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

[TheDude 10]

  joshdance said:

Your lack of logic and objectivity is actually quite stunning Dude. It's as if you are assuming the role of authority on a tool which you don't even use; you get to define it, then you get to call it crap. Wow...!

 

 

 

:rofl: :rofl: This statement puts into perspective everything you've said so far. I won't "vendor bash" here Dude, but if you think he is legit, when he, like most every other vendor, has never proved that every single chart is not simply marked up at the end of the day, then your logic switch has a short in it somewhere, my friend. Pay him 10 grand, and you get to come trade with him for 5 days--what a deal!

 

 

 

Even your writing style makes it clear that you don't really know what 'you're saying here.' Your lack of organization of thoughts makes it evident that you're pretty much just throwing stuff out there. I'm not really disagreeing with all your conclusions; but your assumptions are very suspect and don't hold a lot of water in my book.

 

as i said earlier - i dont really have much time, and im not really here to convince anyone, so i'll be damned if i'll go away and research, spell check, or worry about the structure of my paragraphs. this isnt a thesis - just off the cusp.

 

sorry if i give the impression of being a bit arrogant, but ive been around 15+ years, so think ive got some skin in the game and know what works and doesnt.

 

as for electronic local - like i said, never met him. he may be snake oil, but the ethos of his system does seem to ring some bells. i kind of like the logic behind it.

Edited June 22, 2012 by TheDude

[Roger Felton 10]

  karoshiman said:

Yes, and many of the other Wizards. But it might have also been the case that they all wanted to mislead us retail traders...

 

The amazing point of TD's post is that NO professional trader uses Technical Analysis...period. Nada, zippo, zilch. Not even a little. That's a very incorrect and narrow-minded assumption.

 

I personally know hundreds of professional traders...several manage very large funds. Every single one of them use TA to some degree.

 

It is totally erroneous to blindly state the contrary without facts. And, sorry TD, but MP is another form of Technical Analysis. But it is a good example of complicated, difficult, and subjective use of TA.

[TheDude 10]

  karoshiman said:

You said, you guess we are talking about CTA's, but we didn't.

 

 

 

 

 

errr who's 'we'? do you mean the royal 'we'? it wasnt you, it was bluehorseshoe. is that another alias you use maybe?

 

how peculiar that you think youre someone else who probably doesnt have a split personality

 

:doh:

[TheDude 10]

  Roger Felton said:

The amazing point of TD's post is that NO professional trader uses Technical Analysis...period. Nada, zippo, zilch. Not even a little. That's a very incorrect and narrow-minded assumption.

 

I personally know hundreds of professional traders...several manage very large funds. Every single one of them use TA to some degree.

 

It is totally erroneous to blindly state the contrary without facts. And, sorry TD, but MP is another form of Technical Analysis. But it is a good example of complicated, difficult, and subjective use of TA.

 

i said they dont use it as the corner stone of their strategy. read the posts again. i made several mentions to the fact almost everyone looks at a chart from time to time.

 

i really dont see that i can be any clearer than saying thats the difference between professional and retail - the extent of the use of ta. that doesnt mean that they dont use it at all. even ive stated i glance at charts from time to time. you really do see the world in black and white dont you.

Edited June 24, 2012 by MadMarketScientist
off topic

[Roger Felton 10]

  TheDude said:

finally, maybe youre confusing cta with cfa? no, not everyone can become a successful cta.

 

No confusion. You specifically named CTA's as the "pros" who never used TA. In trading circles, a CTA is a Commodity Trading Advisor. They are a CTA only because they studied and took a test...not because they are a professional trader.

 

They're like Financial Planners. Many can't even manage their own finances much less anyone else's....but they managed to pass a test.

[karoshiman 10]

  TheDude said:

errr who's 'we'? do you mean the royal 'we'? it wasnt you, it was bluehorseshoe. is that another alias you use maybe?

 

 

 

Sorry, my bad. Thought you were referring with "you" in your earlier post to all of us taking part in the discussion. Overlooked that you were replying to a post of BlueHorseShoe.

