Charts.

[TheDude 10]

When you started trading, why did you decide to base your decisions upon charts (assuming you did)?

 

What influenced you to use a chart as the basis of your trade selection process over other forms of market generated information?

 

The alternatives being:

Fundamentals

Order Book

Time & Sales

Seasonal data

Correlations and other statistical data (for the sake of argument, lets call their output GRAPHS, not CHARTS in the OHLC sense).

I assume there are others....

 

Just wondered....

[SIUYA 11]

in brief, why use the charts - they were the best tools available at the time.

long story.....

As a junior I read market wizards and the thing that i got out of it was that you buy things that are going up, (ie; dont try and pick bottoms - just go with the trend)

There was the old style green reuters screen - top of the line in those days, and I used to paper trade the numbers, and started charting them.

When I was allowed to trade live - I figured fundamentals had nothing to do with what was happening immediately in front of me. (We were equity options market making)

In order to get the most out of making markets and rather than just hedging everything I started trading more delta (directional positions) in order to try and make the most out of the book.

As we focused on price and not fundamentals - and looked for more putting skews on prices based on what the trend was, AND what other people were trading, it was important to be aware of price levels, and likely directions. Plus on busy days you might have done 100-200 trades, the important thing was to have a bias to what you thought, and what was happening in the market.

It also became important to understand price levels and how they might interact with option strikes, and when to lean on your positions, or hedge them up.

It was a long and sometimes tedious process, always printing charts, drawing lines, rechecking them.......but that's all that was available.

[wrbtrader 10]

When you started trading, why did you decide to base your decisions upon charts (assuming you did)?

 

What influenced you to use a chart as the basis of your trade selection process over other forms of market generated information?

 

Just wondered....

 

I started using charts when windows PC were mass marketed as home computers in the 1980's also about the same time when I subscribed to Investors Business Daily newspaper that had those small little graphs.

 

Prior to that, I made hand drawn charts on graph paper as a kid for money for a relative that was a floor trader.

[TheDude 10]

Geez - you guys must be real old timers!! I hope no offence is taken at that!

 

So it seems - and correct me if I'm wrong, that you would use the chart to get an idea of the context in order to understand the bias, if any, but not actually make the trade decision?

 

I have a theory that when most new people come to the markets these days, they read a few books perhaps, go to a few web sites, may be even get ripped off by some internet guru and his easy money TA course. This is why (I think) so many people are drawn to charts, when there are so many other ways of making a coin. Why arent these methods taught?

Pretty much everyone uses a chart I guess to get a quick feel for the market, but thats different to basing an entire strategy around a chart.

 

Going back to options is a prime example where a chart can be useful, but isnt the main determination of success. The understanding of options and how they are priced is I'd say far more important.

 

So few people trade options though. Is that because they dont want the work and time to understand them? They'd rather go for the easy quick buck that a chart seems to offer?

[SIUYA 11]

Geez - you guys must be real old timers!! I hope no offence is taken at that!

 

none taken.....

I also guess many other here must be not using charts given few are responding

 

So it seems - and correct me if I'm wrong, that you would use the chart to get an idea of the context in order to understand the bias, if any, but not actually make the trade decision?

 

Initially yes - then you would watch the levels and see what happened at what you might deem turning points, support, resistance - whatever.

Partially why these days with better computers, access etc I cant really find a way to automate (fully 24 hours a day) a lot of what i try and do without some form of discretionary input.....it turns out funnily enough its similar to what many people do in some form or another.....and more is then based around trade management once in a trade.

 

I have a theory that when most new people come to the markets these days, they read a few books perhaps, go to a few web sites, may be even get ripped off by some internet guru and his easy money TA course. This is why (I think) so many people are drawn to charts, when there are so many other ways of making a coin. Why arent these methods taught?

Pretty much everyone uses a chart I guess to get a quick feel for the market, but thats different to basing an entire strategy around a chart.

 

Re educators - a different matter, but yes - basing an entire strategy around a chart without some form of context is what makes things hard from a computer point of view.

eg; working out that its a low probability to buy something as you approach resistance in a long term down trend and the recent activity has shown signs of being congested - but all moving averages are showing as up on the current chart.....

But more than anything a lot of the automation i find difficult is around the trade management for running things, and then the re entry if you need to.....

so for me context is still important....from there one entry is probably only slightly better than another IMHO.

