Demystifying Technical Analysis

[tech/a]

I'm a beloved favourite of the techies, a deer in the headlights, a favourite target for them when the short-term swings don't go my way, but most likely I'll be still here when they've gone away again, and nothing important has changed for the underlying long-term prospects of the businesses that I gladly hold when most others are hitting the kill switch

.

While I understand this is a general comment it is one I generally support---the first part anyway.

It is not my intention to make this ANOTHER T/A V F/A thread---rather an attempt to demystify Technical Analysis so that those who like to use/add or comment on have a better understanding of HOW /T/A should be approached---well in my opinion.

GENERALLY

Those who do not have a sound working knowledge are frustrated and confused at much which is written both in text and on charts. Opportunists do their best to mystify Trading Using T/A even more in the hope that you'll spend $1000s to become one of the few (Their few) who are privileged enough the "know".

EXPECTATIONS

Are for precise predictions and clear buy sell points which can be acted upon profitably---which are known only to those who "know"
Anyone can make a comment technically after reading a few books/attending a seminar or purchasing a charting package.---Many do.
But what I see and many others see and comment on is the total ignorance to--

APPLICATION of ANALYSIS

Prolonged application with a profitable outcome long term.
Putting it all together--not once or this year but on EVERY TRADE in EVERY MARKET.
This you simply DONT see on this forum or to my knowledge any other. Unless of course you are a member of "The Chartists"---You follow Penfold or Subscribe to Todd Kruger or your name is PAV.

ITS NOT ABOUT BEING RIGHT.

Its about anticipation. Recognizing that the behavior exhibited by the participants in an instrument alert you to a pending OPPORTUNITY.
Its about understanding that the application of your analysis will place you in a position to benefit but MORE IMPORTANTLY it will place you in a positions that alerts you that your anticipation is simply WRONG
and you can rescue your hard earned from harms way to live to take advantage of the next opportunity.

You can be clear and clinically precise. No guess work --- no hope---no fear just Right--continue---wrong --Stop.
You have the opportunity to manage each and every trade---each and every component of your portfolio.
With the continued view of maximizing the performance of EVERY SINGLE $ you place in the market.
By Application of Technical Analysis.

BEWARE--

So when you next see a technical view understand that the exponent may have NO IDEA how to apply his craft.
Look at the next chart and see if the application of the analysis spots opportunity.
How can you profit from it and
WHERE is it clearly wrong! Always look for Practical Application of the analysis.

There are no SECRETS

There is no need to invest $1000s-----just become an expert in BEING WRONG--This can be during a trade just as easily as at the beginning of a trade.

This---is where the MONEY IS!

 

[brty]

Not sure exactly where you wish to go with this thread Tech, though the line "attempt to demystify" I assume is aimed at those who think it nothing more than voodoo, mostly fundamental analysts.

I was thinking of posting something recently myself on another thread where the FAs were quoting some well known professors who have fundamental approaches and dismiss TA. One being Damodaran, here.....

http://pages.stern.nyu.edu/~adamodar/

The mention of TA on his site is only in his book "Investment Fables" which is self explanatory as to what he thinks of it. Reading chapter 12, one can easily detect that he has not delved into TA sufficiently to make the debunking claims he does.

It is not my intention to make this ANOTHER T/A V F/A thread

I do not have any qualms about using FA though primarily TA, most of the arguments between FA and TA seem to be more about using, or not using stop losses.

What it it you are asking of posters to this thread Tech?

 

[Gringotts Bank]

Being ok with being wrong - it took me a long time to learn that attitude. Actually I still get miffed when I have too many losers in a row.

The mystery man in the following article has an interesting method for knowing when he's wrong, and subsequently, when to stay out of the market. He doesn't use TA or FA, but instead flies by the seat of his pants. So it's obviously possible to wing it, so long as you are able to take yourself out of the action in a disciplined way as he does. Most here will say, "don't try that yourself", and they may be right, but how to argue with such success? I guess he could blow up, but would he? He's a big time fund manager so surely he has risk profiles to adhere to. Anyway he made "having no system" work for him... Probably not an easy thing to replicate.