[SIUYA 11]

In reality i guess this really does just boil down to definitions, one mans TA is anothers voodoo, is another persons regression analysis of correlation matrix ABC within a fuzzy logic.

 

For the record Dude, my definition is just broader than yours thats all - I pretty much class everything as TA that is not based on fundamental valuations - along the lines of anything that can be derived from price including correlations with other instruments. (In your mind that might be a "weak" definition of TA - in my mind its pretty much the definition - as i agree with you there are higher levels of TA rather than just using a trend line etc; and its often sold as such) (When it comes to the systematic guys, how much "no discretionary input" is another point of definition they gave a presentation once and modified a few things....I was more interested in David Beech prior to that in the history section)

 

(Plus Bravo to the dude as seems like its pick on the Dude day....... he conducted himself well )

[wrbtrader 10]

  TheDude said:

boy! everyones getting a bit anxious on this one.

 

all ive said is pro's dont use ta. and they dont. they may use the odd chart here and there - who doesnt. it may even be part of the strategy. im just saying it's not 100% like retail traders. and theres the key point. the failure rate is MUCH higher in retail than professional environments. and they key difference is the amount of dependence on TA. that is a FACT that is as clear as the nose on your face...

 

Hi TheDude,

 

Maybe you meant to say that the professional traders you know "do not use TA". Simply, I strongly doubt you know every pro trader on this planet and if you did...you would know my family and some of my close friends.

 

My point is this, my experience is just the opposite in comparison to yours. I'm from a family of professional and retail traders (3 relatives) and have several close personal friends that are "institutional traders". They all use charts but not indicators to help with their trade decisions. The use of charts is still technical analysis.

 

Therefore, maybe you meant that those you know do not use "technical indicators" ???

 

Yeah, you're absolutely correct, the typical professional trader (at least the ones I know)...are not as dependent upon TA as the typical retail trader. However, I strongly disagree with you when you suggest that the reason why the failure rate is higher amongst retail traders is due to their use of TA. :rofl:

 

That's like comparing apples to oranges.

 

Most professional traders have compliance office or something that regulates (controls) their trading. Retail traders do not have such. Most pro traders are salary whereas retail traders are not. Actually, I've never met a pro trader that was "not" salary. Most pro traders have access to collaboration resources in their office that retail traders do not have access too. Most pro traders are properly capitalized whereas retail traders are not.

 

My point, the higher failure rate amongst retail traders is not dependent upon their use of TA. Its greatly dependent upon the lack of resources I've mentioned above.

Edited June 22, 2012 by wrbtrader

[TheDude 10]

CAN ANYONE POST A LINK TO ANY RESEARCH THAT PROVES, SCIENTIFICALLY, THAT TA HAS ANY USE IN PREDICTING FUTURE PRICES?

 

although i'd say tarding is more about managing probability than prediction, that staement again would suggest ta shouldnt be the core of any strategy

[Roger Felton 10]

  TheDude said:

i said they dont use it as the corner stone of their strategy. read the posts again. i made several mentions to the fact almost everyone looks at a chart from time to time.

 

i really dont see that i can be any clearer than saying thats the difference between professional and retail - the extent of the use of ta. that doesnt mean that they dont use it at all. even ive stated i glance at charts from time to time. you really do see the world in black and white dont you.

 

"...all ive said is pro's dont use ta." Your very words.

 

I teach a combination of Price Action, Technical Analysis and Trading Psychology.

 

Just out of curiosity, could you please cite the data source that proved that, of all the professional traders there are in the world, not a single one primarily uses Technical Analysis?

Edited June 24, 2012 by MadMarketScientist
off topic

[karoshiman 10]

  TheDude said:

CAN ANYONE POST A LINK TO ANY RESEARCH THAT PROVES, SCIENTIFICALLY, THAT TA HAS ANY USE IN PREDICTING FUTURE PRICES?

 

although i'd say tarding is more about managing probability than prediction, that staement again would suggest ta shouldnt be the core of any strategy

 

 

Nobody said that TA is suitable to predict future prices... would be great, if it would be so...

 

You jump in into the discussion with some bold statements, which are only backed by your statement that you know 100+ professional traders who do not use TA in their trading and now you want from us scientific research?

