Technical Analysis: Is it voodoo? Or does it work?

[SIUYA 11]

The first thing that pops into my mind when I read something like that is 'what a load of rubbish, as i've never met another professional day trading using just TA.

 

While I appreciate what you are saying and agree with most of it. Just saying what you are saying may not help..... as then you become another person who will say just because you have not done it or seen it then it cant be done.

I trust you understand the gist of my gibe.

 

When it comes to day trading I have actually met a lot of traders who use only technical analysis in the way of looking at price action charts. (maybe its a matter of definitions)

I have also met lots of arbitragers, market makers,and quants.

I have never met a trader who day trades from fundamentals..... but then I might be unlikey to classify them as a trader....more an investor.

What about longer term traders who use technical analysis - CTAs, systemised managed futures accounts.

(topical now is John Henry and the Liverpool FC club - how broad or narrow is the definition of technical analysis)

[Cory2679 11]

Learn what is happening on your order book...

 

To me, that's still technically technical analysis...as it is not fundamental analysis.

[BlowFish 10]

To me, that's still technically technical analysis...as it is not fundamental analysis.

 

After reading 86's post it occurred to me that he would probably would consider S/R got from a chart as TA & S/R got from the DOM as something else.

 

Then it occurred to me that "what is TA" was discussed earlier in the thread.... and many like it since god was a boy.

 

Without common terms of reference, or at least defining your own, these conversations can be pretty meaningless.

 

Cory's definition is nice and simple. How about TA is "using market generated data to anticipate future market behaviour"?

 

There is much less ambiguity what 'market generated data' is. It also does not matter how you process it for your 'analysis' or whether you use it to make trading decision or run a news letter.

[86834 10]

I'm not saying that TA has no place, it is a useful support tool, but as I mentioned in another post, every half decent prop firm that i've ever seen will make their traders look at nothing but the book for at least a month. There's a reason for that, and what you should take away from that is if that's how the professional industry train their traders, who have a way higher success rate than retail traders, then maybe, just maybe you should be doing the same?

 

When I refered to TA in my previous post, I was refering to price charts which are just a representation of the past, which it is, no matter how you try and cut it. The order book on the other hand is what is happening right now, which is extremely important.

 

Higher time frames then it's a different ball game, traders managing funds long term etc. I've never traded in this way personally, but my friend who used to sit next me at the firm I started at, he does all that stuff now days. He was completely hopeless at day trading, but his fundamentals were second to none, which is what he trades. Like I say, his track record is faultless, but like I say, not something i personally do so I can't comment

 

So many different trading styles with different methods, but if you're a day trader, in my professional opinion you need to learn to read what is happening now, not 5mins ago. There's always going to be someone who says they're doing well using just XYZ and not using order flow etc, but even if they're are, they're not doing anywhere near as well as what they could be if they knew order flow.

 

A good example would be that there's been loads of people moaning as of late about how quiet the markets are, but if you take the time to learn how price trades on the book it has been quite easy this year really.

[BlowFish 10]

I'm not saying that TA has no place, it is a useful support tool, but as I mentioned in another post, every half decent prop firm that i've ever seen will make their traders look at nothing but the book for at least a month. There's a reason for that, and what you should take away from that is if that's how the professional industry train their traders, who have a way higher success rate than retail traders, then maybe, just maybe you should be doing the same?

 

When I refered to TA in my previous post, I was refering to price charts which are just a representation of the past, which it is, no matter how you try and cut it. The order book on the other hand is what is happening right now, which is extremely important.

 

Higher time frames then it's a different ball game, traders managing funds long term etc. I've never traded in this way personally, but my friend who used to sit next me at the firm I started at, he does all that stuff now days. He was completely hopeless at day trading, but his fundamentals were second to none, which is what he trades. Like I say, his track record is faultless, but like I say, not something i personally do so I can't comment

 

So many different trading styles with different methods, but if you're a day trader, in my professional opinion you need to learn to read what is happening now, not 5mins ago. There's always going to be someone who says they're doing well using just XYZ and not using order flow etc, but even if they're are, they're not doing anywhere near as well as what they could be if they knew order flow.

 

A good example would be that there's been loads of people moaning as of late about how quiet the markets are, but if you take the time to learn how price trades on the book it has been quite easy this year really.

 

Arguably the order book is the past it's just a closer past. It is certainly still 'market generated data' and that by implication makes it historic. ( You cant have 50 offered unles err.... some one has offered 50 ) Recently I posted a couple of 'charts' that are just different depictions of what the order book shows (and some order book history too so you don't have to remember so much). Are they charts, does depicting the DOM and DOM history graphically make it TA? Anyway I guess that is nit picking.

