Why does technical analysis work
- Thread starter Demarco8
- Start date
Let us hope that this thread does not get Grobed.
The markets "are" a physical entity but the prices that are generated within those markets are the products of human emotion. Emotions that are vastly different, such as surfer's and myself. Diametrically opposed to create a perfect balance from one extreme to the other. Like a teeter tauter suspended in midair that is constantly in motion.
As far as predicting the weather or the path of a hurricane, think about the direction of the market. The result you are looking for is; Will the price of a specific market go Up or Down? If you were to apply those same outcomes to . . . say weather, Will the sun come out or not?, the probabilities dramatically increase in ones favor. The same with a hurricanes direction. Instead of predicating a specific path one needs to look at the situation and say, Will the hurricane move North or South?. If that was the only requirement of a weather forecaster, they would rarely be wrong. Get it?
collective human behavior --very old school and indicative of your world view.
yes, back in the day, prior to the huge pools, sometimes called hedge funds, driven by quant program trading, and often just the whim of the manager. it's "collective money behavior" not collective human behavior--as one human now can have the market moving power of 1000's of others. your analysis is quite old fashion.
surf
surf
A couple of thoughts. First off "Wall Street" as you point out is MUCH more focused on developing and marketing esoteric derivative products with a huge imbedded edge than proprietary directional trading strategies.
However "TA" is pretty broad in scope. We traditionally associate technical analysis with charts. Like the older guy placing trendlines on a hand written point and figure chart. But then with computing power came "indicators" which aren't derived from charts at all. They're merely formulas using variables from the closing price of random time intervals. I know traders who run a spreadsheet of MA's and they never even glance at a chart. Pivots ect. Technical yes. Charts, no.
Then of course there's "intermarket" analysis that one could argue is technical in nature. If I say I'm going to buy the dollar everytime the 10year Treasury breaks below X relative to the Bund am I not a "technical trader"? Or what if I "notice" that whenever INTC trades down to $17 it finds support so I buy it there, is that action not a product of technical awareness even if I've never even heard of TA?
"TA is pretty useless when you can see order flow and have informational advantage."
You are on to something!
All one really needs to know is WHO IS IN CONTROL OF THE INSTRUMENT - the buyers or the sellers.
When the sellers are in control, the price goes down.
When the buyers are in control, the price goes up.
Trading is war between the buyers and sellers.
If you can see who is winning then you know which side ( of the trade ) to be on.
Perhaps this is why eSignal does not want you to have my TRO_SM_CONTROL_PMSM5 study that is FREE here:
http://kreslik.com/forums/viewtopic.php?p=1851#1851
TRO_SM_CONTROL_PMSM5 tells you who is in control and how long they have been in control on up to 7 intervals.
By the way, be careful what you type in PMs on eSignal's forum because PMs are being CENSORED.
You are on to something!
All one really needs to know is WHO IS IN CONTROL OF THE INSTRUMENT - the buyers or the sellers.
When the sellers are in control, the price goes down.
When the buyers are in control, the price goes up.
Trading is war between the buyers and sellers.
If you can see who is winning then you know which side ( of the trade ) to be on.
Perhaps this is why eSignal does not want you to have my TRO_SM_CONTROL_PMSM5 study that is FREE here:
http://kreslik.com/forums/viewtopic.php?p=1851#1851
TRO_SM_CONTROL_PMSM5 tells you who is in control and how long they have been in control on up to 7 intervals.
By the way, be careful what you type in PMs on eSignal's forum because PMs are being CENSORED.
Does Technical Analysis work?
I think the best way to answer this is evidence. Opinions & beliefs are irrelevant. For many tech analysis indicators (for futures/commodities) i have been tracking this site for several years:
http://freecharts.com/Commodities.aspx?page=mktcom
To find the tech analysis results, follow this path:
1) pick any commodity link
2) pick a contract month link (some may insufficient data - try another commodity then)
3) Click Performance link - you can serach arond by indicator here. It goes back 1-2 years depending on commodity & indicator.
here is an example page:
http://freecharts.com/Commodities.aspx?page=perform&sym=SU6
Overall? None of these popular indicators, when tested across ALL commodities shows evidence of profitability. Yes - I have tested this
Support/resistance & trendlines are not part of this site.
