Is technical analysis the easy option?

[iota]

No doubt this will be a point of contention because of the dichotomous nature of the subject and I'll probably end up getting chewed out, but as a curious little noob I'll ask anyway.

For all it's complexities and mathematical intricacies it seems to me that TA is largely an easier option than FA. In a recent search for good FA indicators for non-equity instruments it seemed quality sources of information (any in some cases) were lacking; comparatively there seemed to be pages upon pages and forums full of discussion on TA.

So is there bias to TA because it's easier to watch and read the indicator on the screen where someone else has done the hard work (the math, the concept) than it is to do research that FA seems to require?

 

[iota]

http://www.pressassociation.com/

?

 

[tomorton]

FA only genuinely makes sense for those whose objective is to amass shares which generate a dividend incme. For these players, it doesn't matter what price the shares cost or how low they might fall, as long as the dividend income continues. And for this, FA is the appropriate analysis. These are investors as opposed to traders, and their shares won't be sold until they die and their estates are disposed of or inherited by others.

All approaches that take the share price into account however, are TA, and it's arguable whether TA is a branch of PA or PA is a branch of TA.

Both are rational approaches, but significant dividend income is very difficult to gain with low capital, as the leverage available to increase this tends to be short-term only, so for players with a modest capital, TA is obligatory.

 

[anley]

Why not try to combine the 2 so if you are bullish with FA and TA then probabilities suggest (depending on how good your analysis is) it will be a good trade.

But when TA says higher and FA says lower - don't trade.

 

[cr6196]

FA only genuinely makes sense for those whose objective is to amass shares which generate a dividend incme. For these players, it doesn't matter what price the shares cost or how low they might fall, as long as the dividend income continues. And for this, FA is the appropriate analysis. These are investors as opposed to traders, and their shares won't be sold until they die and their estates are disposed of or inherited by others.

i dont get this...u seem to be implying that price and fundemental value aren't related at all? and so fundemental analysis would be pointless on a company that didn't pay dividends, even though they might be reinvesting the free cash flow back in the business? and even then the share price can influence the business success and therefore the dividend...

trying to say a stock is basically a bond doesn't make sense...the income part is the same in a very abstract way but the asset part isn't.

 

[tomorton]

i dont get this...u seem to be implying that price and fundemental value aren't related at all? and so fundemental analysis would be pointless on a company that didn't pay dividends, even though they might be reinvesting the free cash flow back in the business? and even then the share price can influence the business success and therefore the dividend...

trying to say a stock is basically a bond doesn't make sense...the income part is the same in a very abstract way but the asset part isn't.

I am not implying, I am saying it - price and fundamental value are unrelated on any single day, such as the day of purchase or the day of sale. Over a long run, it's possible that average share price is roughly equivalent to average fundamental value, but that is meaningless to a trader. There is no point calculating that a share price is only 20% of the fundamental value of the company when 99.9% of the market don't care. they're not buying it anyway.

Yes, you can apply FA to a non-dividend-paying company, but although the vehicle might offer a comfortable journey, it's the wrong destination.

I'm not at all sure that share price influences business success. I am aware that some companies will use tactics such as buy-backs etc. if their share price gets 'too' low and naturally, this uses up cash they could otherwise have invested into the business or used for acquisitions or paid as increased dividends. But clearly a Tesco customer doesn't consider the share price when reckoning up the value for money of this week's trolley-load of groceries.

FA is fine, but no help at all in a trader's business plan.

 

[cr6196]

basically my point is that any way you look at it, focusing on the dividend isn't logical. it isn't a useful metric for shareholder return in any way. something like free cash flow is more relevant as the actual money to the shareholder after reinvestment. the idea of dividends being a useful measure of return is seriously outdated. and the share price is relevant as companies can use their shares as currency, i.e to buy other companies. the OP's question has been answered.

i still don't understand half of what your trying to say though. if you mean that fundemental value isn't going to make a difference over a day, then obviously i agree but that is just moving the question so it fits with the answer.

TA is easy to work out, is it goin up or goin down. FA isn't written on the chart. FA provides less facts, and so there are less "indicators". The answer is in the name. FA looks at stuff fundemental to the thing you are buying which will change its value. TA looks at how the value changes. There are obvious intellectual differences in either one, that aren't reconcilable. The main one being time, TA is the past, FA is the future. Is there a bias? Probablly. But good FA isn't that simple.

 

[tomorton]

I suppose you could use a positive change in FA to identify when to buy a share, and sell when a negative change comes through. And yes, that might be based on a metric like a deterioration in cash flow, whereas the dividend might even be increasing against the fundamental environment. But if you don't seek dividend income from shares but do seek share price appreciation, then you're a trader, and if you're trading, TA is a more market-responsive, more time-efficient, less manipulable and more time-sensitive tool to use. Which doesn't of course mean it's easy

The fact that FA indeed isn't written on the charts is what makes it so unreliable for traders. It doesn't matter what a share is 'worth' if nobody is prepared to buy even at a lower price, in sufficient numbers for its price to rise to its true 'value'.

As for FA being the future - not in any real sense. It has to be based on historic performance (as calculated, rather worryingly, by the company themselves) and represents only a signpost and an aspiration towards future financial performance. Neither does TA show the future particularly well, but at least we all recognise it just presents a range of possible outcomes of varying degrees of prbability.

 

[BoyP]

hi... new guy that would like to participate in this interesting discussion.

