TA Debunked

[equtrader 10]

The cult of technical analysis and day trading seems to grow and grow. The Web is crawling with technical analysis (TA). Tax changes have created a boom in spread betting, and hundreds of courses have sprung up to teach traders to read short term 'technical' chart set ups. All of this - coupled with the ongoing use of the terminology by market commentators and practitioners - may make you wonder whether technical trading rules are profitable and worth using in your own investing? Given its popularity, is there something to all this TA, basically?

 

Rest at:

http://www.stockopedia.co.uk/content/technical-analysis-debunked-5-reasons-why-we-dont-believe-in-charting-63806/

[SIUYA 11]

All interesting .....but its a bit of a tired old argument (like passive v active investing, EMH) with each side pushing their barrow.

It rather simple IMHO - you use the best tools - and thats all they are, that are available to you at the time. Whether its fundamental analysis, or technical analysis, or quant analysis.

 

FA is debunked a lot as well, especially when it comes to most people, as they dont have the resources, time, knowledge, patience, funding, ability to tell if the accounts and management are lying etc; etc.

 

I have not got any on me, but there are plenty of reports to show if you look at the fundamental calls most research analysts make they are pretty much similar to technicians - win some loose some.

 

There is more to this game than analysis, and number crunching.

[karoshiman 10]

The funny thing is, in the final section of the text the author admits that TA works, as it will help with "timing of investments" and "understanding why a stock moves"... well, that's enough reason for me to use mainly TA

 

Also, it is not true that empirical evidence for TA is negligible. There are many well-known equity market anomalies which are recognized by efficient market theorists (that's why these are called "anomalies").

 

Though, I agree that the right, i.e. profitable, application of TA is more art than science. Hence, it is difficult for some to grasp.

 

By the way, in the first Market Wizards book there was - as far as I recall - only one pure FA guy (J. Rogers) and he had such a long investment horizon that timing was almost irrelevant (> 2 years in most cases). The rest were all TA focused guys. That says also a lot.

[4EverMaAT 10]

Just different sides of a coin really. Focusing and choosing to prefer once side over the other helps to get at the very root of what deludes most traders. Isn't the ultimate goal to figure out the core (fundamental) aspects of what drives the market, then see what entries and exits (technical) can allow us to best extract profits?

 

We assert preferences to the market, and attach ourselves very heavily to these preferences. As long as you get to the end goal, and can duplicate the results, does it matter what adjective we use to describe the process.

 

edit: see new post

Edited May 24, 2012 by 4EverMaAT

[xkr1962 10]

This is an age old argument but I would take TA on a monthly and weekly chart over any crap most fundy analysts come out with.

 

Get the bias from those high time frames trade the m15 using that bias.

[4EverMaAT 10]

followup: the article point number 2 (Reason 2: Empirical evidence for TA is negligible) confirms what former Turtle Trader Curtis Faith emphasized that, besides ensuring the entire process of trading was mechanical (and therefore objective, testable, measurable, etc), position sizing is the most important aspect that the user has under their control. Not spending countless hours on predicting the best point of entry.

 

I eventually got the hang of this, and developed a spreadsheet to assist in formulating a proper money management strategy; one that can handle all market conditions according to the size of my trading account.

[SunTrader 10]

"But if there is, it's escaped the attention of any rigorous academic study on the topic that we've come across, especially for stocks."

 

Didn't bother reading beyond this line.

 

Academics don't live in the real world. If they can't measure and quantify something, in their minds it doesn't exist.

 

My trading account says otherwise. Many others as well.

[karoshiman 10]

"But if there is, it's escaped the attention of any rigorous academic study on the topic that we've come across, especially for stocks."

 

Didn't bother reading beyond this line.

 

Academics don't live in the real world. If they can't measure and quantify something, in their minds it doesn't exist.

 

My trading account says otherwise. Many others as well.

 

 

Good point!

 

I think the motivation of individuals is very important in finding a profitable application of TA. And the motivation to conduct a good academic study is a lot less powerful IMO than the motivation to earn money to make a living.

 

You can see that also in the existing studies on that subject. The approaches they test (at least the ones I saw so far) are not very creative from my point of view...