Arguing to the opposite without clear, testable evidence is basically a waste of time. But some still believe they are different
I think the best way to answer this is evidence. Opinions & beliefs are irrelevant. For many tech analysis indicators (for futures/commodities) i have been tracking this site for several years:
http://freecharts.com/Commodities.aspx?page=mktcom
To find the tech analysis results, follow this path:
1) pick any commodity link
2) pick a contract month link (some may insufficient data - try another commodity then)
3) Click Performance link - you can serach arond by indicator here. It goes back 1-2 years depending on commodity & indicator.
here is an example page:
http://freecharts.com/Commodities.aspx?page=perform&sym=SU6
Overall? None of these popular indicators, when tested across ALL commodities shows evidence of profitability. Yes - I have tested this
Support/resistance & trendlines are not part of this site.
Arguing to the opposite without clear, testable evidence is basically a waste of time. But some still believe they are different
I don't usually join in on discussions based mainly on opinions that are highly subjective from every angle. This is much like discussing religion: what works for some might seem insane for others. However, reading through the last 13 pages, I thought I might add a thought.
In the days when I was in construction management, I often sat through planning meetings for $100+MM projects. There would be engineers, engineering managers, Ph.D.'s, executives, interns, estimators and others in these meetings. Most of the persons present have a fair amount of experience with what it takes to estimate, win, budget, resource and construct whatever it is we were looking at.
Most of the time, these meetings proceeded just like this discussion has been for the most part. There would be strong generalizations, opinions, counter-opinions, jokes, etc. We would base our decisions on broad definitions of terms and whether things work or not based solely on our own experiences and the probability of things going wrong or right. It would be common for an idea or method to be thrown out simply because ONE person of rank in the room to have had ONE bad experience with it. It didn't work for him so it couldn't possibly work. This is what I get from the thread so far.
The funny thing was that people of a lot of theoretical experience would come to some amazingly detached conclusions about a tool or process. This all comes to an end when an experienced FIELD person such as a foreman for an operation or a superintendent comes in and looks at what we have done. The first comment they usually have (because they are usually based on the REALITY of what works rather than the theory or short term experience) is "you guys are like a bunch of monkeys trying to f*&k a football" (he says as he spits some chew into an empty soda can). It is often pointed out that just because a method or tool worked here, it might not work there and vice versa. Field guys also often remind us that we have lost the context of what we are doing. Some problems require sophisticated answers while others can be fixed with a 4x4.
This is similar to the market in that it is easy to get caught up in details and throw out what might work just because it didn't work in the past. TA is a huge field. TA could be done on data generated by FA. Sometimes it makes sense to buy a stock because it just can't be more beat up or undervalued and because your risk is so small compared to the potential reward. Sometimes, a decision might require looking at fibs, S/R, indicators or whatever. It just depends on where we are and what information is available to us.
It is true that I agree with overgeneralizations just like Thunderdog said. Overgeneralizing to me indicates some rigidity and simplistic thinking (sorry, but no offense).
The markets represent exactly what Pabst described. It is an auction market. It is all about price discovery. Price discovery happens due to FA, TA, QA and everything in between. Price discovery is done by people and not just machines because value is an "opinion" based on human and environmental factors. Humans have memory about prices which include emotional responses to those memories. Machines are programmed to respond to variables which are based on past human responses when certain things click together. In the end, price is an "opinion." Plain and simple. Every opinion can be right or wrong at any given moment based on the information available at the time whether it is FA or TA.
The bottom line, in my opinion, is: Don't get caught up in a tunnel and become one of the monkeys trying to f&*k a football (speaking of football: Ohio State does rock... some of the time
). Put price in context. Always. Getting fixated about whether something has worked for you in the past or not will just narrow your field of vision. Consider a variety of factors and consider the counter-argument of those if you have time.
