# Technical Analysis in Isolation of all Speculation?



## alwaysLearning (9 May 2008)

I'm just wondering to what extent one can rely 'purely' on T/A to use as a tool for making decisions?

I mean is it possible to make decisions in complete isolation of rumor and speculation. Is it wise to not look at all at the speculation and just focus on the charts?

What are your set ups? Do you have a TV switched on where you can listen to CNBC or Sky Business Channel or something like that--even if all you do is obtain a general knowledge of what is going on in the world.

Yesterday I watched Bloomberg channel and they were saying that there is a lot of speculation that oil price will continue to rise.

I guess my question is:

To what extent do you listen to speculation before applying Technical Analysis?

Do you read news in things like Business Weekly Review etc?

What do you guys do for obtaining a general knowledge of the markets?--and how important is that knowledge when using Technical Analysis.

I've read that in T/A you can ignore everything and just watch the direction the market is trending and make decisions accordingly, but I'm just wondering if there should be a balance in terms of having some clue about the speculation out there that is causing 'risk' in the market etc.


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## Temjin (9 May 2008)

There is a say that goes something like this,

The price of a share contains ALL the market's collective perception of its "fundamental" at a particular time. However, it does not represent the true value of the security as the theory of market efficiency where all humans will always make rational decisions is by itself flawed. Psychological biases such as greed and fear have a much bigger effect on how the share prices move than its underlying fundamentals. Trends exist because there is greed and fear. Using historic prices to "guess" what the future might do is not totally illogical because humans have never really changed since they walked the planet. That is, they always collectively act in an emotional manner and in a consistent and "predictable" way. Technical analysis attempt to exploit these psychological biases.

So to answer your question, yes, in theory, one can simply use pure T/A as a tool to make trading decisions. Many have done so successfully and consistently in the past. There are no reasons why this would stop working as long as human emotions exist. 

Do note that the above are my believes only so I'm sure someone will find various reasons to dispute it. 

Another interesting insight that I have gained recently is that when a market security, for example, oil, has made a particular price action move such as a correction or trend reversal, the fundamental mobs will alway found a pretty logical and valid reason to explain the move. (like latest data show blah blah, fears of supply drop, highly risk of war in Iran, new evidences show that opec has then market reacts to this news, etc, etc) 

Likewise, the technical mobs will also attempt to explain the move through price action alone such as reaching support/resistance, new Elliot wave count, overbrought/oversold conditions, Planet mars aligned with our moon, blah blah blah. All these make valid senses when you understand how they work, or how you see they should work. 

Another way to explain this is one can almost always see a confluence that seemly have occured coincidentally for a particular security. For example, just when you see something on the charts that a particular share has started to correct or reverse because of whatever indicators you have used to predict the move, a new, previously unheld fundamental news was announced for that particular share to also explain the move. 

To me, it is almost as if the fundamentals seem to follow the technicals. (I could offend someone here) hehe

Very theortical here.


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## Trembling Hand (9 May 2008)

alwaysLearning said:


> Yesterday I watched Bloomberg channel....




Don't! 

If you decide to trade charts thats all you need. News can be helpful to frame your outlook but trading from it will have you buying at the top as the media are the last to figure out anything and get the loudest just at the top of everything. Did you see the hype they gave gold after it broke $1000. 2 days later it was at $900. 

Just read the charts.

When you can read charts you will then find that you spend most of your fading the news.


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## Vito (9 May 2008)

Hi,
   My two cents worth is that you should be informed about what is happening in the markets but  believe what I see on a chart rather than what a commentator may say.
  Vito


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## It's Snake Pliskin (9 May 2008)

Vito said:


> Hi,
> My two cents worth is that you should be informed about what is happening in the markets but  believe what I see on a chart rather than what a commentator may say.
> Vito




We are never truly informed. Opinion is merely opinion.


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## treefrog (9 May 2008)

the FA v TA debate will be with us forever I fear so get used to it.

