long low performance track records are just repeating their initial experiences while not advancing in skills and knowledge.
Most traders never establish a routine as part of their experience. Those that do, make a point of speaking in detail about their routine.
I look for four elements in those routines proferring by these types of traders. I look for the sequence (over time) in which they iteratively refine their routine elements.
The body of knowledge and skills that relate to TA is found in two of the four parts of superior trader's routines. TA is found in all of these trader's commentaries without exception. It is also true that fundamental analysis (FA) is present in these commentaries.
People learning to trade may only get so far in the process. One of the markers is whether or not they get things straight in FA and TA. If they do not, then there is a gradual degredation as they further and further mess things up. There is a concurrent hardening of their viewpoints regarding what they have tossed on their personal junk pile. Rarely does a person go to the junk pile and resurect something he has made a mistake in learning about. It is a one way street.
Learning correctly and knowing what you know is correct is a challenge in trading, However, there is an unusual opportunity to take advantage of an available process for doing selfchecking as a quality assurance effort.* Those who are repeating their initial experiences ad nauseum do not use self checking processes of any kind. There is a common reason for this. Their experiencing of markets and trading does not invlove any regular routine. A routine is absent.
When you read people who "talk" about "reaction", you are experiencing with them their lack of a routine. The line in the sand between being reactive and pro active is well defined and has a strong set of critria for assessing which side of the line the given trader operates on. It is important to be able to assess how long ago in the past the trader crossed the line as part of his progress. The line is crossed going in only one direction it turns out.
So TA appears in only two places in the parts of routines excellent traders follow. first it is coupled with the ont part of the routine that involves the senses: the monitoring of the market. The negative emotions associated with the market are in direct proportion to WHAT the trader is NOT seeing. The more that is not seen the broader the range of NEGATIVE emotions. This is the basis of proflogic comments on why people drop TA from their monitoring. If a person isn't able to even see the market, he isn't going to be able to use TA and he is going to have a braod range of negative emotions associated with the markets.
If a person monitors and gains the ability to collect data sets only as a peart of his routine, then the emotional component becomes most closely associated with HAVING GOTTEN A SUFFICIENT (COMPLETE) DATA SET FOR THE NEXT STEP OF HIS ROUTINE. What does it feel like, emotionally to have a complete or sufficient data set as you turn away from the screen to do the rest of your routine (put on a blind fold accasionally to stop sensing while you do it). The emotions are positive ones; ones associated with accomplishing the m0onitoring task.
Look at a person who has put TA on the junk pile. Does he have a chance to perform as do those who have TA and use it totally to get complete data sets? A common example in ET is the person who does not do trendlines or if he does he doesn't do channels by using a parallel line (remember dbphoenix who would not draw channels and could not see exits on the left line; he would rather believe a BO of the trendline was his supply demand model). Think of those who feel it is only possible to draw a tendline after the fact and channels after the fact.(they are drawn and projected from two consecutive bars ASAP as it turns out. Imagine using a platform for charts that does not let you have future blank space to project into on the right side of the chart. You can't do TA without having the future in the picture. All of this can lead to negative emotions while trading in a handicapped manner.
TA allows a person to successfully collect sufficient data sets that are conveyed to the second part of the routine: analysis.
analysis is conducted blindfolded so to speak while your chair is rotated to a position opposite and away from the screen. Put your log on a table that is behind you when you are monitoring. Turn to it to put down the results of your analysis. Fill in the observations after you have filled in the analysis column. Or do it the other way round.
How does TA fit into analysis? It is where the conclusion set comes from. analysis takes a data set and paris it with the conclusion that fit the data set. A trader has a finite set of monitoring data sets and he has a finitie set of conclusions that can be associated with data sets. Leaf back though your logs and hilight them now. Use yellow for conclusions and heliotrope for data sets. I green ball point number the conclusions from 1 to n. In red bal point number, correspondingly, the data set that corresponds to the appropriately numbered conclusion. When done you are an advanced beginner.
Load the two lists in to excel. You now have an automatic lookup table. Notice the TA as it appears on each list.
Do you have too much TA or too little. Do you notice that the leading TA indicators are the best ones for the best and more important conclusions?