In the end, it is all based on the probability of something happening based on what has happened in the past. As humans, we can only refer to the past and it is in our nature to do so. Charts and other tools provide you with a map of the past and the trader has to have the vision, discipline and intelligence to figure out whether or not the probably course will be profitable. A trader always knows that no matter what, there is a probability of being wrong for a variety of reasons.
The OP will eventually have to decide for himself whether or not TA works in the first place. Why it works is a conclusion that has to be obtained through his own experience.
Good luck to all.
In the days when I was in construction management, I often sat through planning meetings for $100+MM projects. There would be engineers, engineering managers, Ph.D.'s, executives, interns, estimators and others in these meetings. Most of the persons present have a fair amount of experience with what it takes to estimate, win, budget, resource and construct whatever it is we were looking at.
Most of the time, these meetings proceeded just like this discussion has been for the most part. There would be strong generalizations, opinions, counter-opinions, jokes, etc. We would base our decisions on broad definitions of terms and whether things work or not based solely on our own experiences and the probability of things going wrong or right. It would be common for an idea or method to be thrown out simply because ONE person of rank in the room to have had ONE bad experience with it. It didn't work for him so it couldn't possibly work. This is what I get from the thread so far.
The funny thing was that people of a lot of theoretical experience would come to some amazingly detached conclusions about a tool or process. This all comes to an end when an experienced FIELD person such as a foreman for an operation or a superintendent comes in and looks at what we have done. The first comment they usually have (because they are usually based on the REALITY of what works rather than the theory or short term experience) is "you guys are like a bunch of monkeys trying to f*&k a football" (he says as he spits some chew into an empty soda can). It is often pointed out that just because a method or tool worked here, it might not work there and vice versa. Field guys also often remind us that we have lost the context of what we are doing. Some problems require sophisticated answers while others can be fixed with a 4x4.
This is similar to the market in that it is easy to get caught up in details and throw out what might work just because it didn't work in the past. TA is a huge field. TA could be done on data generated by FA. Sometimes it makes sense to buy a stock because it just can't be more beat up or undervalued and because your risk is so small compared to the potential reward. Sometimes, a decision might require looking at fibs, S/R, indicators or whatever. It just depends on where we are and what information is available to us.
It is true that I agree with overgeneralizations just like Thunderdog said. Overgeneralizing to me indicates some rigidity and simplistic thinking (sorry, but no offense).
The markets represent exactly what Pabst described. It is an auction market. It is all about price discovery. Price discovery happens due to FA, TA, QA and everything in between. Price discovery is done by people and not just machines because value is an "opinion" based on human and environmental factors. Humans have memory about prices which include emotional responses to those memories. Machines are programmed to respond to variables which are based on past human responses when certain things click together. In the end, price is an "opinion." Plain and simple. Every opinion can be right or wrong at any given moment based on the information available at the time whether it is FA or TA.
The bottom line, in my opinion, is: Don't get caught up in a tunnel and become one of the monkeys trying to f&*k a football (speaking of football: Ohio State does rock... some of the time
). Put price in context. Always. Getting fixated about whether something has worked for you in the past or not will just narrow your field of vision. Consider a variety of factors and consider the counter-argument of those if you have time.In the end, it is all based on the probability of something happening based on what has happened in the past. As humans, we can only refer to the past and it is in our nature to do so. Charts and other tools provide you with a map of the past and the trader has to have the vision, discipline and intelligence to figure out whether or not the probably course will be profitable. A trader always knows that no matter what, there is a probability of being wrong for a variety of reasons.
The OP will eventually have to decide for himself whether or not TA works in the first place. Why it works is a conclusion that has to be obtained through his own experience.
Good luck to all.
Very good post, FT71. I think that you and Pabst nailed it. I agree with everything you wrote, except for that bizarre reference to fibs.