Please convince me that technical analysis works

["D"]

if technical analysis "doesn't work", is there something else that does? And what do we even mean by "doesn't work"?

A simple example, not actual numbers;

I look at the amount of time I put into researching the markets, time in front of the charts, and ultimately return on investment. If the S&P 500 is returning 10% for example, and my trading is returning 8% then I am not successful. I may be profitable, but not successful by my standard. I can invest in the S&P making more money with no effort.

And I need enough return to be compensated for my time. Am I more profitable committing my time to another activity? That is passively investing in the S&P at 10% while generating other income with my time. Quality of life plays a part as well. I don’t like sitting in front of the charts all day. Others may have different criteria to fit their purpose.

What I find successful is a combination of fundamentals and technicals. Fundamentals provide valuable information on what to trade, why and in what direction, or if you should trade at all. Once my trading decisions have been made, then I turn to technicals which are valuable in the management of the trade. Technicals are used to determine entries, exits, targets and so on. Technicals are not used to make the decision to trade.

 

["D"]

What are fundamentals? Let’s look at the derivation. Derivations of a word sometimes present a clearer understanding.

From Latin fundamentum “foundation”. Fundamentals defined from the 1630’s, ”primary principles or rules”

The basics or foundations of any field of study rarely change even as technology rapidly advances.

Why is this important? To be successful in any endeavor in life the foundations of that endeavor must be in place, with the primary principles and rules being adhered to. Otherwise failure predictably results.

 

[FX4Newbies]

What are fundamentals? Let’s look at the derivation. Derivations of a word sometimes present a clearer understanding.

From Latin fundamentum “foundation”. Fundamentals defined from the 1630’s, ”primary principles or rules”

The basics or foundations of any field of study rarely change even as technology rapidly advances.

Why is this important? To be successful in any endeavor in life the foundations of that endeavor must be in place, with the primary principles and rules being adhered to. Otherwise failure predictably results.

Hi "D",

Yes... fundamentals are important and the ultimate basis for the overall direction in which the price moves, but as I think about it, I believe it has value for all trading styles, but more so for long-term trading. Also, certain markets depend more heavily on Fundamentals, like stocks for example...even commodities. FX seems to be more technically traded. Also, trading styles and timeframes selected can make a difference.

I do look at Fundamentals, maybe not as in-depth as some. Then again, there are traders who pay no attention, because in their minds the fundamental data releases might not even be accurately presented.

May I ask what is your style of trading? Which timeframes do you trade?

 

[FX4Newbies]

A simple example, not actual numbers;

I look at the amount of time I put into researching the markets, time in front of the charts, and ultimately return on investment. If the S&P 500 is returning 10% for example, and my trading is returning 8% then I am not successful. I may be profitable, but not successful by my standard. I can invest in the S&P making more money with no effort.

And I need enough return to be compensated for my time. Am I more profitable committing my time to another activity? That is passively investing in the S&P at 10% while generating other income with my time. Quality of life plays a part as well. I don’t like sitting in front of the charts all day. Others may have different criteria to fit their purpose.

What I find successful is a combination of fundamentals and technicals. Fundamentals provide valuable information on what to trade, why and in what direction, or if you should trade at all. Once my trading decisions have been made, then I turn to technicals which are valuable in the management of the trade. Technicals are used to determine entries, exits, targets and so on. Technicals are not used to make the decision to trade.

"What I find successful is a combination of fundamentals and technicals. Fundamentals provide valuable information on what to trade, why and in what direction, or if you should trade at all. Once my trading decisions have been made, then I turn to technicals which are valuable in the management of the trade. Technicals are used to determine entries, exits, targets and so on. Technicals are not used to make the decision to trade."

Agreed! I also like your assessment of value and time etc.

 

[FX4Newbies]

Another question popped into my mind...if we found a perfect system, 100% winners, do you think the average trader would be able to execute it flawlessly all the time? Not talking about using robots here...

 

["D"]

Another question popped into my mind...if we found a perfect system, 100% winners, do you think the average trader would be able to execute it flawlessly all the time? Not talking about using robots here...

Yes and no. I do believe a lot of traders would do very well with the system. On the flip side, there are a people who couldn’t follow simple directions if their life depended on it.

 

["D"]

May I ask what is your style of trading? Which timeframes do you trade?

I look for setups on the daily. Only trade G8 currencies. I am a swing trader that uses fundamentals to determine the strength or weakness of a currency. Then I trade the strongest currencies against the weakest currencies.

 

[Simon54]

Yes absolutely. I use charts and flick through different template setups too yes. My favourite is daily Pivot Points for identifying S/R with Entry/Exit levels. PPs encapsulate Elliot Wave and Fib tracement levels too imo. If you play about with it - as mentioned starting from longer time frames; monthly daily hourly etc, the levels clearly highlight Support / Resistance levels you can't miss. I would go as far as to say all theories given their mathematical nature and fact that they use the same data inputs, converge. They all pretty much coincide with PPs indicating those points imo. One can also say PPs and other indicators converge with Elliot Wave or Fib Retracements and Extensions. Pick your favourite what ever works for you.

Some traders will say TA is so super cool that when a new piece of news does hit the air waves and traders react, the news is in the price in seconds as it gets digested.