My lists are in my sports memory at this point in time. I don't use them in my personal RAM anymore.
It turns out TA is the science of trading. What is the liberal arts of trading. LOL, we all know he answer to that one.
TA is left behind for the rest of the routine. Mark the log with green hiliter for the decisions that relate to the conclusions of analysis. You see five elements in the green hiliter set. None of them say anything TAwise. There is no TA in decisions. It would be OT to continue to go through the routine further as we see.
What is in the data dests of the "reactors". Usually single elements of date. "I just saw______.(fill in the blank. Is there ever a conclusion that can be draw from a single data element? No there isn't. are any of these things that are seen related to TA? Nope, they are not. There is NOTHING in TA that deals with a single element of data. who uses these single elements that have no conclusions? People who see a single element and skip analysis and go directly to decion making. What is the name of this set of traders? They are called losers, generally speaking.
All losers do not use TA. Not using TA is THE common characteristic of losers if there is one.
*The routine is self checking once it is begun. as items are added to the data sets set corresponding conclusions are added to the conclusion set.
This is now the magic mushroom post. Grob and I answered the first post - the meanderings of a madman at full moon. Now the first post has changed completely into something resembling intelligence.
Or were Grob and I eating something with an interesting mushroom content last night?
How do you delete your first post and change it completely?
Or were Grob and I eating something with an interesting mushroom content last night?
How do you delete your first post and change it completely?
I usually avoid these discussions but I'll throw in my Gospelesque BS.
Q: What is a market?
A: A market is a forum where buyers and sellers converge to facilitate trade.
Q: What useful information can participants extract from this market?
A: We have access to price and volume and we usually know at what time interval "trades" occurred.
Q: Does the price of those trades represent "value"?
A: Price is the consensus among participants of value as expressed either in the past, now or future. Each participant may share a differing view of "value." Value is variable.
Q: Why does the price "move"?
A: Markets are a two sided auction. If a single participant yields larger size than the combined forces of those who seek a counter position or if the combined forces of many are greater than those of a few then prices will auction to levels where trade can be facilitated. These price moves or changes will allow participants of differing "stripes" to either be involved in the activity at these prices or not. An example. A concert is sold out at a 5000 seat venue. I'd like to invite 200 family and friends to see this show. I then call around and buy all 100 tickets that are being offered by ticket brokers i.e. scalpers or short term traders. Great but now I need another 100. How do I purchase them? Well I must simply pay a price high enough that I entice those who had no interest in selling to reevaluate whether they'd rather see the show or put a fair amount of money in their pockets. That's how any market works. Todays housing market is such. It's not so much that fundamentals for home prices have changed for the worse. Low rates, cheap dollar, rising wages. All good. The negative? Prices have risen to levels where even those who are well off and happy in their present home are responding to bids that they en mass perceive to be dramatically higher than the value of their home. When "long term" participants become responsive markets often rotate in price at the paradigm shift in the supply/demand equation.
Q: How can I profit from fluctuations in price?
A: By correctly identifying the probabilities of movements occurring relative to the risk you are willing to incur.
Q: How absolute must I be about a probable price event?
A: There's no such thing as an absolute in speculation. One is dealing with the presentable chances inherent in any random set of events. The less perceived chance of an event happening means the greater the payout to those who were positioned in line with such an event. Options traders know that one definition of delta is the numerical expression of the odds that a call or put will expire in the money at it's corresponding strike. Thus certain markets i.e. options will give participants "odds" much like the tote board at a race track.
Q: But how is that supposed to make me money?
A: All you must do is limit your betting to situations where you perceive the reward of rightness to exceed the probability of wrongness. In other words if you routinely enter positions with a profit target of $3 combined with a stop loss limit of $1 then you must be "right" at least 25% of the time to be profitable. Therefore such a strategy would be wildly successful if your "set-ups" are merely 40% validated.
Q: That's great but how can I know that my methodology gives me a statistical edge. What if I'm right just 15% of the time?
A: You may employ a number of analytical criteria in your technique of optimal trade identification. If you fail to become a winning "percentage" player then don't fret. You can either seek a surrogate manager or become involved in another of life's exciting pursuits. Being a losing "bettor" is not shameful.
