To what instruments is tech. analysis applicable?

[tokyojoe]

Hey everyone! I have a nooby question for you,

To what financial instruments can I apply technical analysis? I am still new to this and I've been reading TA for Dummies as my first TA book and it seems to be focused on stock, I haven't seen any other instruments being used for examples.

What I mean by the question is, it sems highly applicable to stock, but for example, not so applicable to commodities futures since these move due to fundamental reasons or I am wrong? Is there such a thing as an "over\under-valued futures contract"?
Can you apply TA for options? Or Forex?.. Spreadbetting? Anyways what instruments you think it works best with?

-Can you apply TA techniques that you use, say, for stock, on futures markets? or index trading?

-What about timeframes? The TA techniques I've seen so far seem to be applicable on a few weeks timeframes, but what about those who trade minut-by-minute? Or maybe there are specific tools applicable to these short timeframes?

Ayways, hope I made myself clear here, I'd appreciate your help!

Thanks guys!

Hi iliavaco, good question, if you go down the day trading route you will find all TA tells you the same thing.

Price is traded at every single "TA" level, you will use TA then throw it away. I am glad I learned to use it, it helped me focus on the movement of price, but reliance then stole focus away (if that makes any sense) because at the end of the day that's all there is, movement of price, taking of stops & of course cutting loss quickly when the trousers have been pulled down (this is an art all on it's own)

I found it very useful to learn to read the confluence of multiple time frames & still I use 3 tf's together to this day.

No book will teach you to trade, you will glean some insights, but.....

I recommend reading flashboys if you haven't already, although it's been around a while it will highlight how outdated any book is as it comes to print in the trading arena.

All trading instruments work basically in the same way, it's price movement & the reading of not only the print, but the speed of flow (very very important) then it's a matter of trying to hold on to the coat tails of the money movers.

Fundamentals mean squat to me in each average session, aside major events, nfp's & having an eye on data release times all I am interested in is how it moves.

Ps Spreadbetting is very tricky, believe the hype start small, good luck

 

[Fugazsy]

TA can be applied to all instruments and time frames, it is a great tool which encompasses the psychology of the mass participants, it is an art form and to get advantage out of it a good degree of a street smart attitude is a must combined with experience and proper money management, that way we can be wrong on a development of a certain pattern or technicality and still make money out of it.

 

[tokyojoe]

TA can be applied to all instruments and time frames, it is a great tool which encompasses the psychology of the mass participants, it is an art form and to get advantage out of it a good degree of a street smart attitude is a must combined with experience and proper money management, that way we can be wrong on a development of a certain pattern or technicality and still make money out of it.

Street smart attitude, like it, so true, even the algo farms are built in da hoods

 

[IFeelFree]

And I've been trading and investing for 40 years, but that's not pertinent. The fact remains that we develop cognitive biases early. We may even approach the market with our biases already intact, e.g., trading is a "war". Those biases, however, are in us, not in the market, and if one intends to puzzle out the market, he's better off studying the market than studying monographs.

One can develop a consistently-profitable trading plan believing that markets are random. One can also develop such a plan believing the opposite. One can even develop such a plan that is based on planetary alignments. But a belief is not a fact, and to present a belief such as that markets are random as a fact does not reflect the intellectual rigor that mathematicians like to claim for themselves.

Db

One of our cognitive biases is a tendency to explain random outcomes as non-random. We tend to overestimate causality and view the world as more explainable than it really is.

Randomness is defined as "the lack of pattern or predictability in events." The markets are affected by countless events every day, most of which are unknowable in advance, and so, in that sense are "random". Therefore, it makes sense to view asset prices as at least partly the results of random processes. To make money in the markets all you have to do is shift the odds a little in your favor, using whatever methods you have available to you. One of the things I like about statistical approaches is that I can quantify the uncertainty in my forecast of price changes. I can continually monitor the level of stationarity in my portfolio. If the internal structure of the market changes, I should see the statistics change, and this would be my signal to stop trading this strategy.