The patience of waiting, holding back the impulse to trade to not chase, to then hold winners and cut losers - computers do this, but they dont have patience, they are impulsive as they take every trade, they will cut winners quickly if the rules say to and might not re enter....they might not understand bias and the fact that the ECB is meeting today....i have also not seen a computer recognize support and resistance the way i might.

Now basing things purely on statistics is another matter IMHO

 

Going back to options is a prime example where a chart can be useful, but isnt the main determination of success. The understanding of options and how they are priced is I'd say far more important.

 

So few people trade options though. Is that because they dont want the work and time to understand them? They'd rather go for the easy quick buck that a chart seems to offer?

 

Re options - there are other issues here - cost, cost of commissions, spreads, etc......and I dont think they are they great for day trading - likely to be better for longer term protection, occasional extra leverage or kickers, or as a passive portfolio type approach.

and yes - if you run a portfolio of options it helps, but is not the cause of any success. Whereas I have seen some very good option trades put on based on charts - they happen rarely. (One guy turned $100,000 into $1.7mil over about 4-5 months based on buying OTM options when he determined a bull market was going to start and the 3rd wave (for elliots) was likely to occur - he was up about $2.5m at one stage)

 

The chart ultimately to me is just a road map of past historical prices and should be a guide to what is possible - ultimately you want to be following the road, and not fighting it - but there are certain hairpins that you have to slow down on..... and times when you have to dodge on coming traffic.

[Obsidian 10]

i am lost without charts...if i dont use charts, there is no way I can remember all historical actions of these instruments...

[TheDude 10]

i am lost without charts...if i dont use charts, there is no way I can remember all historical actions of these instruments...

 

Sure past levels are important. Thats why we all use charts - to get an idea of context.

 

Do you also use charts to base your execution decisions on as well? If so, how did you come to decide to use a chart to base these decisions upon over other methods?

[Obsidian 10]

...how did you come to decide to use a chart to base these decisions upon over other methods?

 

I had the same situation as SIUYA stated:

... I figured fundamentals had nothing to do with what was happening immediately in front of me....

 

another thing...I started trading stocks and I have to say that technical analysis was much easier to learn

[TheDude 10]

 

....

 

 

I have to say that technical analysis was much easier to learn

 

 

Thats my point. TA is very easy to learn. Thats why most are drawn to it. Does easy mean better?

 

Are all those quants who build algorithms based around bond maths, figuring out convexity etc wasting their time when all they need do is look at a chart to make money?

 

If we were to distil what the average TA trader does, it would probably look like this:

1. back test some pattern or out come of indicators,

2. risk no more than 2% of the account

3. aim for a 1:3 profit target

4. build a 'trade plan' around these points and follow it religiously, then start a process of self doubt when their actual results dont fit the back tested results.

6. think up of a new idea as the old one doesnt work. Blame it on volatility, or some other cycle

7. Repeat from step 1. until the religion part does match history (but it never will because the world and the industry keeps changing)

 

Anyway, getting back to the point, is that why TA is followed by so many - because it's easy? It offers a short cut.

 

Is 'easy' the best route to follow? Does it offer the deep understanding necessary to understand whats going on internally within the market structure to know when to trade?

[SIUYA 11]

Anyway, getting back to the point, is that why TA is followed by so many - because it's easy? It offers a short cut.

 

Is 'easy' the best route to follow? Does it offer the deep understanding necessary to understand whats going on internally within the market structure to know when to trade?

 

no - the hard part is doing the work continually, developing a philosophy for how the market works, developing, testing and following the plan etc etc

the charts are just a visual tool that is part of it.

 

yes - I do think people think that following a chart is easy and that they think that is all the work they need to do - that is the problem. (Vendors prey on that - here's my system that only requires a few minutes a day crap) Once you have all the other stuff out of the way then yes maybe thats all it takes and that is probably why its often said you never meet a rich chartist - there is more to it than that.

[wrbtrader 10]

Thats my point. TA is very easy to learn. Thats why most are drawn to it...

 

Most data providers and software trading platform designers do their advertising via promotion of their charts and the so called "bells & whistles" (technical indicators, advance charting, programing, fancy bid/ask screens, news alerts).

 

They know they can not survive nor compete with their competitors via advertising only the data.

 

These marketing tactics and advertising are seductive in luring us traders into thinking we can't trade without charts regardless if its easy or difficult to learn.

