Technical Analysis in Isolation of all Speculation?

[alwaysLearning]

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.

 

[Temjin]

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.

 

[Trembling Hand]

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.

 

[Vito]

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

 

[It's Snake Pliskin]

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.

 

[treefrog]

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

 

[MichaelD]

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.)

 

[MRC & Co]

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.

 

[Schmuckie]

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

 

[MRC & Co]

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

 

[Schmuckie]

Thank you, MRC & Co!

 

[tech/a]

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.

 

[tech/a]

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!

 

[alwaysLearning]

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

 

[Wysiwyg]

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.

 

[luutzu]

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

Very theortical here.

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.

 

[DeepState]

...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.

 

[Boggo]

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

 

[CanOz]

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

 

[Boggo]

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

Yep, not going there again, no winners there