Why might charting fail to work?

[crgarcia]

It is easier for me to present the logical arguments against charting. First, it should be noted that the chartist buys in only after price trends have been established, and sells only after they have been broken.

Because sharp reversals in the market may occur quite suddenly, the chartist often misses the boat. By the time an uptrend is signaled, it may already have taken place.

Second, such techniques must ultimately be self-defeating. As more and more people use it, the value of any technique depreciates. No buy or sell signal can be worthwhile if everyone tries to act on it simultaneously.

Moreover, traders tend to anticipate technical signals. If they see a price about to break through a resistance area, they tend to buy before, not after, it breaks through. If it ever was profitable to use such charting techniques, it will now be possible only for those who anticipate the signals. This suggests that others will try to anticipate the signal still earlier.
Of course, the earlier they anticipate, the less certain they are that the signal will occur, and in the scrambling to anticipate signals it is doubtful that any profitable technical trading rules can be developed.


Burton G. Malkiel
A random walk down Wall Street

 

[hoodooman]

There can be other thing on charts, rather than price. For example, money flow and earnings trend.

 

[cosmokramer]

Finally a voice of sanity.

exactly correct, isn't funny that no one listens to the most basic common sense? charts look fun, charts look easy so let's stare at them all day blindly plunging with a false map of the past.

poor, poor market soulsas. you never learn

 

[NihabaAshi]

Burton G. Malkiel
A random walk down Wall Street

It is easier for me to present the logical arguments against charting. First, it should be noted that the chartist buys in only after price trends have been established, and sells only after they have been broken.

The false assumption here is that there are those that exclusively uses charts for their trade decisions and nothing else.

That's incorrect. What actually occurs is that chartist tend to not discuss other things they use for their trade decisions that's not chart related. Those things are usually thrown into the basket of boring discussions in thinking most wouldn't be interested in listening too (e.g. money management, market experience, discipline et cetera).

Because sharp reversals in the market may occur quite suddenly, the chartist often misses the boat. By the time an uptrend is signaled, it may already have taken place.

Most chartist are not trend traders although I'm sure most wished they were on trend days.

Second, such techniques must ultimately be self-defeating. As more and more people use it, the value of any technique depreciates. No buy or sell signal can be worthwhile if everyone tries to act on it simultaneously.

Only true if it's a mechanical or automated system.

Of course, the earlier they anticipate, the less certain they are that the signal will occur, and in the scrambling to anticipate signals it is doubtful that any profitable technical trading rules can be developed.

Profitable traders using technical trading are not using technical trading "all by itself". Instead, with all the hype involved with technical trading...many make the mistake of assuming it's the only thing being used. Simply, if using technical trading...it should only be a piece of the puzzle and not the puzzle itself.

Mark

 

[Scataphagos]

Quote from crgarcia:

It is easier for me to present the logical arguments against charting. First, it should be noted that the chartist buys in only after price trends have been established, and sells only after they have been broken.

Because sharp reversals in the market may occur quite suddenly, the chartist often misses the boat. By the time an uptrend is signaled, it may already have taken place.

Second, such techniques must ultimately be self-defeating. As more and more people use it, the value of any technique depreciates. No buy or sell signal can be worthwhile if everyone tries to act on it simultaneously.

Moreover, traders tend to anticipate technical signals. If they see a price about to break through a resistance area, they tend to buy before, not after, it breaks through. If it ever was profitable to use such charting techniques, it will now be possible only for those who anticipate the signals. This suggests that others will try to anticipate the signal still earlier.
Of course, the earlier they anticipate, the less certain they are that the signal will occur, and in the scrambling to anticipate signals it is doubtful that any profitable technical trading rules can be developed.


Burton G. Malkiel
A random walk down Wall Street

Crapola! Misunderestimates by a great deal.

 

[ProfLogic]

Quote from crgarcia:

It is easier for me to present the logical arguments against charting. First, it should be noted that the chartist buys in only after price trends have been established, and sells only after they have been broken.

Because sharp reversals in the market may occur quite suddenly, the chartist often misses the boat. By the time an uptrend is signaled, it may already have taken place.

Second, such techniques must ultimately be self-defeating. As more and more people use it, the value of any technique depreciates. No buy or sell signal can be worthwhile if everyone tries to act on it simultaneously.

