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

[Kiwi 16]

Re psychology, in my earlier post I said:

 

If by IS you mean its there NOW then No. It takes time for the markets to adjust to information so although peoples reactions to information will be reflected in price, there is a time lag and opportunity for both fundamentalists and trend followers on various timescales as a result.

 

Key points from a trading perspective are that there is lag and that what is reflected in price is peoples reactions to information.

 

I neglected to recognize that it's also peoples reactions to prices historical (and very recent) behaviour so there is a second order effect. Re psychology, we need to remember that its also the reactions of machines (programs) to the recent (milliseconds potentially) price and volume action.

 

The reactions to price and volume action will be partially responsible for both the overreaction of markets (people jump on because they can't miss out) and the under reaction (people holding back even though they have new information because they want to see if the "market" reacts to the information).

[torero 10]

Ok, let's end this argument once and for all. Here's Wikipedia's definition:

 

"Technical analysis, also known as charting, is the study of the trading history (the price and volume over time) of any type of security (stocks, commodities, etc.) to attempt to predict future prices. In its purest form, technical analysis is concerned only with the actual price behavior of the instrument, based on the theory that all other factors affecting valuation will be reflected in the price before an investor can become aware of them through other channels."

 

Technical analysis - Wikipedia, the free encyclopedia

 

So, if you're analyzing price or volume, it's TA. That goes for MP, VSA, etc.

[Kiwi 16]

And as much as I love Wikipedia I note that even High School students are no longer allowed to quote it as a source in assignments. Too unreliable.

[walterw 10]

Hey Kiwi Wikipedia has nice things men ¡¡ even you can learn chartpatterns jejejej..... ok very good conclusions, now can somebody start a good sound technicall thread, so we can enjoy ourselves with some good TA ¡¡¡ ?? jejeje good trading today¡¡ cheers Walter.

[dalby 10]

soultrader, you admitted you were wrong? this violates internet macho protocol 19-65 (b) that states that "No participant in internet chat or bulletin board posting can ever admit they are wrong about anything, lest the entire edifice of internet argumentation collapse."

 

 

seriously, though - props for your post.

[dalby 10]

what is at issue here in this discussion of TA : Psychology.

 

I see this same sort of tactic in almost all areas of study, not just stocks.

 

There will be a clearly defined term for a school of thought or practice.

 

Some people who use a subset of same will try to distinguish THEIR method or practice or understanding by distinguishing it as NOT part of the greater set.

 

For example: market profile.

 

TA is defined as the study of price qua price. Iow, not the fundamental reasons WHY price did X, but WHAT price is doing and has done.

 

Clearly, Market Profile is just another way of modeling price over time vs. bar charts or PnF charts, etc.

 

Thus, it is a form of TA.

 

But market profile adherents want to distinguish since OTHER TA is "icky" and "non-scientific" in their eyes.

 

I've seen this tactic (usually unconscious) in everything from weight training to martial arts to rocketry

[Thoth 10]

I have seen someone trade using data from another market to successfully trade yet another market, so I think that dispels the myth that price action is everything. Especially when you don't even have to use the price of the market your trading to trigger the buy sell decisions off of. Anyone ever heard of this?

 

I knew a big sp pit trader who never let the price of the sp decided if he was going to buy or sell. Did you know there is a board in the sp pit and I once asked who decides what is on that board. I was told well the members decide what is on that board, that's who.

 

maxux

[Anonymous 11]

I have seen someone trade using data from another market to successfully trade yet another market, so I think that dispels the myth that price action is everything. Especially when you don't even have to use the price of the market your trading to trigger the buy sell decisions off of. Anyone ever heard of this?

 

I knew a big sp pit trader who never let the price of the sp decided if he was going to buy or sell. Did you know there is a board in the sp pit and I once asked who decides what is on that board. I was told well the members decide what is on that board, that's who.

 

maxux

 

"Every time I think I'm out............they pull me back in". LOL

 

 

First of all Price is king. It is reality. Price and Volume are the only two indicators. But, we all know how I feel :p

 

The actual person to talk to is NihabaAshi. His mastery as a price action trader is humbling and something to strive for by those who call themselves students of the markets or price action only traders.