It was to be published in Jack Schwager's well-known "New Market Wizards", but never made it. http://financetrends.blogspot.com.au/2012/01/zen-and-art-of-trading.html

Market Wizards free ebook in PDF here: page 155 is the reference. http://www.beursplaza.com/ebook7.pdf

 

[burglar]

... What it it you are asking of posters to this thread Tech?

Hi brty,
I didn't know either.

When I first fell into ASF I could not believe the divide created between TA and FA.

With every post it is widened and deepened.
Skillfully manicured and preened.

I did not even know what "Fundies" were!!
Starts with F - rhymes with undies - couldn't be good.

Funny thing, ... I think it is a nonsense!!
Both sides!! :

 

[tech/a]

Hi brty,
I didn't know either.

When I first fell into ASF I could not believe the divide created between TA and FA.

With every post it is widened and deepened.
Skillfully manicured and preened.

I did not even know what "Fundies" were!!
Starts with F - rhymes with undies - couldn't be good.

Funny thing, ... I think it is a nonsense!!
Both sides!! :

Which part of " I don't want to make this an F/A V T/A thread."
Isn't clear Burgler?

My motive is more a statement from observation.
Poor T/A is often presented from so called educators.
Designed to impress the un informed with HINDSITE proof of
Future accuracy ---- and some do it HERE.

The Same un informed have no idea the power of APPLICATION
T/A opens more control for each trade and every portfolio that
Implements it's correct application.

Poor exponents abound everywhere here included.
Comments I have seen here like the one above have prompted me to
Start this thread.

To watch un informed comment from people time and again should be answered.
I don't have the time to answer the many questions that SHOULD be asked by those who are
Genuinely interested in investigating a method of trading in one post which once mastered is

Quick
Succinct
Concise
Visual
Decisive
Measurable
And simple.

The point I'm making is don't put exponents of T/A in one pigeon hole.
There are FEW good ones professional or Amateur.
Don't be fooled by mystique.
Good exponents will be able to show sound application of T/A in all markets
Going forward ---- and most of all will be able to demonstrate how to boost stock
And portfolio management and ultimately profit and risk management as they
APPLY their analysis.

 

[habanero]

Great points and helpful.To me it looks easy. But I'm new. Happy for some pointers.

* Position size/risk manage wisely/conservatively
*Use a cheap online broker like IB so the buy sell is not eating into your profits.
*Find an indicator which reinforces a positive trend.
*Liquid stocks only where ticks are a small percentage.
*Hop on after checking fundamentals that there is little chance of major slippage eg trading halts
*Always use a trailing stop. Set it according to volatility of price.
*Don't worry about number of losses if you follow the above.
*Tinker with trailing stops to maximize gains but never during a trade. Only after analysis of profits over a period.

I'm thinking that a 52week high is a good enough technical indicator to swing the odds of a trade going in your favour.

 

[tech/a]

Great points and helpful.To me it looks easy. But I'm new. Happy for some pointers.

* Position size/risk manage wisely/conservatively
*Use a cheap online broker like IB so the buy sell is not eating into your profits.
*Find an indicator which reinforces a positive trend.
*Liquid stocks only where ticks are a small percentage.
*Hop on after checking fundamentals that there is little chance of major slippage eg trading halts
*Always use a trailing stop. Set it according to volatility of price.
*Don't worry about number of losses if you follow the above.
*Tinker with trailing stops to maximize gains but never during a trade. Only after analysis of profits over a period.

I'm thinking that a 52week high is a good enough technical indicator to swing the odds of a trade going in your favour.

Sorry but this is exactly my point.

Im Not Personally attacking you.

Much T/A is similar,ar to your suggestions here.
They are ideas an hypothesis.
There is NO PRACTICAL APPLICATION.
And even more importantly Unless you know your application of
Analysis is returning a long term posive expectancy your at BEST
Guessing at worst ( when you apply your hypothesis/ ideas )
GAMBLE.

 

[Gringotts Bank]

The Same un informed have no idea the power of APPLICATION

The power of APPLICATION?

Please explain.

 

[notting]

Funny thing, ... I think it is a nonsense!!
Both sides!! :

Hmmm.
What does that leave me with.
Darts? Insider trading?

 

[tech/a]

The power of APPLICATION?
Y
Please explain.

happy to do so but not tonight.

But firstly if your trading how on earth
Do you apply a profitable method.
If you need explanation?

