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

[TheBramble 10]

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

Just finished reviewing the system so I'll jump in if that's OK.

 

You work with the close on the the hourly of the Advancing Issues (NYSE) data with a 7 period (7 trading hours) ROC. It's an 'always on' system in that you're always in the market (which disqualifies it immediately from my toolkit).

 

According to the published details, you review and potentially take a position every hour, which indicates potential pyramiding, but elsewhere it refer to a 'constant number of conteracts' so I guess I'm reading that part incorrectly.

 

Where the RoC on the Advancing issues is greater than a 3 percent increase, you close any short and take a long.

 

Where the RoC on the Advancing Issues is less than a 1 percent increase, you close any open longs and take a short.

 

It is suggested you use the S&P futures to allow the NYSE close Advancing Issues data to be utilized on that day in the futures.

 

It has performed well and it has perfomred badly on my back-test review. Pretty much the same as my randon coin toss system has.

 

YMMV

[torero 10]

I think stop-and-reverse strategies (always in the market) tend to have very high drawdowns. Although using a Advancing/Declining Issues is a not a bad tool, it's different than the typical indicators (stochs, MACD, etc).

[Horus 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....

 

The rocket science is using internal data without ever looking at the emini data at all! This is the first ever application of internals in this format which was disclosed to the public.

[Derry Brown 10]

Interesting post James, thanks. I like your observation that human behavior is the driver of the markets. You say that "human behavior will never change" and as a result "we are able to exploit recurring price patterns to profit". I would say that that human trading behavior can change over time but human emotional responses are the constant factor.

 

Is the real question not whether TA works but whether the TA strategy one is using works and if it is relevant for the chosen asset class? The funny thing is that even with a good system most people in the market would not make money because of their tendency to change the trading rules and their inability to stick with a system after a string of loses.

 

How people can argue that TA does not work when there is so much evidence that it does escapes me? It is not difficult to find people who have become very rich through TA, many of them are even on the Forbes Rich List. Check it out - Top 7 Technical Analysts of all time and their secrets

 

Keep up the good work

Cheers

Derry

[Nemesis 10]

If technical analysis really works, howcome there is no one method out there that can be used to trade consistently profitable ?

 

If there was, there would not be any need for snake oil vendors selling their own failing systems.

 

Usually three things happen:

 

1) The method is so obscured it can't be learnt or verified

 

2) Too subjective

 

3) It's truly a piece of trash.

 

For what is worth, I'm in favor of technical analysis, just not the kind that is readily available because you can only teach yourself, and that's the study of price action. The stuff that really works takes enormous amount of screen time to grasp correctly, and that's assuming discipline and smart money management is in check.

 

Unfortunately there is a lot of ego in this market, because afterall we are talking about money, this leads to lies and deceit. Tough business, tough career. Make sure you really want this before you make a decision, took me 6 long years to even begin to obtain a freaking clue.

[SIUYA 11]

Technical analysis is nothing more than a tool that helps traders manage and quantify their risk, trade management, money management. Its a road map for a repeatable series of trades.

 

(this incorporates all entry, exit levels, discipline, emotions etc;)

[rs1 10]

Technical analysis is nothing more than a tool that helps traders manage and quantify their risk, trade management, money management. Its a road map for a repeatable series of trades.

 

(this incorporates all entry, exit levels, discipline, emotions etc;)

 

Exactly, well said. One thing I never understand about this topic is when people ask "does technical analysis work?". What does that actually mean? Do you mean does it work 100% of the time without fail? I think we all know that nothing really works 100% of the time. Or does it work 60%, 70%,50%? And what do you mean by work - surely everyone's definition of work is different. Some might have a profit target of 1R, 2R,3R etc. The question actually makes no sense. The best answer is the one given above, imho.

 

Technical analysis is great as an unemotional filter to put onto markets and give you reasons to get in and out. Your testing and observation will indicate good setups and profit targets, trailing stops and the rest is your money management. That is what trading is all about.

[AmCan1 10]

At first I began to read Nemisis' comments and I began to think, "oh, no.." I do not agree. But as I read further I was able to get his point and he does make some good ones. Lots of great points actually. What if we just asked does 'analysis' work, and leave out the word technical. It's all semantics really. rs1 and Siuya say it great. I would say that it only works if it does. lol.. I mean, after the analysis, you're either going to go for it or not. Then you'll find out.

