TA-what can it provide you with?
How many times do we have to have the TA doesn't work debate ? Lol...No matter, For me TA does work as the basis of finding a trading edge, but as elucidated elsewhere in this thread and on this and other boards, the naysayers fail to understand the limitations of TA. It is not predictive and at best, like all analysis TA can provide you with a trading edge, which is no more than a set of technical cirumstances that have historically provided a net gain over any given sample when combined with the right risk and money management. This understanding is essential in the successful implementation of TA to provide such a trading edge.
Simply put, TA is essentially the study of price movement over time as a result of supply and demand for the instrument. As an example my own entirely TA based trading edge attempts to identify what I regard as the 2 constants of technical analysis, which are both price based and a result of supply and demand;
a. Trend (via overall price action [opa] classic peak/valley analysis)- A price action phenomenon created by supply and demand and a general imbalance of one over another over any period of time.
b. Support and Resistance-essentially price based previous near-term imbalances of supply over demand or demand over supply as represented by previous price pivots, ie previous obvious fractal swing highs or lows on any given t/f. There are of course other technical phenomena in wide use that can be self fulfilling in respect of their ability to cause market participants to buy or sell at cetain price levels, such as fibs, trend lines and to a lesser extent-calculated pivots.
Knowing what the trend [caused by the overall imbalance os supp/dem or dem/supp] is and at what levels on any given t/f in wide use, market participants caused a previous near-term imbalance of supp/dem or dem/supp provides the overall technical environment from which to make trading decisions.
Add to this overall technical environment a multi (in my case 3) t/f analysis and some tools to tell me things about price that price alone cannot tell me and the trading edge begins to come together;
c. The triple t/f approach is classically Elder, identifying a main favoured t/f (intermediate) and going up or down from that intermediate t/f by a facor of 4-6 gives us a lower trigger t/f and a higher trend t/f. Such a multi-t/f analysis enables us to analyse price across those t/f's and to time entries at the earliest possible time given the overall tech environment as described by
a. and
b. above. By using analytical tools calculated from price, as well as price itself, cabn enhace any such trading edge;
d. Oscillator divergence: oscillator measure momentum and it follows therefore that when momentum in any direction is fading there is a growing probability that price may reverse or at least pullback.
e. Volatility: as measured by standard deviation, ie when the volatility of price over
x units of time is less than that of price over
y units of time on the same t/f the volatility associated with a certain price direction can be assumed to be declining. Ie if the vol over 20 units of time is less than that over 10 units of time on the same t/f then longer term volatility on that t/f is less than shorter term volatility.
* these 2 tech tolols
d. and
e. manifested by the indicators used to measure them can produce repeating patterns.
f. Price itself and the repeating patterns it makes that tell us something about actual supply/demand and of prevailing sentiment and possible near-term change in sentiment. To some extent these patterns too can be self-fulfilling.
So Price action, Supp/Res and Trend (all consequences of supply and demand) combined with analytical tools to measure momentum and volatility of price can provide a trading edge. The combination of these pieces of information produce repeating patterns that provide such a trading edge, and
it is the confluence of this technical phenomena that provide the highest probability trading opportunities.
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I will furnish and discuss one such example that occurred in Gbpusd today:
Price had been rising through the London session having found an early 5022 base, Yesterday's Hi was 5131 and just above that was a descending trend line on the 4hr (shown on 1hr chart below) and also the underside of a breeched previous ascending trend line on that 1hr t/f. We can see that at 5131 - Y/day's Hi price had falled to theat 5022 level mentioned above and in so doing had created an obvious fractal swing hi which is essentially a chart representation of an imbalance of supply/demand. As price approached that 'zone' again it spiked up though it by 5 or 6 pips to the intersection of the 2 trend lines mentioned above...see 1hr screenshot below:
Now we know that trend lines are self fulfilling but at this level we had 2, one descending-potential resistance and one breeched previous ascendinng that when tested from the opposite underside can act not now as potential support but as potential resistance. (SBR/RBS is a technical phnomena of support/resistance analysis.) We also had Y/day's Hi so a confluence of 3 potential res/sbr factors indicating that supply
might exist at that level.
Turning then to price itself at that level and looking at the 2 analytical tools described as
d. and
e. above, on the favoured intermediate t/f (5min) told us 3 things
i. Price had rejected the level in question and close back under yesterday's hi in a classic price action candle bearish pinbar
ii. Momentum was fading as measured by 3 oscillators and in fact there was double regular immediate seperate peak bearish divergence which can be a stronger indication of fading momentum
ii. The longer settings volatility as measured by standard deviation were less than the shorter setting std dev on the same t/f.
So we had a 3 x potential resistance factors, fading momentum, volatility associated with the upmove fading and price rejecting the potential resistance zone on this main t/f...ie a repeating pattern that tells us historically that there has been a greater chance of one thing happening over another, ie that there
might be a change in sentiment and price
may fall.
Add to this that on the 15min and 30min t/f's too there were similar bearish divergence based Reversal set-ups that provided extra confluence and comfort to any decision to short at this potential resistance zone...15min is shown below: (on this occassion dropping down to the lower trigger t/f [1min] did not see a repeating Reversal set-up develop so entry had to be taken on the main/intermediate 5min t/f.)
The above example is of course just one example and the naysayers will say it proves nothing, and of itself they are right. The point however is to show that in order to develop a trading edge from TA you have first to know it's limitations and what it can and cannot provide you with, as well as what the tools you have chosen to use are telling you about price, as well as what price itself is telling you.
Just one man's opinion.
G/L