 

By the way, it's interesting to see that you weakened your initial statement that TA just does not work and hence, professional traders does not use it (they just look at charts from time to time... as a guide)... to: they use it but it's more about the extent of the use of TA between professionals and retail traders.

[TheDude 10]

  SIUYA said:

In reality i guess this really does just boil down to definitions, one mans TA is anothers voodoo, is another persons regression analysis of correlation matrix ABC within a fuzzy logic.

 

For the record Dude, my definition is just broader than yours thats all - I pretty much class everything as TA that is not based on fundamental valuations - along the lines of anything that can be derived from price including correlations with other instruments. (In your mind that might be a "weak" definition of TA - in my mind its pretty much the definition - as i agree with you there are higher levels of TA rather than just using a trend line etc; and its often sold as such) (When it comes to the systematic guys, how much "no discretionary input" is another point of definition they gave a presentation once and modified a few things....I was more interested in David Beech prior to that in the history section)

 

(Plus Bravo to the dude as seems like its pick on the Dude day....... he conducted himself well )

 

thanks - i have no issues if folks want to try and take a piece out of the dude. it wont happen anyway As i mentioned earlier - i knew a load of folk would get p1ssed as soon as i mentioned it was a crock.

 

looking at other areas though:

 

statistical arbitrage

basis trading

long/short equity*

dispersion*

yield curve plays*

spread trading*

market making

etc

etc

 

im sure you can add to the list.

 

these are all professional trading styles - many of which (*) can also be employed by retail tarders. none of them really use TA. most have some sort of hedge built in. they are used by professionals because they have a much lower risk profile. in basis trading for example, risk is really only at the execution level.

 

TA kind of forces people to put all their chips on red or black and pray. i do the same all the time when i scalp or use mp i admit. as wbr trader pointed out - professionls have a risk manager and a whole bunch of other stuff that prevents them from putting it all on black. its just too risky. nothing wrong in that when its your money.

 

however ta approaches have zero evidence to back them up. mp does have a proven statistical edge. scalping doesnt because its very much in the eye of the holder - but as there are fewer inputs, its less subjective (IMO) which in turn reduces risk v ta.

 

the NUMBER ONE priority in any trading endeavour is capital preservation. it comes before making money. saying you have a stop at a ta point (or vol point) just doesnt cut it. the strategy inherently needs to be a low risk approach and ta just doesnt provide that. its too subjective which is why pros dont really use it.

[DbPhoenix 42]

  SIUYA said:

In reality i guess this really does just boil down to definitions, one mans TA is anothers voodoo, is another persons regression analysis of correlation matrix ABC within a fuzzy logic.

 

For the record Dude, my definition is just broader than yours thats all - I pretty much class everything as TA that is not based on fundamental valuations - along the lines of anything that can be derived from price including correlations with other instruments.

 

Unfortunately, James started all this (six years ago) by providing an inaccurate definition of TA. This sets up the strawman scenario.

 

As you say, TA is whatever isn't FA. Specifically, it is the analysis of the balance between demand and supply as manifested in price movement. It need have nothing to do with bars or volume or indicators or patterns or even charts. TA in its simplest form was going on long before Schabacker.

 

TAs have no interest in cash flow or revenues. FAs have no interest in the current price, whether intraday, daily, weekly, or even monthly (a large part of the problem at The Motley Fool in 2000).

 

Are "patterns" useless in intraday trading? Pretty much. But they're not of much more use in daily trading (note those who call H&S patterns without understanding why they form). But patterns do not define TA any more than indicators do. TA is, again, the analysis of the balance between demand and supply as manifested in price movement. Damning it due to all the futzing around that the ignorant do with it is off the mark.

 

Db

[TheDude 10]

  Roger Felton said:

I teach a combination of Price Action, Technical Analysis and Trading Psychology.

 

Just out of curiosity, could you please cite the data source that proved that, of all the professional traders there are in the world, not a single one primarily uses Technical Analysis? That statement is just so blatently biased it's no wonder you hide behind a phony name....I would too. Stay in the shadows and you can make all the outrageous statements you want.

 

again, you need to read the posts again as your statement is wrong.

