Maybe its better to say that some TA works for some people, at least some of the time.
Does technical analysis work or not?
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I think I will agree with that. Then it is not a science because science success is independent of the person that applies it. I found this article and it looks interesting. I do not agree with everything in it but the role of serial correlation is interesting and requires further investigation.
new_trader
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From the article:
I have books about the stock market that were written in the early 1900's in which the overarching principle to trading and investing is technical analysis.
Even way before by Japanese rice traders with candlesticks. But TA became popular in the 90s. Before that only a small % of traders used it.
Interesting article. It argues that TA, a form of lossy compression, is basic useless in forecasting market prices. I tend to agree, based on statistical analysis of market time series' which show that price histories are basically "random walks" in which the past does not predict the future, at least not in any straightforward way. (Perhaps successful traders who use TA have developed an intuition about market movements that goes beyond the TA they're using.)
This is why I favor methods grounded in modern statistics, such as statistical arbitrage which allows traders to assemble portfolios that have better statistical properties for forecasting future price movements.
vanillaman
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Wow! It was Richard D Wyckoff, in the 1900's who says volume on the tape tells you everything, he did not read news release, he looked at the order quantity coming in. That was 100% technical analysis. Why do you think he did that?
Today, there are more advanced ways of judging value perception and volume. Most of it is masked so very difficult to detect. This makes technical analysis harder and a low probability trading approach. If you trade agri futures, then you would use both technical and fundamental, if you traded stocks, you will be inclined to use Lvl 2 and 3 quotes to get more depth in the market, so almost all technical, unless you were a buy and hold would you do absolute valuation modelling. If you are a currency trader ideally in the absence of leverage you will be using fundamental's like interest rate changes, to make your decisions about long-term value but with central banks easing, it seems there is no long-term value in currencies, so the bottom comes every 4-5 years in some cases more, so if you miss the boat then that's it, things top out very quickly and then you watch 2 or 3 years go by of extreme range bound action. This market is now largely short-term because of leverage, so technicals are by far the only choice, by this I mean an analysis that involves short and medium term value perception. So in short statistical technical models work best. In the banking sector statistical modelling is all everyone does. No sense in the RSI, etc. That's for bloomberg and to sell you guys the instruments and give you a reason to trade.
So to answer your question it does work but it doesn't depending on how you do it. What most retail traders do does not work and that's fact. Otherwise half this forum will be millionaires.
piphoe
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if what you say is true it's a fluke. curve fitting.
and noone knows when that "some of time it works" is, or is not.
so, how do you trade it when the TA "rulz" change without notice? when the curve fitting stops working, yet again? and, now you find yourself spiraling downward into yet ANOTHER darkhole?
how do you know??
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darktone
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the main reason why TA "doesn't" work isn't because of the TA per say, but the way folks most like to trade it.
your average tarder likes confirmation. lets take the breakout traders (lard bless em). we got a SH at 70 and a SL 20. Prices are moving back up but BO tarder wants to sure the market is going up so sits and waits.. 71 prints and BOOOM they in on a stop order feeling great that they only got slipped to 73 an they riding the winner as 80 prints, then 90, 91, 92, quick bring stop to BE, risk free trade, fabatastic! (its not really risk free, but security blanky caters for all :cheesy, they wont get now cos they want to be sure the market has turned down before they get out.