[TheDude 10]

I sometimes get the feeling that a lot of traders that use charts are really technical analysts who also happen to own an account, and test their analysis skills with orders in the market.

 

Could it be that there is more to this game (as it is indeed a game), than the ability to read a chart?

[BlueHorseshoe 10]

I sometimes get the feeling that a lot of traders that use charts are really technical analysts who also happen to own an account, and test their analysis skills with orders in the market.

 

I sometimes get the feeling that a lot of quants who use stochastic processes are just maths wizards who also happen to have access to billion dollar hedge funds, and test their mathematical theories with orders in the market.

 

And I also get the feeling that a lot of blue-chip traders who use fundamental analysis are really just conservatives who happen to have some spare cash, and test their belief in the preservation of established institutional monoliths with an intractable market stance.

 

BlueHorseshoe

[TheDude 10]

I sometimes get the feeling that a lot of quants who use stochastic processes are just maths wizards who also happen to have access to billion dollar hedge funds, and test their mathematical theories with orders in the market.

 

And I also get the feeling that a lot of blue-chip traders who use fundamental analysis are really just conservatives who happen to have some spare cash, and test their belief in the preservation of established institutional monoliths with an intractable market stance.

 

BlueHorseshoe

 

Sorry I cant agree.

 

If you turn up at a quantative fund for example, the quants do their thing, but they dont trade. The signals get passed to a trader who does the trading (price improvement) - whether that will be discretionary entry or passing the trade to an algo to execute.

 

In macro driven funds, theres a similar situation. The analyst comes up with the trade idea/position mandate and feed that to the trader for execution.

 

In the middle of both these scenarios there will be a risk manager who will determine position size based on capital, correlations and the like.

 

I think this is key to the self directed trader. So much is made about 'you must have discipline' and 'you must execute when you get your setup'. It's the kind of pony that Mark Douglas spouts. In reality, the analyst in you may have 'identified' a possible setup, but it is upto the 'trader' in you to decide if it should be executed or not, or perhaps more 'when' to execute.

 

Can the feel of 'when' to execute be gained from a chart? It may be silly to go long just before resistance. It may be the best time. A chart will not be able to advise you on timing, just that resistance exists. You need to look elsewhere.

 

A mechanical trader will say 'but its in my rules to take the trade, I have to'. I'd say thats the height of stupidity. I'd suggest a better position may be to think 'ok, Ive got to get long at some point, but when? The markets at support and theres not much buying. Is this really a good spot to go long? The Turtles would disagree with me on that last point I think. Some of them were more successful than I am though.

 

Going back to the start of this post though....

 

So if the analyst comes up with the idea, and passes it to the trader, why? Where is the main skill that leads to profit? Is it in the skill of analysis, or the skill of trading? Maybe its the risk manager in the middle?

 

Sure, all 3 help to some degree, but which is the main core skill that most profit will be attributed to? Where are the pros spending most money? That may give us a clue.

Edited September 10, 2012 by TheDude

[SIUYA 11]

Going back to the start of this post though....

 

So if the analyst comes up with the idea, and passes it to the trader, why? Where is the main skill that leads to profit? Is it in the skill of analysis, or the skill of trading? Maybe its the risk manager in the middle?

 

Sure, all 3 help to some degree, but which is the main core skill that most profit will be attributed to? Where are the pros spending most money? That may give us a clue.

 

(the below is speculation based on what i know, and of people i know still in big firms - but hey these days it could all be complete crap - what with all the banking scandals)

yes - there are very few speculative traders. Most at big firms either fit a mandate, hedge, operate orders or follow a systemised model. Most 'traders' at the bigger firms are doing just that - operating orders....and that can be a completely different skill set.

 

As to your question where is the main skill that leads to profit - I would think the risk manager has little to do with - the parameters are preset, the mandates need to be adhered to. Their job is to make sure they are managed and not broken - independently.

For the analysis - well - how often are we bearish, and eventually right, but loose plenty in the meantime as we went too early......if you are an operator, thats not your problem at the end of the day - you are entering or exiting based on directions, if you are an analyst - you just claim you were right and forget the times you did not give a call to stop out.