 

for someone who teaches psychology, i would have thought you would have been a little more stoic. something seems to have rattled your cage.

Edited June 24, 2012 by MadMarketScientist
off topic

[TheDude 10]

  DbPhoenix said:

As you say, TA is whatever isn't FA.

 

Db

 

 

sorry, but imo, thats just nuts.

 

so there are only 2 boxes in the world and everything must fit into one of them. if it doesnt fit into fa, it goes in the other box.

 

crazy.

 

so what about neural nets? statistical inference? and many other data mining techniques that are looking at relationships and patterns (not on a chart!!) in the data/between markets.

 

that sure aint ta, and it isnt fa (in my book). maybe theres a 4th box - and a 5th?

 

i hope i havent taken a flippant comment too seriously. that would make me a hypocrite of course :haha:

[Roger Felton 10]

  TheDude said:

CAN ANYONE POST A LINK TO ANY RESEARCH THAT PROVES, SCIENTIFICALLY, THAT TA HAS ANY USE IN PREDICTING FUTURE PRICES?

 

although i'd say tarding is more about managing probability than prediction, that staement again would suggest ta shouldnt be the core of any strategy

 

Trading is a lot like trying to predict the weather. The farther out you try to go, the more exposure you have to the random variables of nature that increase the odds of error. Predicting the weather for the next 5 minutes or so requires much less training and tools. But you at least need a wind gauge and a thermometer to eliminate guessing.

 

Weather prediction is nothing more than gathering data, crunching that data and applying it to historical data in order to predict a future result. You have to use the right tool in the right way to get the right answer. How is that different from trading?

 

In our weather prediction analogy, someone could come up with an indicator that tracked various cloud formations...bears, horses, boots, etc. and then spit out a forecast that was usually wrong. If this is the only indicator a meteorologist ever sees, they might conclude that all "tech analysis" is bunk.

 

If my experience and knowledge in TA was limited to H&S formations, crossover MA's, Fib retracement and Market Profile, I would probably consider TA to be a crock of hooey, too. I think that's probably where you're at. Probably not your fault either, since 90% of the common off-the-shelf TA indicators are flat useless. To get the results I wanted, I had to create new means for gathering and crunching data. In order to be an expert in TA, you have to study it in great depth for many years. You also need to approach it with an open mind.

 

I studied MP for over 2 years and tried very hard to find some level of usefulness. I found it to be the biggest waste of time and effort I had ever spent in my 35 years of trading. But I still have an open mind that somehow it might be useful to someone else. If someone is getting all the success in trading that they ever dreamed of, who am I to say that person is doing it wrong?...and who are you?

[SIUYA 11]

  TheDude said:

however ta approaches have zero evidence to back them up. .......

 

probably true (and really again a bit about definitions) couldn't you could also say the same thing about fundamental analysis. There is the never ending debate about passive v active trading.....why pay someone to outperform an index when there is no scientific proven fundamental analysis that works and will outperform....and yet all these guys seem to think that active fundamentals research and 1000s company visits each year give them an edge.....the reality shows it probably does not.....hence maybe a lot has to do with

what ever method you use as wrb said there is more to it.

Plus DBPhonix and I as we define it there are two boxes - TA and FA - then there are subsets in all both those.....there is nuthing nuts about that - its a starting point.

All the data mining you talk about.....if its data mining whereby no fundamental supply data inputs (eg; cash flows, sales, EBIT, weather patterns etc) then what other data is there except that derived from price (moon cycles really mean you are flying on Firday arvo)

 

 

  TheDude said:

the NUMBER ONE priority in any trading endeavour is capital preservation. it comes before making money. saying you have a stop at a ta point (or vol point) just doesnt cut it. the strategy inherently needs to be a low risk approach and ta just doesnt provide that. its too subjective which is why pros dont really use it.

 

my imaginary lines do that- dont yours?

You can use TA to manage probabilites not just predictions......its a road map not a horoscope.

 

Just reading the latest market wizards book and reading one trader (Joe Vidich)

quoting....

What is your opinion on stop orders? They are for fools.

Do you use charts? Charts are extremely important.