One interesting way to consider whether a chart is worth something to traders is to pose the question:
"what information is not factored in to this picture?"
1) are all fundamentals factored in? yes, the FA guys bought/sold on their weeks of research
2) are the director's buys/sells factored in? yes,
3) are the inside trades in there? yes
4) emotions, media hype, psyche etc etc yes, yes, and yes
in fact the only thing the chart does not include at any instance is what is unknown (future)

of course a fundamental issue will move that chart in future

but the chart represents the market's verdict at any given time

but the most important thing with charts is to know yourself whether you are using it to tell you what the market did or what it is likely to do, subject always to future information.

the fundamentalists have a point that historical information is not worth a great deal and most indicators used on charts are lagging the current info that is available.

But successful TA traders will struggle to show you any system that is right more than 50% of the time - they get their main edge from strict money management


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## MichaelD (9 May 2008)

Temjin said:


> Another interesting insight that I have gained recently is that when a market security, for example, oil, has made a particular price action move such as a correction or trend reversal, the fundamental mobs will alway found a pretty logical and valid reason to explain the move. (like latest data show blah blah, fears of supply drop, highly risk of war in Iran, new evidences show that opec has then market reacts to this news, etc, etc)
> 
> Likewise, the technical mobs will also attempt to explain the move through price action alone such as reaching support/resistance, new Elliot wave count, overbrought/oversold conditions, Planet mars aligned with our moon, blah blah blah. All these make valid senses when you understand how they work, or how you see they should work.



It has been a great source of amusement to me to see the news headlines lately on Reuters commenting on the US markets. I as a routine always check what the DOW has done overnight.

Last week, day after day, we had "Market drops on higher oil prices".
This week, we had "Market rises on higher oil prices".

A truly classic example of the non-value of news. All news does is attach an explanation after the fact to something which intrinsically does not require an explanation - it'd be pretty boring to read "Stock market up today. Don't know why"; "Stock market down today. Don't know why".


Analysis of ANY flavour does not of itself provide an edge in the markets. This is of course heretical to both fundies and techies, but is borne out by a vast body of academic research on the financial markets.

Those that make money consistently from the markets are those that are the best risk managers. (Or those that make their money by doing things other than actually trading - brokers, spruikers of black box systems, etc.)


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## MRC & Co (9 May 2008)

Yeh, agree with the above.  I only use the charts when trading, except for the example below:

Setup - Waiting for a company I find significantly undervalued, to consolidate or bounce off support, then go long.  It's the only time I will mix fundamentals with trading.  

If you want to invest, definately fundamentals are the way to go (but I would avoid buying on a downtrend, this is the only time I use T/A with my investments).  I keep a small portfolio of long-term investments in undervalued companies.  CCP, EQN and JST being these currently.


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## Schmuckie (9 May 2008)

MRC & Co said:


> Yeh, agree with the above.  I only use the charts when trading, except for the example below:
> 
> Setup - Waiting for a company I find significantly undervalued, to consolidate or bounce off support, then go long.  It's the only time I will mix fundamentals with trading.
> 
> If you want to invest, definately fundamentals are the way to go (but I would avoid buying on a downtrend, this is the only time I use T/A with my investments).  I keep a small portfolio of long-term investments in undervalued companies.  CCP, EQN and JST being these currently.




This is an approach that makes great common sense for timing.  Can anyone recommend a website or basic rundown of how to understand charting, along the lines of the Charting for Dummies?

Many thanks,
Schmuckie


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## MRC & Co (10 May 2008)

Intro to T/A:  

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:introduction_to_tech

Support/Resistance basics:

http://www.investopedia.com/articles/technical/061801.asp

Very basic rundown of most traditional patterns:

http://www.incrediblecharts.com/sitemap.php?cluster=8

Cheers


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## Schmuckie (10 May 2008)

Thank you, MRC & Co!


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## tech/a (10 May 2008)

Of course you can,I thoroughly recommend it.
You dont need hrs of research.

Purely technical for 14 yrs.

I was recently trading RWD 

https://www.aussiestockforums.com/forums/showthread.php?t=6228&page=4

Noticed this discussion over in the Fundamental section.
I had no idea what RWD did--I do now.
I don't care what a company does nor do I care what is happening in general terms.
Reading from post 73 you may have an interest in the analysis--"It was/is pretty simple".