[SIUYA 11]

It's like they are saying there is no edge in golf because the ball is way too small the hole is way too small,the distance too great and the club is awkward to use.

 

good points - plus......Mitsubishi using a golf analogy - certain things have most certainly been debunked today!

[Logic 10]

I don't quite understand the reasoning for constantly lighting a fire under this argument.

 

You will always have three schools of thought: those that think TA is worthless because they base their assumptions on 100 years of "witch doctor" research and testing and those that actually use it every single day to eek out profits. The third group of us are the researchers, God forbid any of us talk about the consistent returns we get from the non-typical TA we've discovered and use. Then the authors, bloggers and the "fundamentalists" come out of the woodwork screaming that NOTHING NEW CAN EVER BE DISCOVERED, "THERE IS NO SUCH THING AS PENICILLIN". Idiots. They sit with blinders on and their fingers in their ears saying . . . LA LA LA LA I can't hear you. I for one am sick and tired of this discussion.

 

If you aren't bright enought to post something stimulating that works toward the advancement of TA, don't post the same tired crappy argument again. If you are doing it to increase pages views to this site then at least be honest and state that upfront so those of us that actually trade and do our own research can stay away from the discussion like the plague.

[karoshiman 10]

 

...

 

You cannot take one element of TA in isolation and test it expecting the holy grail.

What they never seem to grasp is that there is a mix of several things a trader uses taking into account the general context.

 

...

 

 

 

Exactly! And that is why it is difficult to analyze the way academics analyze... plus, of course, the subjective element in applying certain types of TA.

 

PS: I guess we don't get many contrarian views to our view on TA on this forum...

[karoshiman 10]

Reminds me of the two efficient market theorists who pass a $50 bill lying in the street. They leave it untouched and congratulate each other on realizing that if it presented an opportunity for profit someone else would have picked it up already...

[Brookwood 10]

It seems that the OP (or his link anyway) is positing that TA doesn't ALL work in a consistent and repeatable way, ergo NONE of it can work. Silly flame bait. Proper TA merely reveals the record of previous buyers and sellers, who had the upper hand, and where. It is from there that one makes a leap to assume where resting orders may be or where they might come in, and who might get left holding the bag. There are obviously other moving parts to trading as well: your psychology (micro), market psychology (macro), position sizing... it's a long list of which TA is just a part. Is it a TA failure if you bet too big and bail on a temporary squiggle? Or if a half-million noobs sell a head-and-shoulders neckline break? It all goes back to my favorite comment in this forum ever ( I wish I could remember the poster) to the effect that trading aren't a magical wiggly line place- it's a market- people buying and selling. That's it. Charts are not the market. The map is not the terrain. And I would rather trust my own analysis than Cramer's.

[eqsys 10]

SunTrader is correct. I have been trading and testing systems for about 32 years, and my conclusion is that it's possible to expect 2-3% per month gains using mechanical trading systems over long periods of time through bull and bear markets with the best trading systems. This percentage may seem low to "newbies" but it's realistic.

 

However, and this is a BIG however, a mechanical, or technical trader can and will go through long periods of time (many months) with no profits and frustrating drawdown. Then, the profits return. What's going on is that all markets go through phases - trending phases and chopping phases. A trader usually makes money during the trending phases. If a market is going up it's fairly easy to make money trading from the long side. If a market is trending down, it's possible to make money trading from the short side.

 

When markets stop trending, it's likely that any trading method will lose money. So, a great deal of the success or failure of any system or method depends on the market environment.

 

And, when a market begins to trend, successful traders will be able to identify what is moving with the trend, and go along for the ride.

 

I am often asked what to buy, and I respond by saying buy what's going up, not what you think should go up. Then, I am asked when to sell, and I respond by saying that you sell when your holdings stop going up. This may, at first, seem simplistic and even ridiculous, but it works.

 

Most traders and investors take the opposite approach - they buy because they believe something should go up because of X, Y and Z. In other words, they think they are smarter than the market, than everyone else in the world who knows anything at all about the stock or commodity they are trading. And, some traders/investors ARE smarter and DO have inside information, and are able to figure out the "big picture".