 

[Gringotts Bank]

happy to do so but not tonight.

But firstly if your trading how on earth
Do you apply a profitable method.
If you need explanation?

By application, I assume you mean "just do it" or "put it into action". If so, I agree. One has to act. One has to pull the trigger.

 

[waza1960]

While I agree with 90% of Tech's first post here.
This is how I look at T/A........................................
Although I have studied T/A extensively and enjoy learning about and utilizing it.
I simply believe thats its importance and relevance to making a profit from trading is overrated.
Trading novices are drawn to T/A because its feeds into human psychology and Bias such as
confirmation Bias/ conservatism bias and the need to be right,to find the Holy Grail and of course
numerous educators and or charlatans are there to exploit/fill this need.
Here's an example of what I'm talking about.............
Most educators and novice traders concentrate on Trade entry conditions which I consider
the least important part of a trade.

I will use these comments below as an example of how I view T/A

Originally Posted by habanero

Great points and helpful.To me it looks easy. But I'm new. Happy for some pointers.

* Position size/risk manage wisely/conservatively
this is good Trade management/Money management are very important but this is not T/A
*Use a cheap online broker like IB so the buy sell is not eating into your profits.
Cost to Trade again important and again not T/A
*Find an indicator which reinforces a positive trend. ok this is relevant T/A IMO
as long as you don't spend too much time on this and neglect such things as expectancy /trade management
*Liquid stocks only where ticks are a small percentage.??
*Hop on after checking fundamentals that there is little chance of major slippage eg trading halts
*Always use a trailing stop. Set it according to volatility of price.
Another use of T/A within Trade management which is relevant but beware of trailing stops as they aren't always as profitable as they appear.
*Don't worry about number of losses if you follow the above.:bad:
*Tinker with trailing stops to maximize gains but never during a trade. Only after analysis of profits over a period.
Over emphasis of Trailing stops IMO but a very important point analysis of past trades and positive feedback into
your trading is very important IMO.

I'm thinking that a 52week high is a good enough technical indicator to swing the odds of a trade going in your favour

 

[tech/a]

By application, I assume you mean "just do it" or "put it into action". If so, I agree. One has to act. One has to pull the trigger.

Your agreeing to something which won't guarantee profit.
" Just doing it or Putting something into action " in itself
Could be a complete disaster.

APPLICATION in the sence of applying Technical analysis
Would be placing into action a methodology which will
Take advantage of a perceived opportunity. Found through
The analysis of the instrument. It's correct application
Will ( over a period of time ) ensure long term consistent
Profit and minimize risk of ruin.
In other words give you a distinct profitable edge.

If you've got that edge you'll know EXACTLY how to apply it.
You'll also know WHY it gives you that edge and HOW that edge is
Created. You'll be able to prove it with your trading figures.
-----Your Numbers of which one is profit.

You'll be able to demonstrate the why and how.

 

[Gringotts Bank]

Your agreeing to something which won't guarantee profit.
" Just doing it or Putting something into action " in itself
Could be a complete disaster.

APPLICATION in the sence of applying Technical analysis
Would be placing into action a methodology which will
Take advantage of a perceived opportunity. Found through
The analysis of the instrument. It's correct application
Will ( over a period of time ) ensure long term consistent
Profit and minimize risk of ruin.
In other words give you a distinct profitable edge.

If you've got that edge you'll know EXACTLY how to apply it.
You'll also know WHY it gives you that edge and HOW that edge is
Created. You'll be able to prove it with your trading figures.
-----Your Numbers of which one is profit.

You'll be able to demonstrate the why and how.

Analyze an instrument, identify a statistical edge and apply it consistently. I agree. Consistency is hard though.

 

[burglar]

Which part of " I don't want to make this an F/A V T/A thread."
Isn't clear Burgler?

The part that wasn't clear is what you do want.

 

[tech/a]

The part that wasn't clear is what you do want.

Not to make it a T/A V F/A thread----clear enough?