I think the easiest route is to assess "general market conditions" a-la-Livermore and wait when you have to wait and play when you have to play. Then odds is what will make the difference. Take the present market, driven by political events and economic news, where a large portion of trading has been automated to respond to these variables. In such environment, FA may not correspond to the reality shown by the price of an instrument and technical analysis may also fail. Saying that TA may fail could just mean that one day a chart reader may see a head and shoulder formation while the next day the chart is interpreted as a "reverse" one (the opposite) conveniently fitting the subjective bias of the chartist. Sort of an astrologist, a field I am familiar with after having read thousands of charts over the years. There is the reader's bias. Always.

I personally use both FA and TA (plus PA which I tend to view as a more minute subchapter of TA which can make it somewhat more precise) and at the end of the day, none of it. What has worked for me this year was simply to be unsure and to use trailing stops. And only to trade after many different convergences and confirmations (say all base metals break out, while us dollar weakens and this is confirmed by other currencies against the dollar with the corresponding action in the bond market, and many times looking at international markets for each... it is now that entangled).

 

[redart]

Personally, I would skip TA, and I wouldn't even go near FA. However, I would heartily recommend PA.

Psmith

Is price action not a form of TA?

 

[Chartsy]

Price Action.

Psmith

price action is technical analysis, never understood the difference, those trading 'price only' get on their high horse as 'we don't use indicators, they suck'

i would say certain aspects of TA are difficult, try mastering the order flow! but fundamentals are very important , especially in forex, buy you could probably trade without them, but why not exert yourself to be a better trader?

 

[cr6196]

right that is the mistake, there are real assets behind a stock. stocks have a definite value. so for example, it may be true that no1 wants to buy something undervalued but there are numerous way value is recognised. this can be through a share buyback, a cash return, spinoffs, mergers or even a simple case (and this happens frequently even now) where someone has bought a company for say $100m and got $150m in cash back. the nuance though is in recognising the true value oppurtunities that will get recognised. But in stocks there can literally be money lying on the table waiting for someone to pick it up. i can somewhat understand your point of view though, as the that is placed in earnings can change across the board. in addition though, there are plenty of HFs running quantiative strategies based on this premise, specifically on the P/B ratio which is a subsitute for "undervaluation" in a very general way.

i agree though, saying that FA is based on the future was misleading though. this isn't saying anything for FA in stuff like commodities though which is again different...a lot of it is to do with the market attitude though. I saw a study which surveyed forex dealers and something like 80% believed TA was relevant in their daily decision making, which isn't suprising as they trading a commodity based on relative value...so pricing isn't easy. but stocks are completely different to currencies.

 

[Mike Broudy]

As Jack Schwagger's MW and MW2 have demonstrated, there are numerous paths to the same result.

These methods may also change with the market.

I think it is important to point out that TA is primarily based on what Edwards & Magee describe as human nature in Technical Analysis of Stock Trends.

PA is based on general conditions, though I believe this is also a combination of TA and FA

FA is based on logic and inherent mathematics

I feel that FA is generally biased towards longer-term investments, as this form of analysis generally requires significant time to realize the full extent of gains.

TA can of course be applied to long and even extremely long-term time horizons, though one of it's biggest appeals is the ability it has to provide a readily accessible pulse of the market, and thus has applications for shorter-term trading and even second-to-second trading.

 

[DionysusToast]

There are NO easy options - they can all work and they all take a lot of hard work. Frankly, your method is the least significant part of it.

Psmith

Not true. Lot's of TA is total hogwash.

If you trade off something flawed, no amount of hard work will make you profitable.

I tend to agree with the OP. TA offers a technical approach to trading all markets in all timeframes in all circumstances. As a 'final solution' it absolves its users of learning anything else or getting a clue about the markets.

It does not deliver on this of course but this is what the majority of useless TA books are offering.

 

[oildaytrader]

Price action charts in hindsight are very pretty and perfect,in the real market they are difficult to trade.For every example James 16 shows , there are proportionately more failed price action set ups he hides, otherwise he would not sell those courses.Suckers.


http://cdn.forexfactory.com/attachment.php?attachmentid=277&d=1119065167

Quote James 16"This is why I think day trading forex is tough"

 

[oildaytrader]

I disagree about order flow - to me it seems incredibly simple. The hard part is having the patience to wait for it.

Psmith

Trading seems very easy to all mentors.You should become a mentor.:cheesy:

 

[weakpunter]

There are NO easy options - they can all work and they all take a lot of hard work. Frankly, your method is the least significant part of it.

Psmith

I have to concur with above comment ,they all work at times and their are other times you have to be subjective , if one method worked and worked constantly it would be the easiest profession in the world, which I think we all know that it is definately not.

 

[DionysusToast]

I have to concur with above comment ,they all work at times and their are other times you have to be subjective , if one method worked and worked constantly it would be the easiest profession in the world, which I think we all know that it is definately not.

Incorrect. There is plenty of TA that doesn't work at all.

To say that all TA works at times is like saying a stopped clock is right twice a day.

There is plenty of TA that is nonsense.

Read W D Gann for more information.

 

[weakpunter]

Incorrect. There is plenty of TA that doesn't work at all.

To say that all TA works at times is like saying a stopped clock is right twice a day.

There is plenty of TA that is nonsense.

Read W D Gann for more information.

Saying TA works at times is like saying a stopped clock is right twice a day, I couldnt disagree with you more thats a poor analogy as when trading over a period of time you get a feel for when the markets are more adept for TA and when they are less so. TA dosent have to be working round the clock for you to make money by using it , you just need to be able to recognize when to use it...........reading the time correctly granted you need the clock to be working constantly to know the time, trading is somewhat different.

 

[DionysusToast]

WP - There are many different TA theories, indicators and methods - to say that ",they all work at times" is something you could not possibly know because it would fill a couple of lifetimes trying them 'all' out. If you did try them all out, it would only be because you hadn't found anything that had worked yet.

Like I say - read W D Gann and come back to us.