Does technical analysis work or not?

[babyjake1961]

I even got banned on another forum for asking this question. People who would normally tolerate a wide range of really diverse opinions suddenly went nuts and started throwing insults at me for simply asking. Was just so odd to see such a sudden extreme reaction to a seemingly routine question.

 

[timsk]

I even got banned on another forum for asking this question. People who would normally tolerate a wide range of really diverse opinions suddenly went nuts and started throwing insults at me for simply asking. Was just so odd to see such a sudden extreme reaction to a seemingly routine question.

Hi babyjake1961,
This is outrageous; it's trading blasphemy to even imply in your question that it might not work. How dare you sir!

I've not answered your poll, not because I object to the question as such, but because for me it depends what you mean by 'work'. Also, it looks at TA in isolation. Just as a car won't 'work' without a driver behind the wheel, TA won't work without a trader. And that's where the problems begin. Copied below is an extract from post #2 of the Essentials of Technical Analysis Sticky . . .

The answer to this question (does TA work or not) very much depends on how you define ‘work’. As an infallible predictor of where price is going to go next – NO it doesn’t work! As a useful aid to enable you to forecast (probable) future price trends – YES it can work. Whether or not it will work for you will depend on whether or not you’re prepared to put in the effort required to master it. TA is a tool like any other and using it well will take time and effort. Those who claim it doesn’t work tend not to bother. They apply TA by numbers and buy when the blue line crosses the red line (of XYZ indicator), or sell when price breaches the neckline of an H&S pattern etc.

Some critics who maintain that TA doesn’t work are academics who provide impressive mathematical studies to support their claims. A recent example of this is a paper entitled Technical Analysis from Around the World by Ben Marshall, Rochester Cahan and Jared Cahan. The authors of many papers like this one are intellectual heavyweights, but they are rarely traders and, therefore, have no practical experience or understanding of the subject. Additionally, none of them can actually prove that TA doesn’t work or, even, that XYZ indicator doesn’t work. Here’s why . . .

You’ll probably be familiar with the popular myth that bumblebees can’t fly. Everyone knows that they can, but scientists have struggled to explain how and, even, supposedly ‘proved’ that they can’t. Actually, they haven’t done that at all. What they have done is to demonstrate that relatively simple mathematical models fail to explain something as complex as the flight of a bumblebee. They’ve struggled to model the way the insect moves, the way its wings bend and twist and the number of strokes they have and how their angles change etc. And so it is with academic studies about TA: because the mathematical models fail to take the trader into account. They invariably look at chart patterns or indicators in isolation. It’s akin to saying cars don’t work when there isn’t someone in the driver’s seat. You don’t say! Chart patterns, indicators and TA in general are just tools to aid the trader. As with any tool, how well it works (or not) is dictated by the knowledge, skill and experience of the person using it. Consequently, academic studies about the effectiveness (or otherwise) of TA tend to be as flawed as mathematical models which supposedly ‘prove’ that bumblebees can’t fly.
Tim.

 

[barjon]

I'm with Tim. TA is a tool that assists in making reasonable assumptions (guesses) at what appear to be appropriate times. The job then is to take adequate advantage when it goes favourably and limit the damage when it doesn't.

 

[EnlightenedJoe]

The question pulls the rug right out from under the feet of places such as forums. This is why they have to terminate you.

Technical analysis works most times in favour of banks who are ultimately on the other end of your trade, and they have the profit and stats to prove it. This is how it should be. After all they are running a business.

Are there people consistently benefiting from TA when it doesn't for banks some of the times ? I have seen no conclusive proof of it at least in all the places I have looked so far.

 

[forker]

How does TA work in favour of the banks?

 

[EnlightenedJoe]

How does TA work in favour of the banks?

The usual figure is 90% of retail "traders" lose - my own figure is much higher. As they all use TA. Clearly TA favours and works for the banks.

 

[forker]

That's not really answering the question but I know what you are saying albeit in a general sense.

 

[babyjake1961]

I mean, is it possible to be consistently profitable based on some historical market patterns? My own experience has led me to conclude the number of possible market scenarios is limitless, so the past ones are irrelevant as future guidance. I would throw a trading system on historical data as a random data sample to see if the system survives and profits but would never build a system based on specific historical data as opposed to general market concepts.