 

This is the issue unless people have common definitions it's hard to get on the same page.

 

Incidentally prop is not the only game in town in fact compared to many of the games it is a drop in the ocean, compared to interbank FX almost literally! Also the model for a lot of shops is making money from commissions, desk fees etc. Sure there are straight ones and the situation has improved vastly over the last 10 years but the fact remains a lot of shops make money from commissions off the back of the churned and burned and even the successful for a fair bit of their careers. That is a huge incentive to encourage their fledgling traders towards scalping and the order book is just great for that. Huge incentive. Still, a great start in the industry if you get the chance to join one that isn't out and out dodgy.

 

Anyway just as you are not saying 'charts' have no place I am certainly not saying playing the dom has no place. I do think if you look for order flow at obvious S/R levels (why not use simple charts to see those?) that you can make things easier for yourself. Pretty much agree with most else you said.

[SIUYA 11]

There's always going to be someone who says they're doing well using just XYZ and not using order flow etc, but even if they're are, they're not doing anywhere near as well as what they could be if they knew order flow.

.

 

I agree with you on most of what you say, except this.

I used to work on a trading floor and we saw the order flow so I understand the importance to some, and to some trading styles, but I would counter that as Blowfish mentions - its great for scalping. So as you mention its just another tool that may (or maynot ) help for certain styles.

 

However I and others I know have always done better when I get away from scalping and worrying about what the order flow is doing and trade longer term. Larger size, bigger trends, less leverage, less stress and focus

NB - this is more applicable to different trading styles and account sizes.

[TimRacette 11]

It's pure voodoo, alright! Voodoo economics at its finest. And it works. That's all I really care about.

 

The magic and self fulfilling prophecy. I've found understanding human behavioral psychology is more important than understanding economics when it comes to trading profitably and consistently.

[TheNegotiator 13]

The magic and self fulfilling prophecy. I've found understanding human behavioral psychology is more important than understanding economics when it comes to trading profitably and consistently.

 

Everything is important to some degree. People who don't 'agree' that technical analysis works imo lack understanding more than anything. Skewing the odds of a trade turning out favourably by understanding the basis of current market action is essential to trading success. It is not the only part of success. As with Mad's video and the premise of the 3 legged stool, you can't have one without the other(well unless you're a PC although the algo is still human created (in general)).

 

http://www.videos.traderslaboratory.com/video/901/12-Commandments-of-Trading-Live-Webinar-Replay

 

TheNegotiator.

[Cosa Nostra 10]

you have interesting discussion here! i will be around :missy:

[steve46 12]

Technical analysis is simply making use of the tools of the trade...If you ask a skilled master mechanic if his tools "work" he will probably just laugh at you...of course they do....when he uses them..when someone else uses them the result may differ. I have a small group of folks looking over my shoulder every morning asking similar kinds of questions...once they see it work in real time.....the dialogue changes completely...

 

For technical analysis to work, one has to fit the tools to the job, and to current market conditions....the problem is that most folks don't have sufficient skills or experience to make those calls...and they simply try to apply old tools and old techniques to a dynamic market that has changed significantly since the tools were invented. The result is usually inconsistent performance and slow bleeding of the account down to nothing...(at best)...

 

These days the tools that work are geared toward evaluating broad market balance/imbalance of orders and momentum...most of them aren't even included in charting packages (or they are "add-ons" that you have to pay extra for)...so it isn't surprising that retail traders end up asking these questions.

 

Good luck

[Tams 20]

.

 

 

Technical Analysis is always useful to those who can benefit from it.

 

 

.

[MightyMouse 12]

A market ranges then eventually breaks from the range and trends until it gets to a new range and either breaks from that range in the original direction or breaks from that range in in the opposite direction of the previous trend and so on. It's never the same, its never simple, and there are a zillion conflicting signals while you are in the trade. You will get killed if you trade a range like a trend and you will get killed if you trade a trend like a range.

 

Anything that most of the time helps you identify that you are or will be in a range is great tool. Anything that most of the time helps identify that you are or will be in a trend is a great too. It's foolish to try to do this with your eyes closed.

[TheNegotiator 13]

To me, this is a simple question to answer. Technical analysis does work it's traders that don't. They want a nice simple thing to tell them to do a certain thing which will make them money. When it doesn't work, it's not their fault but the indicator or whatever that isn't reliable.