 

Now what you do not understand is the concept of correlation. Market A can be positively correlated with Market B. The more that number tends to 1, the higher the correlation. Market A can be negatively correlated with Market B. The more that number tends to -1 the higher the correlation.

 

With positive correlation, as Market A goes up, Market B goes up also.

 

With negative correlation, as Market A goes up, Market B moves equally, but in the opposite direction. That is, down.

 

Therefore, a price action trade using specific price set- ups may look for those set -ups on a broad range of markets. If the set-up appears in Market A the correlation with market B should mean that B goes up also. Hence a trade in B can be signaled by the price action of A. But it remains all about the price action.

 

More specifically, NihabaAShi uses candle patterns. Some of which are discussed on the elitetrader.com forum thread "trading hammers (revisited)". Now if market A meets the requirements of (his) valid hammer pattern, but market B only has a hammer line (a hammer line traverses to hammer pattern if and only if ALL the requirements are met), a trade in Market B can still be made both because of PRICE ACTION (which was in Market A) and Correlation (which is a statistical phenomena).

 

Simply, Price, volume, volatility , and news events are used to make trading decisions. The fact that some markets trade together is used to broaden the chance for opportunities, especially when the pattern requirements are so exacting.

 

p.s. He does not only use hammer patterns. He was one of the first to discover WRBs and WRBs is his primary method. Japanese candlestick are his secondary method..............

 

p.s.s. I use WRB & Long Shadow analysis and VSA as my primary methods. I am learning Japanese canldesticks as the secondary method. I currently trade the EURO. But I can make "sister" trades in the EURO based on the Price Acion of the SWISS FRANC because it is highly correlated (negatively) with the EURO. That is, when the SWISS FRANC goes up, the EURO goes down.

[torero 10]

I have seen someone trade using data from another market to successfully trade yet another market, so I think that dispels the myth that price action is everything. Especially when you don't even have to use the price of the market your trading to trigger the buy sell decisions off of. Anyone ever heard of this?

 

I knew a big sp pit trader who never let the price of the sp decided if he was going to buy or sell. Did you know there is a board in the sp pit and I once asked who decides what is on that board. I was told well the members decide what is on that board, that's who.

 

maxux

 

If this pit trader used the price data of another market, it's still TA. TA is TA is TA, whether price of another market or not. Whether who determines what's on the board, doesn't matter, if price is on that board, it is......... TA.

[Thoth 10]

If this pit trader used the price data of another market, it's still TA. TA is TA is TA, whether price of another market or not. Whether who determines what's on the board, doesn't matter, if price is on that board, it is......... TA.

 

Then what would be considered fundamental trading? Why wouldn't fundamental trading also be considered TA? I think there is TA and then there is TA.

[dalby 10]

generally speaking, fundamentals are much harder to use and have less utility, as one moves into short time frames.

 

for example, nobody scalps the dow based on fundamentals. what the dow is at now vs. 15 seconds from now is a matter of supply/demand inequities (which TA helps you ferret out) vs. the PE of the 30 dow stocks, or the balance sheet of MSFT.

 

etc.

 

personally, some of my best investments/trades have been done without looking at ANY TA - no chart, etc. SOLELY based on fundies. but that's on a longterm timeframe (well, longterm for a person who scalps dow futures)

 

if you are buying YM at X expecting it to pop 5 to 10 points in the next few seconds, etc. you obviously are relying on TA.

 

i do both.

[TheBramble 10]

If this pit trader used the price data of another market, it's still TA. TA is TA is TA, whether price of another market or not. Whether who determines what's on the board, doesn't matter, if price is on that board, it is......... TA.

Absolutely spot on torero. AND...I also take price movements from other sectors and other markets into account when assessing my technical position.

 

So, where is the money flow:Gold, Oil, Stocks, Bonds? And what does that mean short, medium and long term? That's the thing. Where does good old TA finish and FA start?

 

If I'm looking at the flow of money out of Bonds caused by changes in the interest rate or protective moves into oil and I use that price/yield data to make an assessment of my short term bias in stocks in the enrrgy sector for instance - is that TA or FA?

[torero 10]

I think if Warren Buffet were a pit trader, he'd be a broke in 2 days. FA is good at looking long term, TA is for confirming that long term and short term outlook and timing the entries/exits. Each has its usefulness. Unfortunately, I can't hold a trade beyond 2-3 days so FA is not helpful enough to considerate it at all.

