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Technical Trading Suddenly Makes More Sense

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ithatheekret said:
I'm no techy but they have had a good run over the last few yaers , as I feel the whole market was technically traded .
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Proportionally I seriously doubt that technically traded money makes up hardly any of the market cap gushing around in the ASX. Even the largest tech funds are dwarfed by the largest fundamentally or macro eco driven investors.

By matter of course technical trading depends on a greater proportion of fundamental or at least sentimental market activity. That technical trading can self perpetuate sounds theoreticallys possible, but it would seem from what the informed say about it that when technically traded money gets too big relative to the aforementioned types then the techniques stop working.

ASX.G
 
Bit of a back slapping session here, so let me take the 'other' point of view. Not to denigrate techies, but to make a case for fundies.

A couple of points:

1.
Ducati does not represent a good fundamental analyst. He was an often-wrong backward looking egotist.

2.
Fundamentalists do sell. When the view of the fundamentals aren't what they used to be or when the price exceeds the value by a mile, they sell.

The stocks in my portfolios have not been sold (despite the horrid looking charts) because they continue to offer large upside to my valuation and their business model is unaffected by the things people are panicking about.

3.
I have been taking this opportunity to pick up some wonderful bargains.

Many (not all) of the largest profits I have made in the past have been from buying 'falling knives' or other stocks that look terrible on charts.

When panic sets in - great opportunities abound because they look terrible on charts and the techs join with the overleveraged and bang-out shares at incredible prices. You get the 'panic discount'.

Nothing has changed, the business is still making the same amount as previously estimated or the copper/oil/gold etc is still in the ground, but the panic is letting me buy at 20%-50% discounts. Lovely.

4.
The ten-baggers in my portfolio all looked terrible on charts many times during my holding periods and many times the greatest gains have been made in 'gaps' not able to be profited from through charts.

The stock looked awful and then BAM it is 15% higher.

The flipside of this occurs too. Looks great, going up, then BAM - something actually changes and the stock is flogged. I have sold many times and sucked a sausage in this scenario.

5.
Not all fundies are yield/PE obsessives, just as all techies aren't obsessed with RSI (which has been flashing oversold for the last week !) Good fundies are both micro and macro focussed and understand all the approriate means of measuring value and are able to match each technique to the appropriate scenario/industry.

6.
Someone noted that green investors are likely to be fundies, I totally disagree. A great percentage of newbies are chartists with a margin loan and a discount broker / CFD account.

I am a massive advocate of getting ADVICE. Note the article in the Fin today stating that of the 500 Commsec margin calls, 90% were from accounts with no adviser.

Instos that operate billion dollar accounts are sponges for research from multiple parties - they take in research and ideas from multiple parties. I cannot understand why people trade their own money without being exposed to advice - you don't have to always agree!

7.
If you are a trader, buy the AFR daily FFS. How many times are there questions posted on here and 20 wrong replies are made, when the answer relates to an article in the Financial Review? Street Talk is laden with inside info!

8.
The best part of fundamental analysis is that if nothing has really changed, when the backside falls out of the market, you are excited about finally having something to buy and not sh!tting yourself about whether to hold or sell your rubbish portfolio full of previous high flyers.



I look at charts all the time - but to use them exclusively in managing an equities portfolio, for mine, is a bit of a mugs game.


Oh and TechA, I dont think that by backtesting any 'system' you can prove any 'mechanical system' will make money. Don't be fooled by randomness.

I could offer a historic comparison of some of my portfolios to 'compete' with your model - but nothing is proved because the next ten years in the market is going to be very different to the last ten. Backtesting proves very little.

But, when will you re-stock your 'long-term portfolio'?


Some serious questions for the chartists:

How much of a rally will the XJO need to make before the index is a buy?

Did you buy stocks post-August and how much of the rally did you miss?

Did you get sucked into the November rally?


A lot of this is irrellevent to the guys punting currency, indicies and commods - you are comparing apples to oranges.
 

You're right. Backtesting proves that you could find a path through historical data using mathematical equations, and that's all in essence. That's where the concept of robustness comes in.

Markets are theoretically random but in practice trends occur in such a way that a robust system should stand a good chance of capturing them. Adapting a system so that it can do so as the years roll on and the nuances of market activity change is the 'art' of system design.

ASX.G
 
BSD said:
Some serious questions for the chartists:

How much of a rally will the XJO need to make before the index is a buy?
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We should get Stevo in here...he uses an index, the XSO I believe, to switch his system on and off ie. to take new buy signals if he has the capital available. But he doesn't buy the index (to the best of my knowledge). And why would you...a market cap weighted portfolio is one of the best things you can do to sacrifice alpha.

BSD said:
Did you buy stocks post-August and how much of the rally did you miss?
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Once again, Stevo would be handy to have around here. I believe he made 8% and 8% in the months following the August correction.

BSD said:
Did you get sucked into the November rally?
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As the saying about lotteries go, you gotta be in it to win it.

ASX.G
 
BSD.