 

Point is - the pros (a poor choice of words) at the larger firms dont do what we do, as they usually have analysts who come up with ideas, operators to help put them on, and they might manage the overall portfolio structure and bias.....and yet you only need to read any of the market wizards books to understand even with all this, most still refer to a chart and price levels. (They rarely worry about perfect setups, indicators etc - just price levels)

Quant analysts - different again - I would think they are either mean reverting, using leverage and looking to spread, spread spread, or trend following and its a portfolio systemised approach looking for the outliers that kill the mean reverters.

 

For me the real skill for those pros who might be like us is recognizing when they are wrong - few analysts ever need to worry about this - and running things when they are right.....this is what few retail traders do.

[Obsidian 10]

Thats my point. TA is very easy to learn. Thats why most are drawn to it. Does easy mean better?

 

Are all those quants who build algorithms based around bond maths, figuring out convexity etc wasting their time when all they need do is look at a chart to make money?

 

If we were to distil what the average TA trader does, it would probably look like this:

1. back test some pattern or out come of indicators,

2. risk no more than 2% of the account

3. aim for a 1:3 profit target

4. build a 'trade plan' around these points and follow it religiously, then start a process of self doubt when their actual results dont fit the back tested results.

6. think up of a new idea as the old one doesnt work. Blame it on volatility, or some other cycle

7. Repeat from step 1. until the religion part does match history (but it never will because the world and the industry keeps changing)

 

Anyway, getting back to the point, is that why TA is followed by so many - because it's easy? It offers a short cut.

 

Is 'easy' the best route to follow? Does it offer the deep understanding necessary to understand whats going on internally within the market structure to know when to trade?

 

I think what method we choose to learn or apply to generate trading ideas should be releated to instruments/time frame as well...

Yes technical analysis was easier for me to learn, but there were times that I made my decisions according to fundamentals...however that was long term investment on the stock market...I used fundamentals to pick the promising ones and then used technical analysis to decide where to enter and when to exit...

now trading currencies, and I just use technical analysis because I dont hold positions for months anymore...

[TheDude 10]

I think what method we choose to learn or apply to generate trading ideas should be releated to instruments/time frame as well...

Yes technical analysis was easier for me to learn, but there were times that I made my decisions according to fundamentals...however that was long term investment on the stock market...I used fundamentals to pick the promising ones and then used technical analysis to decide where to enter and when to exit...

now trading currencies, and I just use technical analysis because I dont hold positions for months anymore...

 

Thats interesting.

 

Why the move from stocks to FX?

 

I would have thought some fundamentals/news stories would be pretty useful in FX - interest rate decisions obviously and other economic releases. I used to trade FX futures exclusively. It seemed it was really the reports that would set the trends for the next x days.

 

I could never get my head around stock fundamentals or longer term commodity fundamentals though.

 

Mixing charts with other methods as you mention seems a common sense approach to me (FWIW).

 

I read somewhere that if you look at the stock market, 80-90% of returns in the last 70 odd years have been made in the 3 days around FOMC rate decision days. In other words, you could have the entire gains of the last 70 years by only being in the market for 30 or so days of the year each year! You cant tell that from a chart! (the article was on zerohedge)

[wrbtrader 10]

...I read somewhere that if you look at the stock market, 80-90% of returns in the last 70 odd years have been made in the 3 days around FOMC rate decision days. In other words, you could have the entire gains of the last 70 years by only being in the market for 30 or so days of the year each year! You cant tell that from a chart! (the article was on zerohedge)

 

This is called a market tendency and many traders trade like this. They are extremely profitable via taking trades in verified market tendencies.

 

If someone is the type that don't have time to trade every day nor a few times per week...trading during a market tendency is an excellent solution.

[BlueHorseshoe 10]

Sorry I cant agree.

 

Hi Dude,

 

I wasn't really trying to make any serious point, to be honest. I liked the sentence structure of your original post, and was simply playing around dropping different elements into it . . . I had a coffee break to fill.

 

I agree with what you say about the different situations people operating in funds etc are in. It must be weird situation to be 'responsible' for such large sums of money and yet to be so hands-off. Similarly, one has to wonder what those whose job is to find price improvement must make of some of the orders that are handed to them.

 

BlueHorseshoe

[TheDude 10]

Hi Dude,

 

I wasn't really trying to make any serious point, to be honest. I liked the sentence structure of your original post, and was simply playing around dropping different elements into it . . . I had a coffee break to fill.

 

I agree with what you say about the different situations people operating in funds etc are in. It must be weird situation to be 'responsible' for such large sums of money and yet to be so hands-off. Similarly, one has to wonder what those whose job is to find price improvement must make of some of the orders that are handed to them.