[Kiwi 16]

Defn: TA = the analysis of price or price and volume to determine probable future price movement (note avoidance of the predict, all, and is words sometime used in such definitions).

 

Defn: TA Trading = trade entry and exit management based on understandings gained from the observation of price or price&volume. Filters such as indicators, market profile etc may or may not have been applied depending on the sect of the analyser.

 

Note: Your TA is voodoo if its not what I do. But your voodoo may work even if it isn't what I do.

 

Note: Intermarket analysis may or may not be considered TA depending on individual preference ... personally I favour regarding IMA as a fundamental because movement in another market is like a fundamental change, it provides a force on a market but the market may or may not respond to that force: and TA is the observation of the primary market to decide if it is (probably (probability always)) responding to the forces.

[dalby 10]

kiwi, great post. i think that puts it very well

 

btw, i can't understand people who won't hold a stock for more than 2-3 days?

 

there are so many wonderful INVESTMENTS out there. sure, i scalp YM for a living, but i INVEST for the longterm.

[Horus 10]

Let's move back to Auction Market theory. The sole purpose of the market is to find that place where there is a disagreement on value and an agreement of price.

 

If there are some traders that know something and are thus bullish, PRICE WILL reflect that bullishness. We are talking about traders IN THE MARKET. And if they are in the market then their bullishness creates a disagreement on value, but that disagreement on value is matched at a point where the bear agrees on price.

 

There is a buyer for every seller. So if the bulls know more than the bears, it must be reflected in price even before the information is known to all.

 

What does that mean?

 

* There is no such thing as Bullish/Bearish consensus. Price already reflects the values of the bullish traders in the market and the bearish traders. So all those reports on such are simply bogus. Any number that states the bullish consensus is 85% simply has not asked enough bears. It must be 50%/50%

 

* There is no such thing as overbought or oversold. Each price is a two sided transaction. The market functions to find that place where the two come together. By definition this is an equilibrium. Certainly not stable , but equilibrium none the less.

 

So using TA to find overbought or oversold conditions is felonious from the start. One is attempting to measure something that does not exist. Price is where it is at, because it is supposed to be there; and price is supposed to be there because that is where it is at.

 

Price is king. Hence whatever says price should be doing something else is irrelevant (note necessarily wrong, just irrelevant). Price may head down from point x, but it has nothing to do with the fact your Fibonacci vortex said it should. Price simply does not move down because RSI is in "overbought" territory. INDICATORS DO NOT DRIVE PRICE.

 

* There is no such thing as "price over-reacting". Price is where it is at because it is supposed to be; and it is supposed to be there because that is where it is at. Those that say, "the market over-reacted and moved too far..." are speaking in code. What they mean is," Price has moved further than I thought it would......"

 

Does the market at times move 100 points in one day and then move back down 100 points the next? Clearly. BUT EVERY PRICE ALONG THAT WAY WAS A VALID PRICE BECAUSE A TRADE WAS FACILITADED THERE. That's the definition of price.

 

Those that embark on TA to tell them what the market should do, rather than the reality of what it is doing, are walking on a tenuous path. Indicators are derivatives of price and therefore have lag. Lag does not have to be a bad thing. But as indicators are derived from price, they cannot Drive future price action. Herein lies where most people come into trouble.

 

Price is reality.

 

1. Price is not driven by Technical

 

2. Price is the best instrument for gauging future price direction. That is, what price is doing now is the best "prediction" of what price will be doing in the future.

 

What is price driven by then? Its not driven by price itself!! Its driven by technical, fundamental, emotions and news.

 

I dont even need to look at the price of SP to trade it... Nor do I need the volume. So I guess your assumptions are not entirely true. OddBall System is proof of the fact that you do not need to look at charts to predict direction in a consistent manner to make money.

 

Overbought and oversold (Bullish/Bearish consensus) conditions do exist, and are driven by fear and greed. Emotions and news drives price which cause these conditions. And can be measured to an extent which provide a statistical bias one way to other.

 

Price is an important factor in any analysis style, however not key to making consistent profits and Profits are the goal of any trader. (at least it should be!!)

[Anonymous 11]

What is price driven by then? Its not driven by price itself!! Its driven by technical, fundamental, emotions and news.