[AuctionMarket_Trader 10]

Technical analysis is useful if you understand the emotions behind the levels order book and whatever your using....Thats why it works because someone that entered at a level if when price comes back to it will have to make a decision again basically it analyzes behavior of market participants and different prices

[TimRacette 11]

Thanks Negotiator I'll check that out.

[ipfree 10]

I was not sure about TA so I figured the best thing to do is to give it a try. One tool that I used was TurTrades (Test your trades). Using a real account or paper trading takes too long to test if technical analysis works so my approach was to write a program that lets you paper trade using historical real market data. This way I can make a trade and click a button to advance to next day, this way in matter of minutes I can tests days or weeks of data. So far I have came to the conclusion that TA works, but you need to practice if anybody wants help using Turtrades just ask and I will be able to help.

[Logic 10]

This is an age old argument that just never goes away. You have a stronger line between both camps on this issue than you see on most. In my opinion that is because of the shear nature of trading to begin with.

 

Being objective is really hard evaluating both camps if you don't take into consideration all of the parts that make them up.

 

Fundamental Analysis is inherently flawed because it only assesses information supplied by the very individuals inside that particular stock, commodity or futures market. Do you think they have an "agenda" they want to see play out. Absolutely! Over the last 10 years we have seen stock information manipulated in many company's reports to sway investing either toward or away from the current stock price. This isn't a rare occurrence. It happens on a regular basis.

 

I personally deal with the Agriculture industry and know first hand that the USDA (United States Department of Agriculture) manipulates the data they release to the Ag community in order to try to control prices. I've caught them in numerous lies over the years especially when it comes to sending reports regarding foreign country usage, acreage planted and weather. I figure they think they can get away with putting out misinformation because "farmers" are ignorant. I remember a trip I made a few years ago to China and Australia. When I got back I went to an Ag conference where the USDA reps were saying that China and Australia were going to have good crops that year. This was a blatant lie. China crop was blighted that year and Australia was in the middle of another huge drought. The USDA was trying to force the farmers to sell their crops early to keep the supply up. The information they release on local usage isn't much better for accuracy. Other industries in the futures arena aren't any different when it comes to trying to manipulate price direction.

 

Technical Analysis (TA), (old school that is) is just as inconsistent. When it comes to analyzing past data and price flow. I agree that the past is just the past. [i want to point out that unless you are making your decisions using anything other than raw data, if you are looking at a chart in any way shape or form to make your trading decisions (even naked price bars), you are using TA]. Old TA assessed a market (symbol) segment usually based in time or transactions. The problem with that is that the markets are traded in Volume not Time or Transactions. Anytime you assess a chart based in Time or Transactions the weight of the price bars are unbalanced. Unbalanced because there is a different amount of contracts or shares represented per bar. Simple math dictates you can not find a solution to any problem where the components of the problem are constantly changing. This is why edges disappear. This is why profitability is always fleeting. This is why consistency was the Holy Grail that was never found. It's impossible to find consistency in an inconsistent chaotic environment.

 

Call it current TA but this environment is far more stable that the TA of old. What is the difference, Constant Volume Bars™. I'm just not saying that because I created them but because they actually balance out the flow of a chart. On a Constant Volume Bar™ chart, each price bar is the exact same weight. Since the bars are weighted the same, assessing or reading the content of the chart or the data flow is perfectly consistent. The variable aspect of the charts are gone. Now I use the chart layout in a unique way to create my own edge (charts attached) but others that are using these chart structures are all telling me they are seeing an increase in profitability and a consistency they never had before in their own trading styles using Constant Volume Bars™. These bars are available in MultiCharts, NinjaTrader, Tradestation and Sierra Charts that I know of but the only charting platforms that build the bars accurately are MultiCharts and NinjaTrader. I personally use MultiCharts because I find it the most robust and easy to use.

 

I'm telling you that I've been profitable for years not to draw attention to myself but to simply point out it is possible. There are many edges out there that work. I know a number of traders that have been trading for a living for years that either trade nothing like I trade or trade in a similar manner. It doesn't matter. I know day traders that are profitable and I know swing traders that are profitable. I do know that most of these profitable traders purposely don't bring attention to themselves because they don't want to argue that what they do is gambling or that it is impossible to do what they do. Both being ignorant statements.

 

Every math professor I gave my findings to (purposely omitting how they were being applied) after rigorous testing, told me that my findings were flawless. Interesting enough that as soon as I told them how I was applying the math they changed there tone. that is all but a couple of them. One actually retired from his college position and started trading.