A belief is not a fact, but when an idea is supported by empirical evidence it rises to the level of a theory that you can have some confidence in. Even in science, our knowledge is subject to revision when confronted with contrary evidence. However, we don't call our scientific theories "beliefs", because they are more reliable than that. They give predictions that are found to be correct, even if those predictions are often statistical in nature (such as in quantum theory). Similarly, statistical approaches that treat asset prices as random are not merely beliefs. They are grounded in mathematical understanding. Treating asset prices as random is a way of analyzing them statistically. The external events that affect asset prices may in reality be deterministic. However, because such events are unknowable to us in advance, they appear as random. Debating whether asset prices are REALLY random isn't productive. For all practical purposes they are random.

If some individuals are able to make money based on hidden causal mechanisms, such as seeing patterns in patterns in random price movements or planetary alignments or whatever, I wish them the best of luck. However, I won't trust my money to such methods. My scientific training causes me to trust sound statistical methods that have been shown to be useful through empirical tests.

 

[IFeelFree]

If you ever see anything that presumes rationality among investors be very skeptical. Even in academia there is a ton of research which documents "anomalous" price behavior - stuff that isn't rational.

To the larger point of the thread, Technical Analysis can be said to attempt to recognize and utilize the not-fully-rational and efficient nature of the markets.

I agree. Investors are not completely rational. That's why trading opportunities develop. I suspect that investors over-react or under-react to events, causing prices to get out of whack. The statistical arbitrage methods I use are an effort to determine when prices have deviated significantly from equilibrium and to bet on their return to equilibrium. It is a form of mean-reversion in which the "mean" is dynamically changing.

My argument is that trading a stationary (mean-reverting) portfolio has a better grounding statistical analysis than much of conventional technical analysis. I'm not saying that technical analysis doesn't work, but that it's effectiveness is limited because of the high degree of randomness in financial time series such stock prices, etc. Others may disagree, but that's OK.

 

[dbphoenix]

One of our cognitive biases is a tendency to explain random outcomes as non-random. We tend to overestimate causality and view the world as more explainable than it really is.

Another is a tendency to explain non-random outcomes as random when they are not as well as to underestimate causality and view the world as less explainable than it is, largely because we don't understand how auction markets work.

If you want to believe in randomness, with quotes or without, you are welcome to do so. That doesn't make randomness a fact.

Db

 

[IFeelFree]

Another is a tendency to explain non-random outcomes as random when they are not as well as to underestimate causality and view the world as less explainable than it is, largely because we don't understand how auction markets work.

If you want to believe in randomness, with quotes or without, you are welcome to do so. That doesn't make randomness a fact.

Db

Randomness is not an inherent quality of some events. It is a statement about our ignorance of the causes of those events. In that sense it is quite real. I can't know everything. Most events are unpredictable.

 

[doubletop11]

I have software that shows me everyday on just how non random the markets truly are. If you don't have context of trend and the current movement of supply/demand that the market is making then I don't think you should be trading because it is random to you and gives you to much flexibility for a 'random event' pullback, reversal bounce, or retracement to go against you.

 

[Thales]

the ... mistake: they study books and similar printed material rather than the market. Those who take the former route often/usually adopt whatever set of beliefs are propounded by the book(s). Those who choose the latter route develop strategies that are tied to market realities rather than theoretical and philosophical constructs.

Rather than "see" some quasi-academic work, observe the market. Apply the scientific method to whatever hypotheses occur to one. Develop a consistently-profitable trading plan. Then adhere to it.

It's that simple.

Db

(bold added by Thales)

Everyone I know who has learned to day trade successfully has done it through observing the market and learning to think for themselves.

Best Wishes,

Thales

 

[timsk]

. . . Everyone I know who has learned to day trade successfully has done it through observing the market and learning to think for themselves.

Without wishing to sound facetious - how many do you know?

 

[Thales]

Without wishing to sound facetious - how many do you know?

A solid dozen at-home retailers (while watching many dozens try and fail), and too numerous to count from my prop/street days. I've been around.

Best Wishes,

Thales

 

[dbphoenix]

(bold added by Thales)

Everyone I know who has learned to day trade successfully has done it through observing the market and learning to think for themselves.

Best Wishes,

Thales

Hey, Thales, long time no see. You're not dead yet?

How's the daughter? Still wrestling the market to the ground?

Db

 

[mangetout]

Why are you so hostile to new members?

Well, he did spend 13 years on Elite Trader.

 

[Thales]

Hey, Thales, long time no see. You're not dead yet?

How's the daughter? Still wrestling the market to the ground?