*All I see is a code,a chart,and a trading strategy,it succeeds or it fails.
*

After 14 yrs I'm still at it so success dominates.


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## tech/a (10 May 2008)

To go a little further.

*Fundamentally I/You have a business*---a trading business---its size doesnt matter,your aim is to grow that business like all the businesses you invest in are trying to do.

What continually amazes me with many traders particularly the Fundamental guys (no offence to you guys ---you put in an enormous amount of work into your investments)--*BUT* I continually see very poor business practices in the care and control of your *OWN* trading business.

I see excellent decisions made with excellent profits gained for these Trading businesses only then to see management of these businesses make horrible decisions.

Ive watched 100% profits fall to zero and worse.
Ive seen brilliant investment decisions turn to terrible management calls in investing more and more in "beliefs" as a trade falls from great profit to loss---good money chasing bad! (Averaging down).

So rather than the argument being about which analysis is best I feel you/we should be looking at the *REAL* determinate factor of profit in our *OWN* businesses.

*Our own management of our own business!*
All the analysis in the world wont rescue a poorly/badly run business!


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## alwaysLearning (11 May 2008)

Thanks everyone, I just needed to know that this was possible and that successful professional traders are out there that operate on the basis of using purely technical analysis.

I respect the people that use fundemental analysis and note from my research that many of them are very successful.

However I seem to be more inclined towards the technical analysis approach and so will look to go more towards that direction.

Many thanks to everyone for their input into this thread


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## Wysiwyg (18 May 2014)

treefrog said:


> But successful TA traders will struggle to show you any system that is right more than 50% of the time - *they get* *their main edge from strict money management*



Yes it's not simply a matter of buying with a stop loss and take profit in place. These two critical factors need ongoing review.


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## luutzu (19 May 2014)

Temjin said:


> There is a say that goes something like this,
> 
> ....
> To me, it is almost as if the fundamentals seem to follow the technicals. (I could offend someone here) hehe
> ...




The fundamentals follow the business, the technical follow each other 

Ben Graham put it best: Some people believe price represent value, when it should be the other way around.


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## DeepState (19 May 2014)

treefrog said:


> ...historical information is not worth a great deal and most indicators used on charts are lagging the current info that is available.
> 
> But successful TA traders will struggle to show you any system that is right more than 50% of the time - they get their main edge from strict money management




Can you please tell me how...if there is no edge in prediction....strict money management actually creates an edge from which TA makes money?  I appreciate that, even with an edge, poor money management can blow away your portfolio.  But without an edge, how do stops and breakeven etc actually create money?

This is not to say that analysis, per se, necessarily saves the day either in terms of generating an edge.


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## Boggo (19 May 2014)

There's fact and then there's fiction.

One major example below in pics 2 and 3.

Locally there was a few of note, who can remember the retail house of cards from the late 90's in the first chart.

I believe that funnymentals and technical can work well together but only trust what you can see in front of you.

My


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## CanOz (19 May 2014)

Great post Boggo...i wanted to reply as well, but my heads pounding and i couldn't imagine another T/A-F/A argument.


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## Boggo (19 May 2014)

CanOz said:


> .... and i couldn't imagine another T/A-F/A argument.




Yep, not going there again, no winners there


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## Joe Blow (20 May 2014)

Just a quick note that I have moved this thread to the *Stock Market Nuts and Bolts* forum as I think it's a little too advanced for the *Beginner's Lounge* forum.


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## Boggo (20 May 2014)

DeepState said:


> Can you please tell me how...if there is no edge in prediction....strict money management actually creates an edge from which TA makes money?  I appreciate that, even with an edge, poor money management can blow away your portfolio.  But without an edge, how do stops and breakeven etc actually create money?
> 
> This is not to say that analysis, per se, necessarily saves the day either in terms of generating an edge.