Moreover, traders tend to anticipate technical signals. If they see a price about to break through a resistance area, they tend to buy before, not after, it breaks through. If it ever was profitable to use such charting techniques, it will now be possible only for those who anticipate the signals. This suggests that others will try to anticipate the signal still earlier.
Of course, the earlier they anticipate, the less certain they are that the signal will occur, and in the scrambling to anticipate signals it is doubtful that any profitable technical trading rules can be developed.


Burton G. Malkiel
A random walk down Wall Street

First, the over generalization of what a "chartist" does is inaccurate since not all chartist's make decisions "after" a price direction as been established or enters a reversing position in a confirmed price direction only after that established direction has been broken.

Some chartists can actually see the longer term and shorter term price strength on the charts they are trading so they make decisions at the moment an oscillation of resistance or support is created enabling them to trade utilizing those strengths and their directions. Sharp reversals do occur quite suddenly but if one trades ONLY using naturally cyclic oscillations, one is prepared for the reversal as it happens not after it happens.

Second, if everyone utilized such natural charting it would become a self-fulfilling act not self-defeating. This won't happen though and proof of that will come in the responses to this post. People simply won't test their opinions using all possible scenarios first before trying to validate their position. They make general statements based on a small segment of the possibilities.

I do agree that traders have a tendency to anticipate their signals and this gets them in a world of trouble. They buy or sell before the chart has confirmed their entry and this is a habit that is truly hard to break. This act, by itself, will destroy even a profitable system.

 

[Gcapman]

For one fighter, Kung Fu works but for another, not so much - he is a better Judo fighter

They are both, however, world champions in their own fields

Chartists and Fundamentalists are the same way --

 

[Scataphagos]

Quote from Gcapman:

For one fighter, Kung Fu works but for another, not so much - he is a better Judo fighter

They are both, however, world champions in their own fields

Chartists and Fundamentalists are the same way --

Disagree completely.

It's fairly easy for a good chartist to be a winner. To win with fundies is difficult for most.

 

[Wallace]

i think it's a specious argument

Malkiel's wording to construe a fact/s is totally erroneous —
"chartist buys in only after price trends have been established" 'fundamentalists' before ?
"Because sharp reversals in the market may occur quite suddenly, the chartist often
misses the boat." - and fundamentalists don't ?
"more and more people use it, the value of any technique depreciates." common bullshit
and etc etc

Malkiel's book was originally published in 1973, long before the introduction of pcs and
charting software, (and before even such techniques as the Elliott Wave Principle - 1979
were introduced to the post war (WW II) generations) which meant charting was done
by hand with a pencil and ruler/straight edge, and calculators - "in Jan 1971 the Sharp
EL-8 which was close to being a pocket calculator. It weighed about one pound, had a
vacuum fluorescent display, rechargeable NiCad batteries, and initially sold for $395"
http://en.wikipedia.org/wiki/Calculator even my Canon LS-2 bought in 1980 cost $35

Malkiel's 'methodology' - or is that 'mythology' is commented on here:
http://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
- whispering 'insider trading' ?

as a 'technical analyst' i can accurately anticipate price changes minutes, hours, days,
weeks, months, years in advance of them occurring with the techniques i employ
the world of 'fundamentals' - if that's the opposite of 'charting' is full of unknowns so far
as i'm concerned particularly when it comes to individual stocks

but regardless of using either/or method, i know the simplest trading system for me is
the 'green light red light' techniques as i call them of buy/sell signals based purely on a
couple of indicators — the 'non-thinking' man's trading system

 

[crgarcia]

Quote from ProfLogic:

Second, if everyone utilized such natural charting it would become a self-fulfilling act not self-defeating. This won't happen though and proof of that will come in the responses to this post. People simply won't test their opinions using all possible scenarios first before trying to validate their position. They make general statements based on a small segment of the possibilities.

If everyone used TA it would be self-defeating.

If everyone thinks, thanks to TA, that stocks will go up tomorrow, then they will go up today, destroying any profitability.

Quote from Wallace:

Malkiel's book was originally published in 1973, long before the introduction of pcs and
charting software, (and before even such techniques as the Elliott Wave Principle -

If TA didn't work back then, much less now that many people use it.