What you say relative to your own trading makes perfect sense. In fact not unlike in many ways to long term technical holding. The model which is still running live similar to those I have closed myself is now mostly cash and not a lot different from the sort of returns on capital I made back 6 mths ago when selling out.

ASX
Agree very few technical traders relative to Fundamental.

Markets are theoretically random but in practice trends occur in such a way that a robust system should stand a good chance of capturing them.
Click to expand...

Agree again but my view is that your trading crowd behaviour which is anything but random.The bigger the crowd the more likely it is to conform.

BSD

Oh and TechA, I dont think that by backtesting any 'system' you can prove any 'mechanical system' will make money. Don't be fooled by randomness.
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Well I don't agree.I can certainly prove that a losing tested system will lose in practice.
Every system I have developed and seen developed with sound testing methodology and positive expectancy has returned a profit.I'm yet to see one that hasn't.
Mind you I've only seen around 15 fully tested that meet the criteria for a robust system.

Seen 100s fail that don't.

I could offer a historic comparison of some of my portfolios to 'compete' with your model - but nothing is proved because the next ten years in the market is going to be very different to the last ten. Back testing proves very little.
Click to expand...

Proves little even in comparing in hind site as each is likely to have very different objectives.Profit being the common denominator.

But, when will you re-stock your 'long-term portfolio'?
Click to expand...

When I feel (Through analysis) that long term trading should be resumed. Technically there is another leg to go on monthly charts but this may take years to develop---let it unfold--patience is everything. If I've learnt one thing its "Let the trade COME to you."


Some serious questions for the chartists:

How much of a rally will the XJO need to make before the index is a buy?
Click to expand...

There will be many rallies that's not what this techie will be looking for LONG term---short term yes.
The index it self will be a buy often in this corrective bear market type phase,but a trend suitable for long-term holds will become clear.

Did you buy stocks post-August and how much of the rally did you miss?
Click to expand...

Yes short term trades did quite a few buggerised around with the pennies. Made a bit lost a bit--- got me thinking.

Did you get sucked into the November rally?
Click to expand...

Yes made a bit lost a bit. No better or worse than most I suspect.Trading short term only.
 
Hi,
Do investors use a business plan?

If so, surely they must have some price cut off point where its in their best interest to sell a stock and put their money to better use?
or
even sell a stock and buy it back later at a better price.

I trade my super - so I can't afford to gamble
Just now I'm 100% cash (I only trade long - at present)

Peter
 
I struggle a little comparing the the two strategies and try to decipher if one is better than another.

How you take profits from the market and KEEP IT largely depends on having a well researched plan and the psychology to implement it FA or TA has little bearing.

From my own observations people using TA create cash flow (my own objective) people using FA create wealth real wealth.

One guy I know well has within ten years grown his account un-leveraged to be able to retire in his early 40's 3 years ago using FA. Richard Farleigh author Taming the Lion walked away with $100 mill or more from If remember correctly largely using FA.

I will say it again how you take profits from the market and KEEP IT largely depends on having a well researched plan and the psychology to implement it

IMHO using Fundamentals to identify mega trends and TA to time entry / exit is where the big money is.....I am not that smart so I just use TA thinking about two things at the same time is just beyond me!


Focus
 

My thoughts too.Apart from the psychological bit.(lack discipline)Another gem posted earlier was "let the trade come to you".How often (through boredom for me) does anyone buy in only to see the good trade show up within weeks.

I suppose it all connects somehow, the dud trade leads to the good trade and vice versa.Learning from `in the kitchen` experiences is the most direct i feel.
 
OK First off, I never intended this thread to become a pie fight between TA and FA (though should have realized it would).

Clearly there are some expert FAers who, because of their time frame and method of investing have no need for TA at all. Equally clear, is that there are TAers who, because of their time frame and method, who likewise have no requirement of FA. There are also those who use a combination very successfully.

Nothing wrong with either approach and I hope folks stop bagging each other.

My point in the OP was not to try to get anyone to switch holus bolus to TA, not at all. But there are a number of folks who are trading non technically, whether it be fundamentally but with the wrong time frame, with inadequate FA skill, on sentiment, rumour, social proof or whatever, who would benefit from adding some technical aspects to their trading.

Thats all.


It's not about comparing, but using tools that help.
 
with inadequate FA skill, on sentiment, rumour, social proof or whatever, who would benefit from adding some technical aspects to their trading.
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I noticed you missed astrology ...

 
well..i don't feel embarrased about admiting this but I have been trading stocks for around five years based on whether or not I had a good feeling about them. Sometimes I just liked their name.... and ( before you start laughing ) I have made a lot of money. I guess I was just lucky that it was a bull market.

But recently my intuition stopped working and I began losing money. So I got myself a book on TA and stumbled across this forum. There has been a lot of good advice here..so thanks alot. I have saved a huge amount of money by exiting the market based on TA and assessing the opinions of people in this forum. isn't consumer sentiment a fundamental?

I think both have a place....but I am deinitely no expert
 
How much of a rally will the XJO need to make before the index is a buy?