 

The results of the average mutual fund or hedge fund debunk this "we are smarter" approach. The majority of funds either track or underperform the S&P. Countless studies have shown this to be true. So, this is a very difficult game for even the best and brightest.

 

Trading/investing is one of the most difficult and frustrating ways to make money. I know a couple of people who spent thousands of dollars taking courses recently on how to make money trading, and of course, they lost money.

 

For anyone who thinks they are going to get rich quickly and easily trading, I say best of luck to you, but be very, very careful and trade very small amounts of money until you are absolutely sure you know what you're doing and can take the periods of drawdown and frustration.

[BlueHorseshoe 10]

Might not work if your analysis looks like this (from the comments under the op's link:confused:

 

You're obviously not very good at TA, Mitsubishi, as your example shows - there is clearly a bearish double top forming here - you can tell from the slope of the 483rd line.

[BlueHorseshoe 10]

SunTrader is correct. I have been trading and testing systems for about 32 years, and my conclusion is that it's possible to expect 2-3% per month gains using mechanical trading systems over long periods of time through bull and bear markets with the best trading systems. This percentage may seem low to "newbies" but it's realistic.

 

Eqsys, there will be a lot of new traders who aren't convinced . . .

 

Any new traders reading? Here's what happens when you are able to compound a consistent 3% monthly return over a ten year period, starting with a $20K account (month down the left, equity down the right):

 

1 20000

2 20600

3 21218

4 21854.54

5 22510.1762

6 23185.48149

7 23881.04593

8 24597.47731

9 25335.40163

10 26095.46368

11 26878.32759

12 27684.67741

13 28515.21774

14 29370.67427

15 30251.7945

16 31159.34833

17 32094.12878

18 33056.95265

19 34048.66122

20 35070.12106

21 36122.22469

22 37205.89143

23 38322.06818

24 39471.73022

25 40655.88213

26 41875.55859

27 43131.82535

28 44425.78011

29 45758.55351

30 47131.31012

31 48545.24942

32 50001.60691

33 51501.65511

34 53046.70477

35 54638.10591

36 56277.24909

37 57965.56656

38 59704.53356

39 61495.66956

40 63340.53965

41 65240.75584

42 67197.97852

43 69213.91787

44 71290.33541

45 73429.04547

46 75631.91683

47 77900.87434

48 80237.90057

49 82645.03759

50 85124.38871

51 87678.12037

52 90308.46399

53 93017.7179

54 95808.24944

55 98682.49693

56 101642.9718

57 104692.261

58 107833.0288

59 111068.0197

60 114400.0603

61 117832.0621

62 121367.0239

63 125008.0347

64 128758.2757

65 132621.024

66 136599.6547

67 140697.6443

68 144918.5737

69 149266.1309

70 153744.1148

71 158356.4382

72 163107.1314

73 168000.3453

74 173040.3557

75 178231.5664

76 183578.5134

77 189085.8688

78 194758.4448

79 200601.1982

80 206619.2341

81 212817.8111

82 219202.3455

83 225778.4158

84 232551.7683

85 239528.3214

86 246714.171

87 254115.5961

88 261739.064

89 269591.2359

90 277678.973

91 286009.3422

92 294589.6225

93 303427.3111

94 312530.1305

95 321906.0344

96 331563.2154

97 341510.1119

98 351755.4152

99 362308.0777

100 373177.32

101 384372.6396

102 395903.8188

103 407780.9334

104 420014.3614

105 432614.7922

106 445593.236

107 458961.0331

108 472729.864

109 486911.76

110 501519.1128

111 516564.6862

112 532061.6267

113 548023.4755

114 564464.1798

115 581398.1052

116 598840.0484

117 616805.2498

118 635309.4073

119 654368.6895

120 673999.7502

121 694219.7427

 

If you've got fifteen years then your figure is:

 

4090066.939

 

A cool four million, with a little bit of change left for that soft-top.

 

There is plenty of information on this site, elsewhere on the web, and in countless books and articles, about how to use money management to make a small edge work for you.

 

Happy trading.

 

BlueHorseshoe

[bobcollett 10]

Eqsys, there will be a lot of new traders who aren't convinced . . .