Q: If I think the economy is slowing and that the Fed will soon stop raising rates can I use that predictive intuition to sell the U.S. dollar and make money?
A: Absolutely! However let's play devils advocate. What if your hypothesis is incorrect? At what price level will you exit your trade? The larger the "bet" the less corresponding "heat" you can take. I would suggest you look a the prices EUR as traded and give yourself information that can be used to derive the probabilities and magnitude of unfavorable prices.
Q: That sounds a bit ambiguous. How can past prices tell me about the future?
A: They can't per se'. Past prices will tell you at what "level" buying interest as overwhelmed sellers and vica-versa. But don't think in absolute terms think in probable terms.
To be continued..........
Q: What is a market?
A: A market is a forum where buyers and sellers converge to facilitate trade.
Q: What useful information can participants extract from this market?
A: We have access to price and volume and we usually know at what time interval "trades" occurred.
Q: Does the price of those trades represent "value"?
A: Price is the consensus among participants of value as expressed either in the past, now or future. Each participant may share a differing view of "value." Value is variable.
Q: Why does the price "move"?
A: Markets are a two sided auction. If a single participant yields larger size than the combined forces of those who seek a counter position or if the combined forces of many are greater than those of a few then prices will auction to levels where trade can be facilitated. These price moves or changes will allow participants of differing "stripes" to either be involved in the activity at these prices or not. An example. A concert is sold out at a 5000 seat venue. I'd like to invite 200 family and friends to see this show. I then call around and buy all 100 tickets that are being offered by ticket brokers i.e. scalpers or short term traders. Great but now I need another 100. How do I purchase them? Well I must simply pay a price high enough that I entice those who had no interest in selling to reevaluate whether they'd rather see the show or put a fair amount of money in their pockets. That's how any market works. Todays housing market is such. It's not so much that fundamentals for home prices have changed for the worse. Low rates, cheap dollar, rising wages. All good. The negative? Prices have risen to levels where even those who are well off and happy in their present home are responding to bids that they en mass perceive to be dramatically higher than the value of their home. When "long term" participants become responsive markets often rotate in price at the paradigm shift in the supply/demand equation.
Q: How can I profit from fluctuations in price?
A: By correctly identifying the probabilities of movements occurring relative to the risk you are willing to incur.
Q: How absolute must I be about a probable price event?
A: There's no such thing as an absolute in speculation. One is dealing with the presentable chances inherent in any random set of events. The less perceived chance of an event happening means the greater the payout to those who were positioned in line with such an event. Options traders know that one definition of delta is the numerical expression of the odds that a call or put will expire in the money at it's corresponding strike. Thus certain markets i.e. options will give participants "odds" much like the tote board at a race track.
Q: But how is that supposed to make me money?
A: All you must do is limit your betting to situations where you perceive the reward of rightness to exceed the probability of wrongness. In other words if you routinely enter positions with a profit target of $3 combined with a stop loss limit of $1 then you must be "right" at least 25% of the time to be profitable. Therefore such a strategy would be wildly successful if your "set-ups" are merely 40% validated.
Q: That's great but how can I know that my methodology gives me a statistical edge. What if I'm right just 15% of the time?
A: You may employ a number of analytical criteria in your technique of optimal trade identification. If you fail to become a winning "percentage" player then don't fret. You can either seek a surrogate manager or become involved in another of life's exciting pursuits. Being a losing "bettor" is not shameful.
Q: If I think the economy is slowing and that the Fed will soon stop raising rates can I use that predictive intuition to sell the U.S. dollar and make money?
A: Absolutely! However let's play devils advocate. What if your hypothesis is incorrect? At what price level will you exit your trade? The larger the "bet" the less corresponding "heat" you can take. I would suggest you look a the prices EUR as traded and give yourself information that can be used to derive the probabilities and magnitude of unfavorable prices.
Q: That sounds a bit ambiguous. How can past prices tell me about the future?
A: They can't per se'. Past prices will tell you at what "level" buying interest as overwhelmed sellers and vica-versa. But don't think in absolute terms think in probable terms.
To be continued..........