 

SUPPLY AND DEMAND.

 

Technical are derivates of price and can not therefore drive price. They are calculated on past prices so how can they lead future price?

 

Emotions and news drive trader's actions. That is buying and selling. But buying is Demand and Selling is Supply.

 

Overbought and oversold (Bullish/Bearish consensus) conditions do exist, and are driven by fear and greed. Emotions and news drives price which cause these conditions. And can be measured to an extent which provide a statistical bias one way to other.

 

Every price where there is a transaction involves two parties: a buyer and a seller. No matter what the price, there is always somebody on the other side. Hence, how there is no such thing as overbought or oversold.

 

This is especially evedent in the indecies, where no contract is made until a buyer and seller come together.

 

Yes, Professional Money uses the retail trader's greed to get them to buy tops, but that has nothing to do with the felonious condition of overbought.

 

The Smart money uses the retail trader's fear and pain to get them to sell at bottoms, again nothing to do with the felonious notion of oversold.

 

Price is an important factor in any analysis style, however not key to making consistent profits and Profits are the goal of any trader. (at least it should be!!)

 

Price is not an important factor in most analysis styles, which is why most traders do not make consistent profits.

[Anonymous 11]

Overbought/Oversold or Bullish/Bearish consensus example:

 

We ask 10 people if they are bullish. They all say yes and they are long. Well, there is a bear on the other side of the trade (the seller). Therefore the amount of bulls and bears is equal.

 

Now we ask 10 more people if they are bullish and they say yes. But these 10 are NOT in the market. Their opinions don't matter. If they are not willing to "place a bet" based on their beliefs then they need to be discounted. Hence to say the market is overly bullish or overbought is incorrect.

 

To be sure, at this time there is a general euphoria for the market, as seen in the large number of "bulls". But the market is still evenly dispersed. If any of the second 10 want to go long, a as of yet un-asked bear must take the other side of the transaction. So any measure that comes up with either an overbought or bullish consensus, including those NOT in the market, simply has not asked enough bearish people.

 

But what do you really care about the opinions of those who are not in the market?

 

Now as soon as the other 10 enter the market (a bear lets them in), Price reflects that. That is, if the bulls are more enthusiastic about buying than the bears are about selling then price will rise. There will still be an equal amount of bulls and bears, however.

 

This also means that while the 10 new bulls may know something the bears do not, price must reflect that information. Price reflects it, even if all don't know it.

[Kiwi 16]

Awwww commmonnn ... the facts are getting fuzzy as hell.

 

 

"Technical are derivates of price and can not therefore drive price. They are calculated on past prices so how can they lead future price?"

 

Rubbish (to Horus too). Price can drive price (and thus so can derivatives of price) ... see the typical overreaction in the marketplace ... that's not just driven by fundamentals and news, its frequently driven by peoples reactions to what's happening to price.

 

 

"This is especially evedent in the indecies, where no contract is made until a buyer and seller come together."

 

Presumably you mean in futures contracts based on the future value of indexes. Still wrong really. Sure you need a buyer and seller (of kinds) to create the contracts in the first place but most day to day trading doesn't require the creation of new contracts.

 

 

"We ask 10 people if they are bullish. They all say yes and they are long. Well, there is a bear on the other side of the trade (the seller). Therefore the amount of bulls and bears is equal."

 

Here we go again. Frequently in a market move up the buyers are bulls but the sellers are not bears ... they are people who went long at a price they perceived as value and are now unloading positions for a profit. So they are hardly bears and in fact after a pull back and the re-establishment of value may be active bulls again. Come to think of it, substantial elements of an up move are driven by bears who sold too early and are thus buying back contracts as cascading stops are smashed. They may still be bears, just bears in pain.

 

 

There's more but that's enough from me.

[torero 10]

kiwi, great post. i think that puts it very well

 

btw, i can't understand people who won't hold a stock for more than 2-3 days?

 

there are so many wonderful INVESTMENTS out there. sure, i scalp YM for a living, but i INVEST for the longterm.

 

I don't trade stocks, it's why my holding is no more than 1 week. If I did trade them, it would be a better way to longer term. I gave up stocks a while back ever since I found eminis and cannot devote enough time to do all the homeworks (scans, calendar of earnings, etc).