 

Any new traders reading? Here's what happens when you are able to compound a consistent 3% monthly return over a ten year period, starting with a $20K account (month down the left, equity down the right):

 

1 20000

2 20600

3 21218

4 21854.54

5 22510.1762

6 23185.48149

7 23881.04593

8 24597.47731

9 25335.40163

10 26095.46368

11 26878.32759

12 27684.67741

13 28515.21774

14 29370.67427

15 30251.7945

16 31159.34833

17 32094.12878

18 33056.95265

19 34048.66122

20 35070.12106

21 36122.22469

22 37205.89143

23 38322.06818

24 39471.73022

25 40655.88213

26 41875.55859

27 43131.82535

28 44425.78011

29 45758.55351

30 47131.31012

31 48545.24942

32 50001.60691

33 51501.65511

34 53046.70477

35 54638.10591

36 56277.24909

37 57965.56656

38 59704.53356

39 61495.66956

40 63340.53965

41 65240.75584

42 67197.97852

43 69213.91787

44 71290.33541

45 73429.04547

46 75631.91683

47 77900.87434

48 80237.90057

49 82645.03759

50 85124.38871

51 87678.12037

52 90308.46399

53 93017.7179

54 95808.24944

55 98682.49693

56 101642.9718

57 104692.261

58 107833.0288

59 111068.0197

60 114400.0603

61 117832.0621

62 121367.0239

63 125008.0347

64 128758.2757

65 132621.024

66 136599.6547

67 140697.6443

68 144918.5737

69 149266.1309

70 153744.1148

71 158356.4382

72 163107.1314

73 168000.3453

74 173040.3557

75 178231.5664

76 183578.5134

77 189085.8688

78 194758.4448

79 200601.1982

80 206619.2341

81 212817.8111

82 219202.3455

83 225778.4158

84 232551.7683

85 239528.3214

86 246714.171

87 254115.5961

88 261739.064

89 269591.2359

90 277678.973

91 286009.3422

92 294589.6225

93 303427.3111

94 312530.1305

95 321906.0344

96 331563.2154

97 341510.1119

98 351755.4152

99 362308.0777

100 373177.32

101 384372.6396

102 395903.8188

103 407780.9334

104 420014.3614

105 432614.7922

106 445593.236

107 458961.0331

108 472729.864

109 486911.76

110 501519.1128

111 516564.6862

112 532061.6267

113 548023.4755

114 564464.1798

115 581398.1052

116 598840.0484

117 616805.2498

118 635309.4073

119 654368.6895

120 673999.7502

121 694219.7427

 

If you've got fifteen years then your figure is:

 

4090066.939

 

A cool four million, with a little bit of change left for that soft-top.

 

There is plenty of information on this site, elsewhere on the web, and in countless books and articles, about how to use money management to make a small edge work for you.

 

Happy trading.

 

BlueHorseshoe

 

Hi BlueHorseshoe,

And while you were compounding your small return every month,what were you using to pay the rent?

regards

bobc

[SunTrader 10]

SunTrader is correct....

Never said anything about mechanical though.

[JMB 10]

The cult of technical analysis and day trading seems to grow and grow. The Web is crawling with technical analysis (TA). Tax changes have created a boom in spread betting, and hundreds of courses have sprung up to teach traders to read short term 'technical' chart set ups. All of this - coupled with the ongoing use of the terminology by market commentators and practitioners - may make you wonder whether technical trading rules are profitable and worth using in your own investing? Given its popularity, is there something to all this TA, basically?

 

Rest at:

Technical Analysis Debunked: 5 Reasons Why We Don't Believe In Charting | Stockopedia Features

 

--------------------------------------------------------------------------------

 

TA is IMHO the only way to objectively take action from and enter into a trade with a real plan that you follow consistently. This is also the only way you can realize if your plan works or not. At leat you can put some numbers to your trades (even proffesional BlackJack players have an objective system with technical rules, they can't take the dealers word for it). Everything that happend in the market (fundamentals included), is happening in the market (fundamentals included) and will happen in the market (fundamentals included) is already considered and taken into account on a price chart. For this reason you can put a plan towards the future with Technical/Objective analysis. How can anyone make a consistently profitable trading plan/system by looking at the news on CNBC?? You cannot just say: Ok of Bernanke says the buzzword "Interest rate" i will short. The experts you see on TV who are giving you their view on the markets are probably working for an institution/bank/fund that looses when you win.