There is also the herd theory of TA. Whether it works or not if enough peeps around the globe act on agreed signals and patters, it becomes a self re-inforcing event.

My point is that by it self TA does not ultimately determine or forecast a price movements. They only indicate where it has been and give the trader valuable information to confirm or amend/adjust trading strategy. Candle sticks speaks volumes about market moves (wars) between bulls and bears. All useful tools.

Ultimately however, it is Fundamentals that identify and account for valuations and prices that reflect those valuations in the medium to long term.

I agree with you. Pivot Points are great for spotting the key levels and they align well with Fib & Elliot Wave. Also, TA helps with the strategy but fundamentals drive the bigger picture. Use what works!

 

[FX4Newbies]

Yes and no. I do believe a lot of traders would do very well with the system. On the flip side, there are a people who couldn’t follow simple directions if their life depended on it.

Agree with you D. Most people don't like following rules. It can be a fight sometimes to do so. In trading it is a must to be consistently profitable.

 

[FX4Newbies]

I look for setups on the daily. Only trade G8 currencies. I am a swing trader that uses fundamentals to determine the strength or weakness of a currency. Then I trade the strongest currencies against the weakest currencies.

Sounds like you have a good strategy. Fundamentals would definitely work well for you...swing trading the Daily.

 

[Simon54]

What are fundamentals? Let’s look at the derivation. Derivations of a word sometimes present a clearer understanding.

From Latin fundamentum “foundation”. Fundamentals defined from the 1630’s, ”primary principles or rules”

The basics or foundations of any field of study rarely change even as technology rapidly advances.

Why is this important? To be successful in any endeavor in life the foundations of that endeavor must be in place, with the primary principles and rules being adhered to. Otherwise failure predictably results.

I agree! I feel basics never go out of date. What's one fundamental you believe that people overlook the most?

 

["D"]

What's one fundamental you believe that people overlook the most?

There are no overlooked fundamentals. If it is pertinent to a market there is going to be a lot of attention on it from across the globe.

 

[Simon54]

There are no overlooked fundamentals. If it is pertinent to a market there is going to be a lot of attention on it from across the globe.

I agree! If something is important for the market, everyone will be watching it closely, no matter where it’s coming from. What do you think about the current global market focus?

Agreed! In case anything urgent in the market everyone watch it closely no matter where it is coming from. What are your thoughts on current market focus?

 

["D"]

What do you think about the current global market focus? What are your thoughts on current market focus?

My thoughts are completely and utterly irrelevant. It is all about what the market thinks. Not what I think. I suggest a subscription to Bloomberg and a paid subscription from a major bank that analyzes/forecasts the markets.

 

[Simon54]

My thoughts are completely and utterly irrelevant. It is all about what the market thinks. Not what I think. I suggest a subscription to Bloomberg and a paid subscription from a major bank that analyzes/forecasts the markets.

Got it. Will get those subscriptions done.

 

[FX4Newbies]

My thoughts are completely and utterly irrelevant. It is all about what the market thinks. Not what I think. I suggest a subscription to Bloomberg and a paid subscription from a major bank that analyzes/forecasts the markets.

Good advice D! I don't think many FX traders think about going in that direction. 👍

 

[FxSuperb]

Of course it will work it you put enough effort. The right question would be: "Does mine money management, psychology and patients works?"

 

[brettb]

TA does work but too many noob traders focus on their buying strategy (i.e. chart patterns). The real skill lies in probability and money management. Another thing I'll add: you need to find a pattern that's really easy to spot using automation.

I joined a private member's forum with a winning VCP strategy (CAGR 100% since 2014). It works but relying on a few big wins wasn't for me. Right now I'm developing a buy low sell higher strategy. I need a lot more research but I am convinced it will work.

 

[FX4Newbies]

TA does work but too many noob traders focus on their buying strategy (i.e. chart patterns). The real skill lies in probability and money management. Another thing I'll add: you need to find a pattern that's really easy to spot using automation.

I joined a private member's forum with a winning VCP strategy (CAGR 100% since 2014). It works but relying on a few big wins wasn't for me. Right now I'm developing a buy low sell higher strategy. I need a lot more research but I am convinced it will work.

Hi brettb,

I do agree that Newbies need to trade "patterns" or "set-ups" on the chart that are clear enough that they can recognize. They need visual triggers. What they also tend to ignore is a proper understanding of market structure, price action and the like. How can you ignore the underlying structure of the market and focus on the patterns etc. That is a disaster waiting to happen.

Money management...and emotional management are BIGGIES!

All the best with your buy low sell higher strategy. Go for it! Why not...

 

[brettb]

Thanks - also I'll add that some strategies work until they don't. I don't think VCP works as well as it used to. Maybe AI bots find the pattern too easily, or maybe too many people know about it now Mark Minervini written so much about it. But I'm happy to stand corrected.

That's why I like my own strategy. 52 week lows can be found without charts. They've also been a good signal since stock markets existed. If anything they work better now than in the past. I just use the charts to ensure MarketBeat is not lying to me when it claims a stock is at a 52 week low.

There's also a lot of good probability stuff on YouTube. I don't see too many new traders using this stuff, but it can be extremely powerful.