Db

I only look dead, Db!

My oldest daughter is still trading, though she only day trades in the summer (can you believe she is now a sophomore and just a few months shy of her sweet sixteen?!)

My younger daughter gave it a try, but it wasn't for her. She wants to be a chef, so who am I to stop her?

My son just turned 10 and he is getting started. He is making a good start, but too early to tell how good will be his finish.

I see you're still putting up the good fight, Db. Not sure where your patience comes from. If only you could preach to the choir rather than the world wide web!

Best Wishes,

Thales

 

[dbphoenix]

Well, he did spend 13 years on Elite Trader.

Actually 4, which was at least 2 too many.

 

[IFeelFree]

Everyone I know who has learned to day trade successfully has done it through observing the market and learning to think for themselves.

True, but you also need a sound trading system. Some systems are better than others. I've been trying to make the case for algorithmic trading methods, especially those based on statistical arbitrage. Such methods are widely used by institutional traders and I think they can be successfully implemented by day traders and swing traders who have a good math/programming background.

 

[timsk]

Hi Thales,
Thanks for your earlier reply to my question. With your experience, I hope to be reading a lot more from you.

. . .My son just turned 10 and he is getting started. He is making a good start, but too early to tell how good will be his finish.

With regard to your comment about successful traders "observing the market and learning to think for themselves" - I'm curious as to how much direction you give your children? I imagine there must be times when you see them making mistakes and have to bite your lip to ensure they learn from their experiences?

. . . I see you're still putting up the good fight, Db. Not sure where your patience comes from. If only you could preach to the choir rather than the world wide web!

I assume - and hope - that this comment isn't in response to the exchange between dbp and IFeelFree which, IMO, is of the highest calibre and exactly the sort of thing I wish there was more of here on T2W. Great contributions from both members. Dbp is more than capable of speaking for himself (obviously), but I'd like to think he agrees with me on this, as IFeelSure (do you see what I did there) - he'd much rather have an exchange of views with someone like IFeelFree - than with some other (past) members he's crossed swords with!
:cheesy:
Tim.

 

[dbphoenix]

I see you're still putting up the good fight, Db. Not sure where your patience comes from. If only you could preach to the choir rather than the world wide web!

Best Wishes,

Thales

Not much preaching anymore. Since the last time we talked I wrote the SLA (see my signature), so it's pretty much take it or leave it. If one elects not to take it, that's okay by me. It's now written and done so I can focus my attention on other things.

Hard to believe it's been seven years since your daughter annotated those charts.

Db

 

[Thales]

With regard to your comment about successful traders "observing the market and learning to think for themselves" - I'm curious as to how much direction you give your children? I imagine there must be times when you see them making mistakes and have to bite your lip to ensure they learn from their experiences?

I keep it simple for them. Some Darvas, some O'Neil, some Kroll, and a few others, e.g. selections from Wyckoff the original, Livermore's How to Trade (the original), etc. Can't say I've ever bit my lip. In each case they started by simply watching a live data feed without our ever having discussed trading, orders, stop losses, profit targets, etc. My oldest took to it quickly, and has turned a ridiculously small forex micro account into a rather impressive futures trading account in six years. My younger daughter did well, but she didn't enjoy it. My son is just spending time watching a live data feed and replay. He really has no idea as to how any of what he sees is eventually to translate into a trading plan.

I assume - and hope - that this comment isn't in response to the exchange between dbp and IFeelFree

For some reason today I got in in my head to see what some of my old TL colleagues might be up to, assuming I could find any who were still active. Found db over at ET but then came to realize he'd been sent packing and that he was now posting over here. What I said was based on the general sense I derived from some of the interactions he has had with other folks.

 

[Thales]

True, but you also need a sound trading system. Some systems are better than others. I've been trying to make the case for algorithmic trading methods, especially those based on statistical arbitrage. Such methods are widely used by institutional traders and I think they can be successfully implemented by day traders and swing traders who have a good math/programming background.

No argument from me on needing a sound system. No problem accepting the validity of certain stat-arb models as yielding consistently profitable results. I do not agree with the random market hypothesis. And I am certain that the stay-at-home retail trader wannabe will do much better focusing on price action rather than statistical arbitrage. And by saying that, I do not mean to imply that statistics do not play an important role in the development of a sound trading plan based on price action.