 

Just giving my opinion and i'm definately not an expert here.

Is it not funny when the experts say that a certain market is very strong and bullish that always two things happen: Your spread widens for about the double or triple and after that the market drops like a brick in mid air.

 

Well,....my

[BlueHorseshoe 10]

Hi BlueHorseshoe,

And while you were compounding your small return every month,what were you using to pay the rent?

regards

bobc

 

I was paying the rent with the wages from my job. Because I live in the real world. Actually my employer pays my rent and all my other bills, but that's beside the point . . .

 

If you want to draw a wage every month then there are far easier ways to do it than by trading. I suggest you chose one of them, and then use trading as a way to build long term wealth by compounding returns. I really cannot imagine why anyone would choose to draw 3% per month return from an account rather than get a day job and turn that 3% into a serious amount of money ten years down the line. It seems totally short sighted . . . But maybe that's just me . . .

 

BlueHorseshoe

[Logic 10]

. . . I really cannot imagine why anyone would choose to draw 3% per month return from an account rather than get a day job and turn that 3% into a serious amount of money ten years down the line. It seems totally short sighted . . . But maybe that's just me . . .

 

BlueHorseshoe

 

If your trading only returns 3% then you aren't trading you are investing. Some of us have "traded" for years and earned far greater than 3% even monthly. Skills are skills.

[4EverMaAT 10]

--------------------------------------------------------------------------------

 

TA is IMHO the only way to objectively take action from and enter into a trade with a real plan that you follow consistently. This is also the only way you can realize if your plan works or not. At leat you can put some numbers to your trades (even proffesional BlackJack players have an objective system with technical rules, they can't take the dealers word for it). Everything that happend in the market (fundamentals included), is happening in the market (fundamentals included) and will happen in the market (fundamentals included) is already considered and taken into account on a price chart. For this reason you can put a plan towards the future with Technical/Objective analysis. How can anyone make a consistently profitable trading plan/system by looking at the news on CNBC?? You cannot just say: Ok of Bernanke says the buzzword "Interest rate" i will short. The experts you see on TV who are giving you their view on the markets are probably working for an institution/bank/fund that looses when you win.

 

Just giving my opinion and i'm definately not an expert here.

Is it not funny when the experts say that a certain market is very strong and bullish that always two things happen: Your spread widens for about the double or triple and after that the market drops like a brick in mid air.

 

Well,....my

 

It's the interpretation of the TA or FA that gets traders in trouble. An indicator is just that: indicates or detects a certain market condition.

[BlueHorseshoe 10]

If your trading only returns 3% then you aren't trading you are investing. Some of us have "traded" for years and earned far greater than 3% even monthly. Skills are skills.

 

Hi Logic,

 

The 3% figure came from the thread starter, not me.

 

All I did was try and provide a concrete illustration of the progressive effects of compunding this level of return for those (I explicitly stated 'new traders') who are not familiar with this.

 

I don't care whether you make 3% per month or 3,000% per day - it simply doesn't affect my life (or trading) in any way.

 

Cheers,

 

BlueHorseshoe

[Logic 10]

Hi Logic,

 

The 3% figure came from the thread starter, not me.

 

All I did was try and provide a concrete illustration of the progressive effects of compunding this level of return for those (I explicitly stated 'new traders') who are not familiar with this.

 

I don't care whether you make 3% per month or 3,000% per day - it simply doesn't affect my life (or trading) in any way.

 

Cheers,

 

BlueHorseshoe

 

 

You are absolutely correct!

[SunTrader 10]

......

I don't care whether you make 3% per month or 3,000% per day - it simply doesn't affect my life (or trading) in any way..........

You didn't say it but I will .... another reason, since most claims by others are dubious, at best.

 

Not to be taken by anyone in particular as referring to them, but what the internet age is famous for.