 

I'm not technical in my own opinion of myself but when I tell people what I do, for a second they're interested. They ask a question or two, and when I try to answer, usually their eyes begin to glaze over and the conversation is done. I guess it was too technical. For someone to imagine all the time I spend in front of charts.. they become very antsy, the very definition of technical, lol..

 

Good proper analysis, technical or not, will work, even if it shows you that what you are analyzing is a bad idea and shouldn't be traded. That qualifies as working too, no? Unless it would have worked and your analysis was bad. Bad analysis obviously won't work. Garbage in, garbage out, as they say. Sorry guys.. Just trying to add a little levity to a very important question, while hopefully making a good point that contributes a bit.

[bathrobe 10]

I heard a great quote from Jim Rogers in which he said the only people he knows of who got rich of technical analysis are those selling it.

[cuttshot 11]

I think the reason many people struggle with technical analysis is the fact that they over analyze. How many times have you seen people post a chart on a forum that has 10 different indicators working at the same time. Combining multiple indicators doesn't always mean a better result. In fact it can lead to disaster because the more indicators you add will just lead to trying to find a reason not to take a trade. You will be stuck with the paralysis by analysis syndrome.

 

With that being said, technical analysis if used correctly can be a very powerful tool. You just need to keep things simple. Find a few indicators that fit what you are trying to do and then test to make sure they put the odds in your favor. For example being familiar with basic moving averages can definately help put those odds in your favor.

 

Making sure you know how to read price action, support/resistance levels, highs/lows is much more important than any indicator.

[Tiobingo 10]

For me, the thing about technical analysis that is important to realize, is the belief that everything happening in the world that effects a market, is reduced down to the current price. So as price moves, it is supposed to be a reflection of the change in balance between the two opposing forces, buyers and sellers. Charts, indicators, etc. are just tools to help interpret the price action. In my view, it is easier to interpret price action than it is to interpret every fundemental fact (or fiction) that occurs at each moment, worldwide. That's not to say you can't take advantage of specific world events. I believe you surely can. But you can look at the price action and use technical analysis to take advantage of it. IMO, tech analysis works best when you focus primarily on price action and then use other TA tools to help confirm your assumptions.

[cuttshot 11]

tiobingo I agree price action/technicals will tell you everything you need to know about a market. I really don't care about the results of an economic release or diving into a companies earnings report because all that matters is the reaction to the news. Reading price action and a few technicals will privide a road map which is all I need.

[bathrobe 10]

The latest newsletter that is being recognized in the world of stocks!

 

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WOW!!!!

 

I need to get on that

[EsotericRule 10]

I'll put in my two cents...there is no 'price reaction' to 'news'. 'News' is used as a cover for price action that cannot be easily explained away, but is quite natural. Sekota and others are quite correct when they state, 'throw that flash right in the trash'.

 

Price and time are key considerations in trading. Gann knew it, Elliot knew it, others allude to it. How do you think the old timers could trade intraday with only a ticker tape?

 

Using any technical indicator not in synch with the current proper time frame can be just as disastrous as not using an indicator at all.

[Tams 20]

...

Using any technical indicator not in synch with the current proper time frame can be just as disastrous as not using an indicator at all.

 

good one.

 

I may add:

 

Improper application of any technical indicator can be just as disastrous as not using an indicator at all.

 

or,

 

Not using an indicator is better than an improper application of a technical indicator.

[EsotericRule 10]

good one.

 

I may add:

 

Improper application of any technical indicator can be just as disastrous as not using an indicator at all.

 

or,

 

Not using an indicator is better than an improper application of a technical indicator.

 

No. While all common technical indicators are akin to driving using the rearview mirror, on proper settings they do minimize noise. Anyone looking for more than that sadly does not understand the concept of past, present and future :doh: You can do a lot more with simple math than you can do with some very complicated (and largely unproven) 'technical indicators'.

[Tams 20]

No. While all common technical indicators are akin to driving using the rearview mirror, on proper settings they do minimize noise. Anyone looking for more than that sadly does not understand the concept of past, present and future :doh: You can do a lot more with simple math than you can do with some very complicated (and largely unproven) 'technical indicators'.

 

what is your "no" referring to?

[EsotericRule 10]

Given your reply I wished to clarify my position, thats what the 'No' was about. I don't hold that technical indicators are all that valid, unless one chooses a proper inception point and can adjust an indicator to it. Not many know how to properly identify 'beginnings'.