 

[EnlightenedJoe]

I mean, is it possible to be consistently profitable based on some historical market patterns?

The historic pattern is that TA consistently yielded profits to the banks. On occasions it doesn't.

If you want to profit from the banks when TA doesn't work for them, it involves considerable amount of work and capital. I estimate the effort needed is more than the amount necessary to reach the PhD level in a university.

 

[forker]

There is no data that suggests TA has a direct reference with bank profits. To have this sort of dataset would require the source of this data to have direct knowledge of how each person being measured trades

 

[EnlightenedJoe]

There is no data that suggests TA has a direct reference with bank profits.

Well, the solution is simple. We can always make data when it isn't available. Do some live trades and show us the bank isn't taking your money. That will give us the data. You stated you are consistently profitable. So it should be quite easy. You won't even have to tell us your technique, or be prompt in stating your trade. I will even welcome you to state the trade only after it has gone into profit.

 

[babyjake1961]

Could it be that TA works ever less due to the ever growing HFT, use of frontrunning algos, market manipulation as well as the ever increasing number of "black swans" as the global financial system becomes ever more inefficient because of unsustainable debt levels and some bizarre "non-conventional" economic policies?

 

[forker]

Well, the solution is simple. We can always make data when it isn't available. Do some live trades and show us the bank isn't taking your money. That will give us the data. You stated you are consistently profitable. So it should be quite easy. You won't even have to tell us your technique, or be prompt in stating your trade. I will even welcome you to state the trade only after it has gone into profit.

Consistency doesn't mean you have to get every trade right. Nobody on earth can claim that title.

 

[timsk]

I mean, is it possible to be consistently profitable based on some historical market patterns?. . .

Hi babyjake1961,
Same answer as before! Unfortunately, it's not possible to divorce the historical market patterns from the trader trading them. Therefore, IMO, it's not possible to say that pattern A 'works' and that pattern B 'fails'. Both will work and fail according to any number of other factors, nearly all of which are controlled by the trader trading them. Even if the trader is using a fully automated bot to trade them, there's still loads of user defined inputs which will have a huge bearing on the end result. Take a head and shoulders pattern as an example where conventional wisdom dictates entry upon the breach of the 'neckline'. Will you enter on the tick that breaches the neckline or wait for the candle/bar to close? If the latter, what time frame is that; M1, M30, 4 hourly or daily etc.? Will you use a market order, stop order, limit order or other? How much of your account will you risk and where will your stops be? Oh, so you don't use stops eh! Okay, so how will you manage your risk? Will you have a profit target and will you exit all or only part of your position when it's hit? Oh, you don't use profit targets eh! Okay, will you have a trailing stop or other means of exiting the trade? The list is pretty much endless. It's all these things that, collectively, determine whether TA patterns 'work' or not work IMO. There's no TA pattern that's inherently better or more reliable than any other; it's all down to the trader trading them.
Tim.

 

[EnlightenedJoe]

Could it be that TA works ever less due to the ever growing HFT, use of frontrunning algos, market manipulation as well as the ever increasing number of "black swans" as the global financial system becomes ever more inefficient because of unsustainable debt levels and some bizarre "non-conventional" economic policies?

TA doesn't work less or work more. It always work the same: that on aggregate, the bank(s) must make money or they go out of business.

 

[forker]

TA doesn't work less or work more. It always work the same: that on aggregate, the bank(s) must make money or they go out of business.

Whatever you're smoking please send me some

 

[EnlightenedJoe]

Consistency doesn't mean you have to get every trade right. Nobody on earth can claim that title.

Yes, I understand. This is why I suggested you put up trades only after it has gone into profit, obviously within some fair limit of promptness. It will reduce your burden that way. Trading is pretty tough, I see no reason to put obstacles in your way when the market itself is quite capable of doing the necessary.

 

[counter_violent]

The usual figure is 90% of retail "traders" lose - my own figure is much higher. As they all use TA. Clearly TA favours and works for the banks.

Bugger all to do with TA but everything to do with deep pockets and firepower.

 

[EnlightenedJoe]

Bugger all to do with TA but everything to do with deep pockets and firepower.

It has everything to do with TA. Without TA, nobody will put their money in. If no money goes in, the banks will make bugger all profit.

I don't know, are you still a mod ? We could be skipping on thin ice.

 

[mike.]

Welcome back Joe... no longer a beginner then ?