 

but I agree with your sentiments

always interesting....any how Dude have a good weekend. Thanks.

Edited June 22, 2012 by SIUYA

[DbPhoenix 42]

  TheDude said:

sorry, but imo, thats just nuts.

 

so there are only 2 boxes in the world and everything must fit into one of them. if it doesnt fit into fa, it goes in the other box.

 

crazy.

 

so what about neural nets? statistical inference? and many other data mining techniques that are looking at relationships and patterns (not on a chart!!) in the data/between markets.

 

that sure aint ta, and it isnt fa (in my book).

 

Actually, they are TA, though perhaps not by your definition. And, as I said, charts aren't necessary. Early tape readers didn't use them, though they may have used P&F notations. Many modern-day tape readers don't use them either. Charts are an elective, not a required.

 

Db

[Roger Felton 10]

  TheDude said:

again, you need to read the posts again as your statement is wrong.

 

for someone who teaches psychology, i would have thought you would have been a little more stoic. something seems to have rattled your cage.

 

Dude, first you said that no professional trader uses TA, period. Then you amended it to say "cornerstone" of their trading.

 

Here are the direct quotes:

 

"all ive said is pro's dont use ta."

 

"...professional traders have also found ta just dont work."

 

"all im saying here is that out of ALL professional traders ive PERSONALLY MET ... NONE of them trade using TA as the cornerstone of their strategy."

 

Everytime I quote you, and address your statements, you flip flop. What statement is wrong now?

Edited June 24, 2012 by MadMarketScientist
off topic

[Roger Felton 10]

  DbPhoenix said:

Actually, they are TA, though perhaps not by your definition. And, as I said, charts aren't necessary. Early tape readers didn't use them, though they may have used P&F notations. Many modern-day tape readers don't use them either. Charts are an elective, not a required.

 

Db

 

It's impossible to have a meaningful discussion if we make up our own definitions. So now we have TA, FA and Dark Matter?

[Roger Felton 10]

My first 10 years of trading were in penny stocks. Did pretty well, actually, but hated the research. It was all fundamentals and intuition so nothing like I trade today. Didn't start with TA until about 25 years ago and that's when my real experience began.

 

When I first started speaking at the major tradeshows in late '98, I would be addressing anywhere from 500 to 1500 traders from all over the world. One of the first things I'd ask during my presentation on "The Future of Futures" was, "How many of you have heard of the S&P 500 E-minis?" Maybe 5 hands would go up on a good day.

 

If you check the volume growth of the S&P E-mini, it stayed pretty flat for the first 2 years (it launched by the CME in Sept. '97). Then, when the tech bubble burst in Apr. 2000, traders were more than ready to move to something besides equities. Getting totally destroyed will cause you to look around a bit, you know.

 

It was then that the E-minis really took off and the growth went ballistic. But then, I told 'em it would back when they were too busy in the bubble to listen.

 

15 years from their launch, most traders are at least aware of the E-minis. So a relative newcomer like yourself, mits, can't imagine a time when most traders would offer a blank stare when asked about them...but that time really did exist once.

Edited June 24, 2012 by MadMarketScientist
no personal attacks please - thanks

[ForexTraderX 10]

  Roger Felton said:

Trading is a lot like trying to predict the weather. The farther out you try to go, the more exposure you have to the random variables of nature that increase the odds of error. Predicting the weather for the next 5 minutes or so requires much less training and tools. But you at least need a wind gauge and a thermometer to eliminate guessing.

 

Weather prediction is nothing more than gathering data, crunching that data and applying it to historical data in order to predict a future result. You have to use the right tool in the right way to get the right answer. How is that different from trading?

 

In our weather prediction analogy, someone could come up with an indicator that tracked various cloud formations...bears, horses, boots, etc. and then spit out a forecast that was usually wrong. If this is the only indicator a meteorologist ever sees, they might conclude that all "tech analysis" is bunk.

 

If my experience and knowledge in TA was limited to H&S formations, crossover MA's, Fib retracement and Market Profile, I would probably consider TA to be a crock of hooey, too. I think that's probably where you're at. Probably not your fault either, since 90% of the common off-the-shelf TA indicators are flat useless. To get the results I wanted, I had to create new means for gathering and crunching data. In order to be an expert in TA, you have to study it in great depth for many years. You also need to approach it with an open mind.