 

Just don't limit your focus. Be open minded. Trust what you see not what you think! Work smart not hard.

[ipfree 10]

I was not sure about TA so I figured the best thing to do is to give it a try. One tool that I used was TurTrades (Test your trades). Using a real account or paper trading takes too long to test if technical analysis works so my approach was to write a program that lets you paper trade using historical real market data. This way I can make a trade and click a button to advance to next day, this way in matter of minutes I can tests days or weeks of data. So far I have came to the conclusion that TA works, but you need to practice if anybody wants help using Turtrades just ask and I will be able to help.

 

For some reason the links to Turtrades did not work. Web address is turtrades.com

[Logic 10]

Here are the charts I tried to post earlier.

[SIUYA 11]

As TA is really just a road map of prices - stick yourself on a desert island with the choice of fundamental analysis or TA and try and trade.

Even Warren Buffett - arguably the worlds greatest fundamental investor stills insists on seeing the price.

[joshdance 10]

Old TA assessed a market (symbol) segment usually based in time or transactions. The problem with that is that the markets are traded in Volume not Time or Transactions. Anytime you assess a chart based in Time or Transactions the weight of the price bars are unbalanced.

...

Call it current TA but this environment is far more stable that the TA of old. What is the difference, Constant Volume Bars™. I'm just not saying that because I created them but because they actually balance out the flow of a chart.

 

Logic,

 

The CVB charts you created are great, and in eliminating the time variable, they do smooth the view of price on the chart.

 

Traders may trade contracts which we measure in volume, but do you really think time is an insignificant variable? Do you think 50K contracts traded over 5 minutes indicates a different market sentiment than 50K contracts traded over 15 minutes, given some "normal" number? The market is people--people are by nature time-oriented. Because humans pay attention to time, then so does the market, and you eliminate this valuable piece of information unless you add it to a volume chart with an indicator, much in the way most people use a volume indicator with time-based charts.

 

You can almost feel in the price action when market participants are getting ansy because of a trading range that has lasted all morning that they are ready to get out of. A sharp reversal that happens quickly indicates a different sentiment than one which takes a while to develop. A breakout that stalls (measured in time) may be saying more by what it's NOT doing than what it is doing. A volume-based chart does not show this dynamic. Volume charts are great at filtering if you find the time not helpful, but if you're used to a time chart, then the filtering is automatic, no chart help required.

 

Some go with range charts, some volume, some time, and so on. Each has its advantages. Many prefer range charts and would say that volume and time charts both contain noise, and that the range charts show only what is important: price MOVEMENT, regardless of time or volume. Volume is only useful in relative terms anyway, though in my trading I have found it to be a necessary component of my chart.

 

I personally prefer to use both time and volume when making trading decisions. In my opinion they are both important!

 

Just don't limit your focus. Be open minded. Trust what you see not what you think! Work smart not hard.

 

I'll drink to that!

[Thoth 10]

i think there are many ways to make money with ta some involve just the price and other methods do use the price. there is no doubt that ta can make money is there "really"? in modern times. that would be like saying germs don't exist cause we can't see them "really" come on.

[Logic 10]

Logic,

 

The CVB charts you created are great, and in eliminating the time variable, they do smooth the view of price on the chart.

 

Traders may trade contracts which we measure in volume, but do you really think time is an insignificant variable? Do you think 50K contracts traded over 5 minutes indicates a different market sentiment than 50K contracts traded over 15 minutes, given some "normal" number? The market is people--people are by nature time-oriented. Because humans pay attention to time, then so does the market, and you eliminate this valuable piece of information unless you add it to a volume chart with an indicator, much in the way most people use a volume indicator with time-based charts.

[Logic 10]

Logic,

 

The CVB charts you created are great, and in eliminating the time variable, they do smooth the view of price on the chart.

 

Traders may trade contracts which we measure in volume, but do you really think time is an insignificant variable? Do you think 50K contracts traded over 5 minutes indicates a different market sentiment than 50K contracts traded over 15 minutes, given some "normal" number? The market is people--people are by nature time-oriented. Because humans pay attention to time, then so does the market, and you eliminate this valuable piece of information unless you add it to a volume chart with an indicator, much in the way most people use a volume indicator with time-based charts.