[Tams 20]

Given your reply I wished to clarify my position, thats what the 'No' was about. I don't hold that technical indicators are all that valid, unless one chooses a proper inception point and can adjust an indicator to it. Not many know how to properly identify 'beginnings'.

 

I am not sure if I understand what you are talking about...

[SIUYA 11]

indicators indicate what may or may not occur.

you could follow a car with the right turn indicator on (or left turn for those in other parts of the world) for miles, when the driver never has any intention to turn.

 

in terms of what does or does not work.... there is always that old clanger of putting 100 lawyers/doctors/statisticians in a room and announcing that 50 % in the room are below the average for the room and seeing the response of disbelief that anyone is in that bottom half. Just because it is not 100% right all the time does not make it worthless.

[leenco12 10]

Thanks Lisa. I like to emphasis more on classic price patterns. I do recognize candlestick patterns but these patterns are not taught in trading books. They are patterns that I just recogniize from years of trading experience. I do not look for standard price patterns such triangles and flags. Instead I look at the bigger picture. For example, one particular pattern I see over and over again is a low, a higher low, then a 61.8% fib retracement from the swing low to the swing high. To me this pattern represents a low in place and will usually look for a long entry at or near the fib line.

 

Most of my trading methodology involves pivot points and market profile. These are technical tools but different from technical indicators such as Moving Averages, ADX, RSI, MACD, etc... I do not like using lagging indicators. I like to base my trading on price action alone. I hope this clarifies things.

 

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

[EsotericRule 10]

Damn, I liked that reply too. Posted it and poof!...off into the ether never to be seen again.

 

TA is, in large part, an amalgam of unproven (and unprovable) tools that help you justify a move you already made or a hope that you are currently fostering. TA is, in large part, only doublethink.

 

Question why your favorite indicator fails time and again, or signals too late for good profit. Question why the markets now operate as a Tote Board (DOM), with the punters never getting to see the whole book. Question how you are being dutched.

 

Question all assumptions you bring to the table BEFORE you have ever taken a trade and in areas you believe or assume to be not the least bit associated with the markets.

 

Question why you believe a log of the past has any impact on the present and future. To what views of reality have you been conditioned?

 

When you have questioned enough, and if you've asked the right questions, you'll be consistently profitable. Until that point, you have just been lucky.

 

And just so you know, yes...I do use a limited number of technical analysis tools...those that illustrate or help reduce the noise that masks natural law.

[BlowFish 10]

 

Question why you believe a log of the past

Statistics.

has any impact on the present and future.

Probability.

[dorramide7 10]

Newbies often get frustrated with TA because they use it incorrectly. Typically they'll do something like put RSI on a 5 minute chart and buy every time the line crosses above 30 and sell every time the line crosses below 70. Or they may buy every time they see a hammer on the 2 minute charts. They'll lose money and conclude "technical analysis doesn't work". TA is just a way of reading the markets. Looking at the daily YM chart for example we can see a double bottom then a rally then a 50% pullback of the rally then a doji then a dragonfly doji. What's that telling you? It's telling you supply was cut off at the low, then strong buyers came in but the buyers took the price too far up so it retraced but then strong buyers came in again. Using TA to read the markets we could see that a further rally was a strong possibility and the market acted as expected.

 

Also TA isn't just about candles and indicators. Volume analysis and Market Profile are forms of technical analysis.

 

all studies of price/volume, or aggregates of same (tick, etc.) are TA.

 

asking if TA works is like asking if surgery works - sometimes, and if in the right hands.

 

but it's not 100% and there is a fair amount of subjectivity to decisions

 

the one thing that drives me NUTS is when people say that technical analysts believe, or that TA implies that ALL knowledge is "priced in". that's stupid. all that is necessary for TA to work is that enough information is "priced in" such that one can make plays with positive expectancy.

 

it does not follow that ALL fundies etc. are priced in. that's as absurd as efficient market theory is absurd,and for the same reasons.

[86834 10]

If you're a day trader, then technical analysis is only a support tool and shouldn't be something that you're using to find or justify trades. Learn what is happening on your order book, then as already mentioned, use technical analysis along side that as a support tool.

 

A lot of people in the past will reply to such as post by giving it the 'big I am' by saying that they've been profitable for years with technical analysis alone. 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. I'm not going to mention names, but them ones who give it the big I am, i've noticed haven't made any posts on any trading forms for well over 18months now.... main reason probably is that they've given up trading as they only focuse don TA which got them no where.

 

There's no shortcuts in learning to trade. You just have to do it probably, that's all