 

[Sir Osisofliver]

While I agree with 90% of Tech's first post here.
This is how I look at T/A........................................
Although I have studied T/A extensively and enjoy learning about and utilizing it.
I simply believe thats its importance and relevance to making a profit from trading is overrated.
Trading novices are drawn to T/A because its feeds into human psychology and Bias such as
confirmation Bias/ conservatism bias and the need to be right,to find the Holy Grail and of course
numerous educators and or charlatans are there to exploit/fill this need.
Here's an example of what I'm talking about.............
Most educators and novice traders concentrate on Trade entry conditions which I consider
the least important part of a trade.

I will use these comments below as an example of how I view T/A

Hi Waza that's an interesting viewpoint. I can see what you are saying, but I'd like to go through Habanero's comments and perhaps show a different perspective.

* Position size/risk manage wisely/conservatively - Waza is absolutely correct here. This is not TA - however it's of supreme importance regardless of if you use Technical or Fundamental analysis.
*Use a cheap online broker like IB so the buy sell is not eating into your profits. Once again, controlling your costs is not an issue of Technical Analysis, so I agree with Waza.
*Find an indicator which reinforces a positive trend. This is the one that bugs me for several reasons.
1) Indicators are mathematical tools that seek to enhance some aspect of price. Indicators are derived from price and/or volume, ergo indicators will lag price action. Indicators should be used to confirm an aspect of price. Be aware that indicators have weaknesses, because you are attempting to interpret chaotic price action with mathematical tools that are (generally) not chaotic in nature. Understanding price, volume and pattern is far more important than understanding indicators.
2) What about negative trends? Can I make money from Negative trends?
3) What about neutral trends? Can I make money from Neutral trends?


*Liquid stocks only where ticks are a small percentage.This is system specific - low liquidity (or tightness of stock traded) - may be a feature you actively look for.
*Hop on after checking fundamentals that there is little chance of major slippage eg trading halts
*Always use a trailing stop. Set it according to volatility of price.There are very few absolutes in trading...this is not one of them. Risk management is not Technical Analysis.
*Don't worry about number of losses if you follow the above.??? I'd prefer instead of the term "worry" the use of the word "evaluate". Evaluate losses (and Gains) regularly. Losses tell you more than gains about ways to improve, but this applies equally to all analysis.
*Tinker with trailing stops to maximize gains but never during a trade. Only after analysis of profits over a period.

 

[burglar]

Ok So here is my view of TA

Using charts to find patterns of behaviour which are repeatable.
This is done in order to anticipate that behaviour again.

 

[waza1960]

Hi Waza that's an interesting viewpoint. I can see what you are saying, but I'd like to go through Habanero's comments and perhaps show a different perspective.

SirO I think our perspective is similar just expressed a little differently.........

*Always use a trailing stop. Set it according to volatility of price.There are very few absolutes in trading...this is not one of them. Risk management is not Technical Analysis

Agree however using a trailing stop such as cantilever or an indicator as a trailing stop is a relevant use of T/A within risk management IMO.

Find an indicator which reinforces a positive trend. This is the one that bugs me for several reasons.

Again agree Sir O but the basic premise "Find an indicator which reinforces a positive trend."is still
an acceptable use of T/A if its importance is not over estimated.

BTW I'm not picking on your post habanero it is just an easy way to theorize and comment on Techs' Thread.

So how I would summarize the Habanero post is to say that some of the points have merit and could be included in a trading plan but they alone will not make you profitable.
The problem is that markets are dynamic and pyschology plays a part particularly with discretionary trading.
So what happens when you have a series of losses following just the points above?
What if the markets are mean reverting and don't suit trend trading?
Usually pyschology and or account balance will stop you trading.
What happens then ? Most traders then try something else and so on continually looking for something that works.I have seen some traders doing this for years without becoming profitable.

I have noticed Tech state in other posts that designing a trading system and backtesting is a good way to start.
I really believe this is a great approach because it does the following:
Gives you an idea of what works within trading and covers most of your points and also indicates the importance of such.
Will force you to consider the most important aspects of trading such as expectancy,probability/Trade management/money management and the impact of one approach on different phases of the markets.

 

[burglar]

Hmmm.
What does that leave me with.
Darts? Insider trading?

I feel the need to explain.

The part which I believe is a nonsense is the creation of a divide.
Personally I believe there is an overlap.

Like Bathurst is Motor Sport and enjoyable!
It's not Holden vs Ford.

I did not get it right, did I?

Oh well!