I "invest" in the StockDoctor Strong and Satisfactory (fundamentally) group of stocks, currently 479 stocks, using weekly buy and stop etc signals.
Good fundamental reports seem to provide that bit more support to the trend, it becomes more reliable.

Fundamentals alone on that group would probably still have me holding the likes of SUL whereas applying tech analysis allowed me to move out SUL and add to NHF as an example.

This is the backtest result of the current group based on the period (nearly 10 years) that I have been running this account. It is fairly close to the actual outcome but obviously a lot of stocks in that current would not have existed over that period and others would have come and gone.

The test results obviously do not take into account dividends based mainly on instalment warrants which I use on many stocks such as TLS etc..

Note on the result that number of losers greatly exceed the winners, its the size of the winners that matter.

The bottom chart is a pictorial example of the process on the weekly chart of BTT (which I am out of again).

System backtest (click to expand)


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## cynic (20 May 2014)

DeepState said:


> Can you please tell me how...if there is no edge in prediction....strict money management actually creates an edge from which TA makes money?  I appreciate that, even with an edge, poor money management can blow away your portfolio.  But without an edge, how do stops and breakeven etc actually create money?
> 
> This is not to say that analysis, per se, necessarily saves the day either in terms of generating an edge.




If you examine your post carefully you may notice that you've actually provided an answer to your own question.

"...even with an edge, poor money management can blow away your portfolio.."

Oftentimes when a portfolio is blown away by poor money management somebody else will usually benefit (i.e. profit) from that trader's losses!


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## Wysiwyg (20 May 2014)

Boggo said:


> This is the backtest result of the current group based on the period (nearly 10 years) that I have been running this account. It is fairly close to the actual outcome but obviously a lot of stocks in that current would not have existed over that period and others would have come and gone.



Improvement could be made with Interactive Brokers 0.08% flat rate per trade as opposed to the $33 per trade ($66 round trip) you allocated in the back test. Though I add more brokerage on my test runs to compensate for possible entry/exit slippage in present time. Yeah that survivorship bias is a biggy.



> It’s called survivorship bias and it’s an idea that has its roots in World War II, when mathematician Abraham Wald helped steer the US Army Air Forces away from a potentially costly mistake.
> 
> Journalist and author David McRaney tells the story on his blog, You Are Not So Smart. The background: the USAAF was suffering huge losses of life and aircraft and was studying planes that had made it back to base for signs of how to better protect them.
> 
> ...


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## DeepState (20 May 2014)

Boggo said:


> I "invest" in the StockDoctor Strong and Satisfactory (fundamentally) group of stocks, currently 479 stocks, using weekly buy and stop etc signals.
> Good fundamental reports seem to provide that bit more support to the trend, it becomes more reliable.
> 
> Fundamentals alone on that group would probably still have me holding the likes of SUL whereas applying tech analysis allowed me to move out SUL and add to NHF as an example.
> ...




Hi Boggo

Thanks for this. It is very thoughtful and there is much that I agree with in terms of underlying rationale.  

This is what I see in the results you have provided:

+ There is a database of stocks which have been used.  Due to data restrictions, these will inevitably result in survivorship bias.  From my experience (I was a money manager with world class tools and team that did this sort of thing), I know that this will be strong when the backtest period is this long.  This will materially skew results into stocks that have done well.  Stocks that have done well will have an inherent trend within them.

+ You have chosen a stock screen to aid in directional positioning.  But you seem to trade intraday where fundamentals just can't assist materially.

+ Your backtest included stops etc.  I can see from the stats you have provided that there is a deep skew in outcomes which suggests to me you are using some form of grail or pyramid type strategy with possibly a trailing stop in place.  In essence you are purchasing a type of synthetic option in a generally rising market.  It will deliver you an above cash return if you happen to be in an able to pick direction.  Given the database is skewed to high trend, this is not an adequate test of predictive power.  Random selection would also do quite well.

+ In the presence of in-built trend, it ought not be surprising that profitability is positive for the strategy employed.  