 

You can almost feel in the price action when market participants are getting ansy because of a trading range that has lasted all morning that they are ready to get out of. A sharp reversal that happens quickly indicates a different sentiment than one which takes a while to develop. A breakout that stalls (measured in time) may be saying more by what it's NOT doing than what it is doing. A volume-based chart does not show this dynamic. Volume charts are great at filtering if you find the time not helpful, but if you're used to a time chart, then the filtering is automatic, no chart help required.

 

Some go with range charts, some volume, some time, and so on. Each has its advantages. Many prefer range charts and would say that volume and time charts both contain noise, and that the range charts show only what is important: price MOVEMENT, regardless of time or volume. Volume is only useful in relative terms anyway, though in my trading I have found it to be a necessary component of my chart.

 

I personally prefer to use both time and volume when making trading decisions. In my opinion they are both important!

 

I'll drink to that!

 

I read your post this morning but waited till now to answer. I agree that both volume and time are important but for unrelated reasons. I will explain.

 

You mention an instance were 50K contracts traded over 5 minutes indicates a different market sentiment traded over 15 minutes of a specific contract or stock. Do I agree, absolutely! Does that matter to my charting environment absolute not. Does it matter to time, range or other variable chart environment, it absolutely does. In fact it has to be interpreted in order to accurately utilize the information. Any interpretation of information is in error or the natural occurrences in price action. Now that being said you run into the exact same problem that has plagued traders since they began plotting price action on a chart and that is being able to accurately interpret market sentiment (EMOTION) in a chart. Using time, range or other variable chart increment makes it impossible to "read" emotion.

 

HUMANS PAY ATTENTION TO TIME BUT HUMANS DO NOT TRADE BASED ON TIME. If you can find a single human that places trades based on the time of day and is consistently profitable I will kiss your dancing feet. Humans pay attention to weather and sports scores too but that has nothing to do with price action. Humans put a volume indicator on a time chart because volume is important.

 

Time is only relative to the release of news reports that are relative to the market you are trading. This is only good so you are aware of trading action that will increase during that time. To bad you can't have something that would tell you of consolidation or a lack of liquidity . . . oh yea, my stuff does that.

 

I have objectively programmed what I do based 100% on volume bar charts. This is something that is impossible to do with any other charting environment. As soon as you or your great great grand children figure out how to interpret emotion on a chart. post a blog.

 

You are stating a problem it has taken me 10 years to solve and are too stubborn allow someone to simply offer you the solution. So be it. In 10 years or whenever you may come to the same conclusion I have, let me know.

 

I know you "like" time. I used to like playing in a sand box but I outgrew it. I know that is a smart ass answer but it's appropriate. How long have you been trading Josh?

[joshdance 10]

Using time, range or other variable chart increment makes it impossible to "read" emotion.

 

HUMANS PAY ATTENTION TO TIME BUT HUMANS DO NOT TRADE BASED ON TIME. If you can find a single human that places trades based on the time of day and is consistently profitable I will kiss your dancing feet.

 

I'm sure the successful traders who "read" emotion (isn't that what trading is about after all?) who don't use volume bars would have issue with your first sentence above.

 

Of course, I'm not talking about taking a trade based on the time of day--I'm talking about taking a trade with the information that a certain amount of activity has happened within a certain period of time, for example.

 

To bad you can't have something that would tell you of consolidation or a lack of liquidity . . . oh yea, my stuff does that.

 

I think most traders are able to identify consolidation on any chart type. For volume information, I have volume bars at the bottom of my chart, though liquidity is not nearly as important as price movement. Imbalance of buying and selling produces price movement, not the presence or absence of liquidity, as can be seen in the globex session for many instruments.

 

You are stating a problem it has taken me 10 years to solve and are too stubborn allow someone to simply offer you the solution. So be it. In 10 years or whenever you may come to the same conclusion I have, let me know.

 

I know you "like" time. I used to like playing in a sand box but I outgrew it. I know that is a smart ass answer but it's appropriate. How long have you been trading Josh?

 

You have "A solution" -- is it "THE ONLY solution"? You sound like someone defending an attack on your "baby," and that attack isn't coming from me, I assure you.

 

As for me, I first traded in 2007, lost about $1K because I didn't know what I was doing, and then took some time off until last year, and now I'm trading, and still don't know shi*. I know nothing, and never have claimed such. Everything I say is solely my opinion. I have found over the years that in trading forums, people who claim to have all the answers, to know everything, and particularly those who are condescending to other traders, are 100% of the time bullshi**ers, and usually are selling something to boot.

 

Do you always respond so defensively when others present a different view than yours?