Why does technical analysis work
- Thread starter Demarco8
- Start date
We trade in real-time and must make our decisions in real time. Since specific time based chart's volume fluctuates and is unstable, we have to create the environment to represent a "Time" environment. The less volume designated per bar the faster the time frame. Through trial a trader can match up a Volume Bar increment to their style of trading; Intraday, Swing, Position or Long Term. The Volume Bar increment also depends on the market as well. Markets like the E-mini S&P, E-mini NASDAQ or Euro FX contain more liquidity. Markets like the E-mini Russell & E-Mini Dow are less liquid and will need more volume per bar for trading a like time increment.
FYI, i read the rest of the thread.
Did not get answers which is why i asked in the first place.
You could've told me you think the answers are already there, no need to assume i did not read the rest of the thread.
In any case, I do not intend to carry on this conversation with you.
If you have gotten the answers then I am glad for you.
Good trading !
xiaohu, ET is full of answers to these questions . . . either search and go find them in other threads or start a tread for each question and wait for responses. You are never going to get all of your questions answered at one time in one place. Trading is a timely venture, expect to acquire patience along the way. Patience is one of the keys you need to possess in order to succeed.
xiaohu, I'll take a stab:
So in the end, why does technical analysis work?
- Many years of statistical computer modeling on my part indicate TA does not work, or at least is not repeatable to a level where it becomes a valuable tool.
For those of you who like S/R levels, pivot points, is it because people look at these levels and it is a self fulfilling prophecy ? Thus these become critical levels ?
- Experience seems to indicate that S/R levels and pivot points may indeed be "self-fulfilled" by the market's participants.
For those that look at chart patterns, candle patterns, higher highs/higher lows it is because history repeats itself?
- Chart patterns can be and are a valuable tool...however, it takes years spent in front of the computer to develop a good basis of understanding and all analysis is not perfect, only one additional factor in the trading equation.
For those that apply other scientific fields unto the market, even though it may do well in other fields, why do you believe it will work well on the market?
- The field of science and specific methods of analysis or data mining are generally appropriate for one or more bounded 'strategies' and there are many of those, so whether it's Chaos theory (fractal analysis), Neural networks, Genetic inheritance, Bayesian probability and prediction or Hilbert state-space modeling each form can be useful or a failure depending on timeframe/duration and the nature of the problem(s) to which they are applied.
What are your beliefs about the market and what aspect of it, in terms of the auction process, demand/supply or human nature is your TA trying to help you objectively and consistently exploit?
- Opportunity and ultimately, profit!
So in the end, why does technical analysis work?
- Many years of statistical computer modeling on my part indicate TA does not work, or at least is not repeatable to a level where it becomes a valuable tool.
For those of you who like S/R levels, pivot points, is it because people look at these levels and it is a self fulfilling prophecy ? Thus these become critical levels ?
- Experience seems to indicate that S/R levels and pivot points may indeed be "self-fulfilled" by the market's participants.
For those that look at chart patterns, candle patterns, higher highs/higher lows it is because history repeats itself?
- Chart patterns can be and are a valuable tool...however, it takes years spent in front of the computer to develop a good basis of understanding and all analysis is not perfect, only one additional factor in the trading equation.
For those that apply other scientific fields unto the market, even though it may do well in other fields, why do you believe it will work well on the market?
- The field of science and specific methods of analysis or data mining are generally appropriate for one or more bounded 'strategies' and there are many of those, so whether it's Chaos theory (fractal analysis), Neural networks, Genetic inheritance, Bayesian probability and prediction or Hilbert state-space modeling each form can be useful or a failure depending on timeframe/duration and the nature of the problem(s) to which they are applied.
What are your beliefs about the market and what aspect of it, in terms of the auction process, demand/supply or human nature is your TA trying to help you objectively and consistently exploit?
- Opportunity and ultimately, profit!
Ok. If you've done the reading and couldnt find it.
It works because its a way of reading what the other participants in the market think is going to happen. If you read it correctly then more than X% of the time you will be able to get a reward of Y risking a loss of Z.
Pivots and s/r work because people see those as key point and, as a group, mount their campaigns to move price up or down from those points.
The big secret of the markets is that if you can detect a trend (sorry surfer) then its more likely to continue than reverse (as long as you detect it reasonably early). So ta seeking to detect and join trends will have a high success rate. Similarly ta seeking to detect reversals and ride them for a while will have a lower success rate but may provided a bigger win because you can get more of the next trend.
You don't have to have any beliefs about science, mathematics, or MP style auction processes to use simple ta. The issue of human nature can also be irrelevant too if you treat markets as price movements to be explored - involving speculation about human nature just makes it intellectually more interesting.
Good luck.
nbates, thanks for your responses.
I asked these questions because i felt they have not been objectively answered enough, even though the title of this thread is "why does technical analysis work"
Most of the time such threads becomes personal gets reduced to petty arguments, either that or sometimes, you get some vendors who join in with their unsubstantiated, sound good crap.
Thanks good trading to all.
Technical analysis works because many people use it, and successful traders are able to predict how other people will react when they implement different technical analysis strategies; i.e. while the losers use TA to determine their trades (usually the wrong way), the professional traders wins because they know how the losers are going to react based on this data.
TA doesn't work for everybody. Those for whom it works have done their own homework and come up with their own indicator(s) rather than rely on some cookbook formulae with little basis in reality. Those for whom TA works have probably become familiar with classic time series analysis because, in the end, that's all price action and volume action are -- time series. And they have come to their own conclusions about what matters and what doesn't in price action and volume action, something you'd be hard pressed to find in the typical TA book collection of 1,001 ways to lose your money.