+ You have limited losses via some sort of stop and this limits losses for an individual trade.  It can be applied to other levels too.  For a diversified investor, a stop should, for example, be placed at the overall portfolio level rather than at the level of individual stocks for the most part.  Insuring each position is actually over-insuring as it does not allow for diversification benefits which are inherent.

+ I cannot tell how much of the profit you are showing comes from inherent trend due to survivorship bias (it would be large), fundamental screening and, separate to all of these, TA overlay.  This would not be achievable from the backtest engine you seem to be using.  

My question remains as to whether the TA part actually adds value if you don't have a the ability to be directionally accurate.  I think you are trying to explain that the strategy worked which included TA.  But, despite the issues I have raised above,  suggests that directional prediction remains necessary for TA to be useful.  

If you are able to pick trends then all sorts of aggressive strategies would work.  Or even buy-hold.  But they are all conditional on picking direction.  Yet, some seem to believe that risk management is all that is necessary to succeed.  As I mentioned, I don't believe that risk management alone makes you money.  It actually can't.  So it puzzles me why some people believe this.

In terms of risk management though, it is not that it is useless.  Far from it.  When trading with an edge, you have to be alive to see your edge play out.  But the edge is what creates profit expectation.  Risk management provides a surer way to get there. If you have a high chance of blowing yourself up, the expected return for a given strength of edge declines as you need to 'pay' for insurance in the form of deep-OTM-Puts (or their synthetic equivalent) or otherwise bear the cost of potential ruin. At the extreme, just to make this point, super-tight risk management will just earn you the cash return.  'Riskless'.  It doesn't make you money without an edge - does it?


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## DeepState (20 May 2014)

cynic said:


> If you examine your post carefully you may notice that you've actually provided an answer to your own question.
> 
> "...even with an edge, poor money management can blow away your portfolio.."
> 
> Oftentimes when a portfolio is blown away by poor money management somebody else will usually benefit (i.e. profit) from that trader's losses!




Hi Cynic

Sorry to hear you're having a tough trot.  Nil all each day.

I totally agree that bad money management decreases profit expectation in the presence of an edge.  However, that's not the situation I'm querying about.  

How does risk management actually add value without an edge?  Some TA commentators who people on ASF seem to regard highly will claim that, even though they have no directional predictive ability, returns can be generated via various TA methods to 'bend the distribution'.  This seems implausible.

I know you trade options.  Certain types of options (with OTC style payoff structures which may include escalators etc) have similar payoffs to grail type strategies, for example.  If I have no idea which direction the market will go in at all, simply purchasing a call will do nothing for me over time than deliver me a cash return.  Same with a put...in bought or written positions.  Skews/Smirks for the relevant maturity are priced in.  In option land, you have more variables to think of than in linear land, but I'm sure you see this analogy given your experience with this stuff.

Ignoring predictions in the other Greeks except for delta (given we are really talking about linear instruments in the end), you can't make money in options without directional accuracy.  If you can't make money in options without directional accuracy, you can't make money bending distributions either without directional accuracy.  Every conceivable TA strategy can be housed in OTC options and are able to be hedged given they are able to be implemented in a TA strategy.

If you wish, you can relax my restriction on the other Greeks.  It still leads to the same conclusion.  If you can't forecast direction, or other relevant variables which are relevant to option pricing, you get no profit in the wash up.


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## Boggo (20 May 2014)

Hi DeepState.

You certainly seem to have a much better analytical approach to the process that what I have. Mine is to simply find an entry point on (apparently) better than average stocks from a fundamental perspective.
In some cases I have no knowledge of the background etc of the stock, I will have a look to see the latest news and if and when it pays a dividend.

There are many issues with the backtesting process, the case of the biggest winner JIN being where I held less than it assumed and in the case of the backtest another being NEA where I held more than it assumed. I apply more of a discretionary approach to each, the average overall outcome is fairly similiar though.
The backtest doesn't pyramid amount held but does pyramid base finds and increases the amount available for each stock proportionally.
Those are probably the negatives that may erode the results a bit.