 

BlueHorseshoe

 

True.

 

I guess it removes some of the bias from the equation.

 

I mean if your handed a sell order in a screaming rally, you can at least say to yourself 'Well I never made the decision', and wait at least until the move slows. You can only do your best.

[SIUYA 11]

I read somewhere that if you look at the stock market, 80-90% of returns in the last 70 odd years have been made in the 3 days around FOMC rate decision days. In other words, you could have the entire gains of the last 70 years by only being in the market for 30 or so days of the year each year! You cant tell that from a chart! (the article was on zerohedge)

 

I agree with wrb trader - there can be value here, but this is one of those often quoted statisitics that miss the other side of the coin.

All the falls in the markets have probably occurred in only 30 days as well.

Another great one people use is 80% of options expire out of the money - hence you should short them......:doh: - they forget about the ones that get rolled, and the 20% of the time that wipes out your account. However that is not to say that there might not be value in it.

 

I would say the real value is only trading when there is a reason to.

 

(another simple one to use a quant friend showed me is to wait until the markets crap out and then look to buy good stable high dividend paying cash flow stocks - problem is these opportunities are rare)

[SIUYA 11]

True.

 

I guess it removes some of the bias from the equation.

 

I mean if your handed a sell order in a screaming rally, you can at least say to yourself 'Well I never made the decision', and wait at least until the move slows. You can only do your best.

 

oh there is still a good amount of skill in operating an order - being able to read the ebb and flow of the market. They have the advantage of only having to go one way, not worry about stops, and to follow instructions - they have the disadvantage of usually having to follow the instructions, put up with the sales guys, or PM, beat vwap (or other measure) ensuring they get filled, and usually managing other orders - eg; what happens when you have a large order to sell on a screaming rally day as well as large orders to buy - do you favour one or the other? It is a different skill set.

The difference for them is that the next day they wander in and sit down and get a new set of orders - like analysts - the risk is transferred to another person who actually does the trade.

[BlueHorseshoe 10]

I guess it removes some of the bias from the equation.

 

I think one reason that people use charts which hasn't been mentioned explicitly is that some people are naturally visual thinkers. While I can grasp many mathematical concepts, for example, I'm not really very good with numbers; I struggle to see relationships between numbers, and can't even remember my own mobile number. Using a chart puts a load of forgetable figures into a historical, contextual, and highly visual relationship. The problem is that a good trader with a good head for figures will remember only the most salient data points. A chart remembers every data point, so then one has to find ways to "forget" the insignificant data.

 

BlueHorseshoe

[Obsidian 10]

Thats interesting.

 

Why the move from stocks to FX?

 

I would have thought some fundamentals/news stories would be pretty useful in FX - interest rate decisions obviously and other economic releases. I used to trade FX futures exclusively. It seemed it was really the reports that would set the trends for the next x days.

 

I could never get my head around stock fundamentals or longer term commodity fundamentals though.

 

Mixing charts with other methods as you mention seems a common sense approach to me (FWIW).

 

I read somewhere that if you look at the stock market, 80-90% of returns in the last 70 odd years have been made in the 3 days around FOMC rate decision days. In other words, you could have the entire gains of the last 70 years by only being in the market for 30 or so days of the year each year! You cant tell that from a chart! (the article was on zerohedge)

 

hmm what made me move to fx..well, there are less instruments to focus on, trading hours allow me to trade while i am at home (since i live in asia, i can trade during the london session without any distraction) and i can rely more on technicals (hard to manipulate compared to stocks)...

[SIUYA 11]

I think one reason that people use charts which hasn't been mentioned explicitly is that some people are naturally visual thinkers. While I can grasp many mathematical concepts, for example, I'm not really very good with numbers; I struggle to see relationships between numbers, and can't even remember my own mobile number. Using a chart puts a load of forgetable figures into a historical, contextual, and highly visual relationship. The problem is that a good trader with a good head for figures will remember only the most salient data points. A chart remembers every data point, so then one has to find ways to "forget" the insignificant data.

 

BlueHorseshoe

 

good point - it raises another issue.

Humans are naturally good at seeing patterns and recognising, however when it comes to data and such, often those patterns have no real significance. (others may say this better)

 

When it comes to trading thats why often the visual is the road map and you have too see what happens when you get to certain points on the map.