 

I studied MP for over 2 years and tried very hard to find some level of usefulness. I found it to be the biggest waste of time and effort I had ever spent in my 35 years of trading. But I still have an open mind that somehow it might be useful to someone else. If someone is getting all the success in trading that they ever dreamed of, who am I to say that person is doing it wrong?...and who are you?

 

Agree with the "create new means", as well as study TA in depth for years to really get it.

 

To the OP and others:

 

As for definitions, I think fundamentals are anything other than price or volume derived, quantifiable factual information that can reasonably be used to determine if a market is more likely to go up, or down, over some period of time. Sentiment and sentiment analysis is more a measure how the market is interpreting and acting on both fundamental information, as well as various expectations of fundamental information both past and future, and relatively "overbought" or "oversold" market conditions (COT analysis can help with this type of idea).

 

Technical analysis, IMO, is anything that is primarily derived from price, volume, and the fluctuations of both price and volume over time. This would include stat arb, since stat arb opportunities arise as a function of changes in price over time, as well as trend, market correlations,

 

And finally, "tape reading" - which doesn't so much consider price, or the change in price over time, but more focuses on liquidity as a function of bids and offers, and the fluctuation of bids and offers over time. Rather than as a change in price over time (as tech analysis fall under, IMO), tape reading is the change of bids/offers over time. This DOES affect price of course (so it in fact has a direct effect on what data is produced and then used by tech analyists), but it is, IMO a distinct catagory.

 

These are the 4 catagories IMO, and this is how I see they break down. TBH, it seems like an argument of semantics more than anything else, other than simply to say "I don't believe the following specific chart patterns are effective edges in the market"

 

I disagree there too, to a degree.... as classic chart patterns can and do work, depending on the circumstances they appear under.

 

TraderX

[wciszak 10]

Technical analysis is simply a toolbox. Some tools are more useful than others, all need to be used properly. What we use the tools for is to build something. What we build with technical analysis is predictive signals. We cannot blame tools for building a leaky roof and we cannot blame technical analysis for building a trading system that loses money.

[Logic 10]

  wciszak said:

Technical analysis is simply a toolbox. Some tools are more useful than others, all need to be used properly. What we use the tools for is to build something. What we build with technical analysis is predictive signals. We cannot blame tools for building a leaky roof and we cannot blame technical analysis for building a trading system that loses money.

 

Understand that you can use those tools to build "Reactive" signals as well. Reactive signals are completely different than predictive signals.

 

You are absolutely correct when you say that, "we cannot blame technical analysis for building a trading system that loses money". The problem is that very very few people, including the high paid quants, know how to first define the environment they are trying to build signals into and second, they are clueless on how to make them consistently profitable over long periods of time.

 

I used to spend, literally hundreds of hours, trying to persuade people that were hard headed and "thick as a brick" that there was an easier way to create systems but I gave up. Now I co-manage 2 funds, one is a 1/3 billion dollar private fund that has been around for over 13 years and I just keep my mouth shut. We did over 15% last month in the one I am primary on and I consider that a shitty month.

[BlueHorseshoe 10]

  Logic said:

Understand that you can use those tools to build "Reactive" signals as well. Reactive signals are completely different than predictive signals.

 

You are absolutely correct when you say that, "we cannot blame technical analysis for building a trading system that loses money". The problem is that very very few people, including the high paid quants, know how to first define the environment they are trying to build signals into and second, they are clueless on how to make them consistently profitable over long periods of time.

 

I used to spend, literally hundreds of hours, trying to persuade people that were hard headed and "thick as a brick" that there was an easier way to create systems but I gave up. Now I co-manage 2 funds, one is a 1/3 billion dollar private fund that has been around for over 13 years and I just keep my mouth shut. We did over 15% last month in the one I am primary on and I consider that a shitty month.

 

Hi Logic,

 

I consider myself somewhat persuadable - please could you share a little about the easier approach to creating systems that you advocate?

 

BlueHorseshoe