The positives that more than make up for it are items such as pyramiding existing positions (NHF currently) and TLS as one example where I have never held the stock but have made profit from both the instalment warrants and the dividends, an approximate average 2.4 times the dividend per share instead of just 1x if I held the underlying TLS share.
(TLSIOM will be off loaded tomorrow or the next day for a profit after it has earned quite a bit in dividends, it expires on 23rd)

The discretionary factor is an advantage too where it takes less than a minute to exit a stalling uptrend and either fund a new or add to an existing position.

Apart from the relatively minor discrepancies as mentioned, looking at the individual trades that are in the results gives me confidence to continue the same process of a combination of fundamental support to a technical process.

Cheers


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## cynic (20 May 2014)

DeepState said:


> Hi Cynic
> 
> Sorry to hear you're having a tough trot.  Nil all each day.
> 
> ...




Thanks for your reply RY.

Again your theories are at variance to my actual experience of trading the financial markets. 

I do minimal directional analysis in my trading. I could just as easily dispense with the directional analysis altogether and still maintain a (reduced) level of positive expectancy! 

Whilst some may achieve an edge via directional prediction it is by no means the only way to trade profitably!

Edit: I am of the opinion that some traders give the market way too much credit for adherence to mathematical theory. Many of these theories fail far to often for such faith to be justifiable.


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## Ves (20 May 2014)

My understanding was that the initial question was this, paraphrased into my own words:

(RY can confirm)



> Can technical analysis be profitable without having an analysis edge and instead relying on risk management practices as the sole source of profitability?




We seem to be confusing terms here.  So the important terms are:

Technical analysis
Edge (lack of)
Risk management

Cynic,  you are now talking about,  what I assume  (sorry your posts are not clear to me at all in this thread) are neutral or non-directional options strategies.  Which I assume are based more on the assessment of volatility,  and other measurements such as this, rather than taking advantage of the probability that the market price will move in your favor. In other words you gain advantage because you can price risk better than other participants in the options market.

If I have this bit of understanding correct,  I would suggest two things:    this probably infers firstly that you are not practicing technical analysis  (most definitions that I can find suggest that it is the analysis of price direction or price action) which would mean that it is not relevant to the initial question and secondly that despite having sound risk management (well, don't you?) your source of success (should you have any) would be more reliant on your expertise (ie. you have an edge) in assessing the options data and making decisions upon this analysis,   rather than profitability arising from risk management and only risk management.

It might be easier if RY and yourself defined the terms that you are using much more clearly,  so it is easier for you to communicate and definitely easier for RY and yourself to be held accountable.


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## cynic (20 May 2014)

DeepState said:


> Can you please tell me how...if there is no edge in prediction....strict money management actually creates an edge from which TA makes money?  I appreciate that, even with an edge, poor money management can blow away your portfolio.  But without an edge, how do stops and breakeven etc actually create money?
> 
> This is not to say that analysis, per se, necessarily saves the day either in terms of generating an edge.






cynic said:


> If you examine your post carefully you may notice that you've actually provided an answer to your own question.
> 
> "...even with an edge, poor money management can blow away your portfolio.."
> 
> Oftentimes when a portfolio is blown away by poor money management somebody else will usually benefit (i.e. profit) from that trader's losses!






cynic said:


> Thanks for your reply RY.
> 
> Again your theories are at variance to my actual experience of trading the financial markets.
> 
> ...






Ves said:


> My understanding was that the initial question was this, paraphrased into my own words:
> 
> (RY can confirm)
> 
> ...



Ves,

It seems I may have overlooked RY's reference to T/A in the question to which I was originally responding. 
The point that I believed myself to be confirming was that risk management alone can confer an edge for the simple reason that those deficient in such practice usually end up donating much of their trading capital to the more disciplined market participants. 

However, I certainly agree that there is a clear distinction between the concepts of risk management and T/A.

As for options strategies, many of them are deployed pursuant to directional analysis of the components from which their pricing typically derives, whether that be analysis of the price direction of the underlying, volatility interest rates etc... 

(I could say something further here but I do not wish to surrender my edge.)