On a dime the market turns down and prints a low of 72 before turning up again in a blink to print 92, it then cruises through the 00s great big F.U. very much
"Well traded" says tarder to themselves, "that's just how the market goes sometimes, no one can know where the markets gona turn, no one can those deal tops n bottoms :smart:"
your average tarder likes confirmation. lets take the breakout traders (lard bless em). we got a SH at 70 and a SL 20. Prices are moving back up but BO tarder wants to sure the market is going up so sits and waits.. 71 prints and BOOOM they in on a stop order feeling great that they only got slipped to 73 an they riding the winner as 80 prints, then 90, 91, 92, quick bring stop to BE, risk free trade, fabatastic! (its not really risk free, but security blanky caters for all :cheesy
, they wont get now cos they want to be sure the market has turned down before they get out. On a dime the market turns down and prints a low of 72 before turning up again in a blink to print 92, it then cruises through the 00s great big F.U. very much
"Well traded" says tarder to themselves, "that's just how the market goes sometimes, no one can know where the markets gona turn, no one can those deal tops n bottoms :smart:
"Markets today are very different to the markets in the 1900s
darktone
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piphoe
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you got a cat fetish you need to work on haha
and not talking about pussy CATS lol :clap:
darktone
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Ok,, you got me on that one
new_trader
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In the 1900's the markets would rise and fall irregularly whereas today the markets fluctuate.
babyjake1961
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And the reason they fluctuate is due to a much higher number of market participants with vastly different approaches to trading. Some are into long-term carry trades while others run short-term HFT algos and by far not all of them react to certain market events. You basically need to predict two things:
1. The outcome of a market-moving event (rate hike or rate cut, data better than expected or worse than expected etc);
2. The scope of the market's response to that outcome (a new trend, a reversal, and if the latter, after how much initial movement in the breakout direction and how soon after the price topping out).
In Wyckoff's days, there was no such technology and not so many players, so the markets at any given point of time were far thinner than now. A Japanese investment fund couldn't trade NYSE real-time with virutally no latency back then - simply because it was not technologically possible. Likewise, no such thing as fully automated algo (HFT or not) was even known at the time. With some players responding to the events much later than others and all trades placed manually, lengthy bullish and bearish market rallies were common which was pretty much all that was needed for market tycoons like Bernard Baruch or Jesse Livermore to make untold fortunes out of nothing over just a few years.
These days, trends are short-lived. Those that are long-lived aren't steep enough to leave you with much profits on a leveraged trading account after the swaps. Every single one and their grandma too trades - be it retail FX, penny stocks, some type of options (from the binary scam to the legit vanilla ones). Prices often consolidate within as little time as a couple of hours even after the major market-moving events. The world's top financial bodies are presided over by incompetent unelected individuals who hardly know what they're doing.
Now you want to go into this with Wyckoff's times technicals. You roll 'em out, go live, and see Mario Draghi first cutting the interest rate to its all-time low at 0.00%, then half an hour later saying he won't go any further no matter the outcome of the cut. There's no way in hell Wyckoff's technicals could have predicted this situation. They would come likewise useless when in the middle of a dark cold January night last year the SNB announced it was unpegging the Franc from the Euro despite vocally restating its commitment to the peg a mere week earlier. It wouldn't take more than one of these things to take you out for good if you're leveraged enough.
So unless you're riding an event post-factum with some clever strategy which would render the market unnaturally repetitive if it were not to be profitable in the long run, you stand no chance at telling the future with some indies that might have worked often enough in the past and even still do on every other occassion, just not every time or even often enough to keep you and your leveraged trading account afloat with a chance for profits in sight.
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I agree. However, my argument against TA is that if you analyze price histories of stocks, currencies, market indices, etc., with statistical tests, they are basically "random walks", i.e., non-stationary time series, such that future prices changes are uncorrelated with past and present prices. The implication is that you can't predict future price movements by analyzing price charts.
That said, it is often possible to assemble a portfolio of trading instruments that are stationary or mean-reverting, so that trading strategies are possible. This is the basis of statistical arbitrage, which is what I use to trade. However, this approach requires a more sophisticated mathematical background than that of your average trader.
babyjake1961
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Have you been through a major market crash with your portfolio? Would it survive the second half of 2008 unoptimized, for instance?
I've only been trading live with this algorithm for 9 months. If we have another crash, I guess I'll find out how it performs under those conditions. However, the portfolio is market neutral, and I employ only modest (2x) leverage, so I anticipate that I'll be OK. We'll see.
Good post. Experience helps in developing intuition. Key in trading is finding a positively skewed distribution of returns. Then, bingo!
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