[walterw 10]

What is price driven by then? Its not driven by price itself!! Its driven by technical, fundamental, emotions and news.

 

I dont even need to look at the price of SP to trade it... Nor do I need the volume. So I guess your assumptions are not entirely true. OddBall System is proof of the fact that you do not need to look at charts to predict direction in a consistent manner to make money.

 

Overbought and oversold (Bullish/Bearish consensus) conditions do exist, and are driven by fear and greed. Emotions and news drives price which cause these conditions. And can be measured to an extent which provide a statistical bias one way to other.

 

Price is an important factor in any analysis style, however not key to making consistent profits and Profits are the goal of any trader. (at least it should be!!)

 

 

 

Horus : can you explain what the odball does, never heard about it, thanks Walter.

[Anonymous 11]

Awwww commmonnn ... the facts are getting fuzzy as hell.

 

 

"Technical are derivates of price and can not therefore drive price. They are calculated on past prices so how can they lead future price?"

 

Rubbish (to Horus too). Price can drive price (and thus so can derivatives of price) ... see the typical overreaction in the marketplace ... that's not just driven by fundamentals and news, its frequently driven by peoples reactions to what's happening to price.

 

 

"This is especially evedent in the indecies, where no contract is made until a buyer and seller come together."

 

Presumably you mean in futures contracts based on the future value of indexes. Still wrong really. Sure you need a buyer and seller (of kinds) to create the contracts in the first place but most day to day trading doesn't require the creation of new contracts.

 

 

"We ask 10 people if they are bullish. They all say yes and they are long. Well, there is a bear on the other side of the trade (the seller). Therefore the amount of bulls and bears is equal."

 

Here we go again. Frequently in a market move up the buyers are bulls but the sellers are not bears ... they are people who went long at a price they perceived as value and are now unloading positions for a profit. So they are hardly bears and in fact after a pull back and the re-establishment of value may be active bulls again. Come to think of it, substantial elements of an up move are driven by bears who sold too early and are thus buying back contracts as cascading stops are smashed. They may still be bears, just bears in pain.

 

 

There's more but that's enough from me.

 

And the sun doesn't actually rise: the earth rotates. lol

 

True, during a day you can have one new bull enter the market and the seller can be already long, but liquidating. BUT THAT TRANSACTION HAS ONE BUYER AND ONE SELLER.

 

The market will bring them together at a point where their disagreement on value is at an agreed upon price. Therefore every price will be valid and has two sides. Hence No overbought or oversold condition can exist.

 

Since all prices are valid, as each party in a two side transaction are willing to do business at that level, markets can not overract.

 

Anybody that says the market is overreacting (to the upside) is saying "price has move further than I thought it would". Or, "I am short and getting my a** handed to me".

 

Like you said , a new contract is not necessarily created on every transaction. But every transaction has two sides and so a new buyer still has to be let in by a seller. Now if the seller is not a "bear" as you posit, then you only further prove that Bullish/Bearish consensus does not exist as it is would not correctly reflect market reality. That is: two bulls here, but only 1trade made so the market is still equal from the standpoint of 1 buyer and 1 seller.

[Kiwi 16]

PivotProfiler,

 

You are anthropomorphising the the market and imposing your beliefs on it. So your first statement of your beliefs does appear representative of you market views as well: "And the sun doesn't actually rise: the earth rotates."

 

Please come and trade the HSI some time.

[Thoth 10]

Horus : can you explain what the odball does, never heard about it, thanks Walter.

 

im not hourus and im not an expert on the oddball system but i can tell you that the guy who published it proved beyond a doubt that you dont need the price of the sp to determine buying and selling the sp.

 

the oddball somehow uses the advancing issues of the nyse to predict buy and sells on the sp. i never traded it myself but for two years the thing made zillions in real time on a free web site where the trades were for anyone to use.

 

active trader magazine has back articles on it and you can look on the web i think there are some postings as well on a second oddball system he published latter in the same magazine. i am serious when i say the system predicted the sp moves, it was amazing. then one day the web site was gone and the guy disappeared.

 

Thoth

[walterw 10]

well no rocket cience, that would be timing entries with an internal.... lot of people trade that way.... any way can get tricky.... think internals should only be a backup analisis....