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## DeepState (21 May 2014)

cynic said:


> 1. Again your theories are at variance to my actual experience of trading the financial markets.
> 
> I do minimal directional analysis in my trading. I could just as easily dispense with the directional analysis altogether and still maintain a (reduced) level of positive expectancy!
> 
> ...





Hi Cynic

Thanks for pursuing the thread.

1.  If your experience is at variance with these theories there are the following possibilities:
a) you have experienced a positive idiosyncratic variance (that's a nice way of saying you were just lucky)
b) you actually do have predictive power which generates an edge
c) the mental model which I am bringing to the 'table' is wrong.

I believe that the mental model I have brought to the table is correct and have asked how profit is achievable without edge.  I am also interested to know why people believe bending distributions somehow generates returns.  In my understanding of the way the world works, it cannot.  If it did, it would require the equivalent of financial alchemy.  Two TA traders bending distributions in opposing directions without edge cannot, in sum, make money.  But, if is believed that bending distributions does generate an edge, this is only possible in some sort of weird situation where money gets created and handed to both TA traders.  This is clearly lunacy.

2. Whilst you may not be a directional player, there are indeed other ways to make money.  I was referring to an edge in prediction. I did not specify it had to be directional in my first question on this thread and suggested you could relax the sources of prediction axes in the options discussion to include all Greeks.  It need not be directional (delta).  As you have alluded to in your response, you believe there is an edge in your identification of options positions.  I used to trade Gamma.  I know what you mean about non-directional edge.  This involved virtually no directional prediction in a long term sense.  It involved an edge in other parts of the components of option pricing.

I suspect that the reason why your experience is at variance is because you may possess an edge there.  Treasure it. Protect it. Risk management helps you preserve it and maximize your chances of extracting it from the market.  Risk management is not actually making you money.

3. I certainly agree that some quants take their models too literally and can come unstuck.  In the Sub-prime and CDO meltdown in particular, the copula functions were found to be unstable.  That blew a lot of balance sheets away.  In 1987, the CPPI approaches that were so popular at the time, found the markets to be discontinuous as opposed to what was assumed.  That said, there are many many more instances that I have witnessed and been a part of where models support decision making very successfully.  For me, the amount of interest I show towards models requires a deep understanding of their underlying assumptions and questioning if they are fact or opinion.

In the obverse, I have seen a great many investors who eschew models entirely, completely impale themselves.  Many of this camp have very inflated opinions of their own forecasting power and lack basis for their beliefs.  That said, I have also led, been part of, spent time with, interviews, drank beer with...excellent investors who are less reliant on models.  Many of these have gone on to become centi-millionares or deca-millionares..

At variance with what I observe on this site, out of the hundreds of investors I have worked...drank beer with, only 1 used technical methods to develop and maintain portfolios.  Yet I find here a belief that TA-style risk management, via stops and other methods to increase expectancy dominates thinking and believes this activity alone generates returns.  

This is not to say we did not risk manage.  We did.  But not in this way.  We did not believe that risk management alone could generate returns.  It just stopped us from blowing up before we could extract all we could.  As the late Jack Brabham is quoted as saying (at least paraphrased) "To Finish first, you first need to finish".

4. Your assertion here, that bad risk management hands money to the rest of the market is only correct if you are trading with an edge.  Taking excessive risk reduces your expected profitability but it remains positive.  You could say that poor risk management reduces the amount of money taken from the rest of the market.  It is not correct to say that poor risk management makes the rest of the market profitable because of your poor risk management.

In the situation where there is no edge, you are generating no expected profit so your bankruptcy does not deliver any expected return to the market.  To make this clearer, let's say that you risk manage a stock position to lose at most $100.  Keeping this still, if your wealth only equated to $100...your expected profit would still be zero.  If your wealth was $1,000,000....representing a much tighter level of risk management, your expected profit would still be zero.  In this situation, nothing is lost or gained by poor risk management.  'Excellent' risk management without an edge just keeps the trader in play for longer but does not increase their expected return and, ultimately, doesn't do anything to the expectancy for the rest of the market.  This part relates to my response to 1.  It is this area where I think all sorts of alchemy in TA-beliefs seems to develop from. These are just options with different strikes.  Buy an option without an edge gives you cash. Zero edge leads to zero premium.  Yet the belief by some is that curving the distribution somehow generates returns.


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## Boggo (21 May 2014)

Boggo said:


> (TLSIOM will be off loaded tomorrow or the next day for a profit after it has earned quite a bit in dividends, it expires on 23rd)




Just a one off follow up on this post and process.

Sold TLSIOM instalments and bought TLSIOZ. Exited all of KMD.
TGA has has indicated that it would like to be my friend soon.


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## cynic (22 May 2014)

DeepState said:


> Hi Cynic
> 
> Thanks for pursuing the thread.
> 
> ...




RY thankyou again for yet another lengthy and somewhat amusing reply.

I shall try not to allow my amusement at the enormity of your post distract me from the simple matter raised.

Whilst I wasn't intending this discussion to centre upon my particular trading methodology, I would have to agree that my roughly 1,000 completed trades for FY YTD have enjoyed a healthy SR accompanied by an enviable ROR.

This has been achieved without so much as a glance at a single chart! So yes!!! What else could it be down to but pure dumb luck!!!?

Now what does this have to do with the questions rof T/A, Edges, Risk management and profits I hear someone type? 

Since I don't have terribly many quants, centimillionaires, CEO and fund managers in my circle of peers to name drop, I've opted to establish my credentials in an alternative manner. When it comes to trading I endeavour to practice that which I preach!!!

As was recently pointed out by another poster, there seems to be a difference in our terminological understanding. 

When I refer to an edge (within the context of financial trading), the edge itself is not the profit!

The edge is simply the advantage that one might typically expect to be able to capitalise upon whilst competing for profit!

Whether that advantage be derived from such things as superior resources, analysis, intuition, luck, astrology, voodoo or risk management doesn't change the fact that the advantage is simply an advantage! 

In other words an edge is simply an edge - irrespective of its source!

Virtually any edge may be capitalised upon in the competition for profit! 
Superior risk management can indeed confer just such an edge!!! (I believe that this last statement echoes some of the sentiments in the post by treefrog which precipitated your original question.)


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## CanOz (22 May 2014)

Cynic, would you consider posting some stats on your systems, either back tests or actual is fine, just curious to see what kind of stats your trading


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## cynic (22 May 2014)

CanOz said:


> Cynic, would you consider posting some stats on your systems, either back tests or actual is fine, just curious to see what kind of stats your trading




Thanks for your interest CanOz.

Firstly I wish to reiterate that I definitely do not want this matter to become about my trading methodology so shall refrain from proferring a complete statisitcal picture of my performance. I don't want to open the floodgates to the usual rush of wannabe experts insisting that I'm doing it all wrong and chanting mantras taken from the sacred scriptures of their chosen guru.

Just last weekend (after having made the unfortunate and costly decision to terminate one of my largest deployments early) I hastily cobbled together a snapshot of the total deposits, withdrawals and maximum original capital deployed across all my active trading accounts for FY YTD.

According to my figures, my withdrawals exceeded my deposits by an amount equivalent to 71% of the maximum original capital deployed. The liquidation value of my trading accounts amounted to another 28%. In effect I'd achieved a 99% overall profit on original capital deployed. 

Please note that whilst I'm very happy to be experiencing a reasonably good year, I am actually quite disappointed at my overall performance. I was expecting to triple my original capital and I believe that my failure is almost entirely attributable to faulty risk management. 

There were two occasions where I heavily sold the low and bought the high!  This was due to a design fault in my grail strategy which allowed my position size to increase dramatically (boys and girls - do not try this at home!!!) resulting in the hasty termination of both deployments at an inopportune time (FTSE last December and DAX last week).

Edit: I forgot to mention - I still like to describe myself as a "wannabe" trader


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## DeepState (22 May 2014)

Boggo said:


> ... looking at the individual trades that are in the results gives me confidence to continue the same process of a combination of fundamental support to a technical process.




Good stuff! Glad it's going well for you.


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