Should be irrelevant to most stock traders as there are components of the index which will be buys, even if the index is dreadful.

Sure, but surely the all-knowing charts can predict the direction of the XJO?

If they can pick the currencies and commodities they should also pick the winner of the Superbowl too (based on the charted price of the Patriots). Why not?

The majority of equity dealers at the moment are looking at charts to get a 'feel' for the bottom or the next 'target' for the market.

Despite the apparent irrevelevence of the value weighted index that is the XJO - why would charts work any better for predicting the future on any other price/time function?

--

Did you buy stocks post-August and how much of the rally did you miss?

Will depend on the individual technicians parameters

Looking for someone who was a bold seller as the market crapped-out to own up to when they re-entered. How many re-entered above their sale price?

Did you get sucked into the November rally?.

Not a point of being sucked in, it's a point of entering and exiting according to your parameters

Well I dipped heaps of cash into the market in the sucker rally in November fuelled by US data that turned out to be noise.

Point is, I didnt sell in Dec/Jan, because nothing (in my view) has changed apart from sentiment. A pure discliplened techo would be well in front of me now - but lets see how it is in May?

A lot of this is irrellevent to the guys punting currency, indicies and commods - you are comparing apples to oranges.

Not necesarily, a technical system is a technical system. I use exactly the same method whether stocks, gold, pork bellies, or 17th century thimbles

Superbowl prediction please...

I am not trying to do anything but raise interest in the discussion and make people think. You guys obviously do well, so congrats and why change?

In the spirit of the thread, I am trying to note that rather than being panicked by margin calls, I am excited by opportunities and ambivalent to mark to mark losses.
 
BSD,

A common criticism of technicals is that they try to "predict" direction. It's a fair criticism in those instances where it is actually true. This is restricted to a minority of Gannists and nooooobs who don't understand what they are doing.

In the vast majority of cases, technicians don't try to predict at all, rather they are reacting to market movements in various ways in order to create a positive result, using expectancy and demi-fancy concepts like that.

When I place a trade, I haven't a goddamn clue where it's going next, but, I still have a positive expectancy of profit. Sure, I try to up my odds by trying to pick trends, patterns etc., but as we all know, it's generally a 50/50 proposition.

It's the technicals that create the profit from the chances I have taken over a number of trades, not the fact that I predicted anything.

This is why fundies criticisms of techies are generally, misguided, misinformed and unfair.

The fact that some techie in an insto is trying to "predict", doesn't make him or here any less a muppet than the clown at home trading in his underware. It's the wrong application of TA.
 
I hope people listen and learn from you Wayne. I don't disagree with you, but I wont be stopping reading analyst reports and equity strategy any time soon.

I also don't think many traders have the same focus and discipline you must have. It is absolutely something required for your style - can you imagine working 10 hours a day in another role while still doing your trades?

I actually believe what you do is 90% money management and discipline rather than analysing patterns, shapes and graphs.

I also still have the nagging belief that if you focussed your seriously disciplined mindset on studying fundamentals, you would be doing even better than you must be doing now...

Tough firmly in cheek
 
Not the way I currently trade, however, I could simple morph my style to suit.

Working 10 hours a day, presumably would bring in a tidy income. Therefore I could stand a bit of drawdown in my trading. As trading is my income I trade to suit. (actually I have a little job over here )

BSD said:
I actually believe what you do is 90% money management and discipline rather than analysing patterns, shapes and graphs.
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The best money management practices in the world cannot overcome a negative expectancy. MM is very important, but you MUST have a positive expectancy first.

BSD said:
I also still have the nagging belief that if you focussed your seriously disciplined mindset on studying fundamentals, you would be doing even better than you must be doing now...

Tough firmly in cheek
Click to expand...
There are actually two components to FA IMO, 1/ crunching the numbers 2/ analyzing how the market will perceive the numbers and extrapolating a value from there.

Let me be the first to admit that I have great trouble with 2/. This is shifting sand to me, I just don't get it. What the market perceives as cheap, or value, is entirely different to what I think.
 

Wayne,good points.
But its more than that.

Radge put it best.

Prove,disprove,prove,disprove.
(If Trading Discretionary)

Take a technical set up.
Have it Prove it will do as the analysis suggests.
Then take the trade.

Question
If a fundie values a stock price to be $45 and its $34 they take the trade and 6 mths later its $24 then what?

Ive never heard of a fundie who has fessed up to copping a loss due to in correct valuation.
Even worse internals of a company can alter within a year that alter the valuation.
There seems to be no money management in the fundamental trading methodology.(Well that I've seen).
Even to position sizing,how is that governed,or just what you can afford.

To me 2 vastly different methods---cant be compared.
 
Interesting discussion so far. I am enjoying reading both points of view.


Tech I will attempt to answer your questions.

I try desparately not to buy a stock at intrinsic value. Rather depending on the risk of the stock as judged by micro and macro factors such as type of industry, previous range of Share Price movement etc I will have a criteria for % discount to Intrinsic valuation that I use. For higher risk stocks ie diversified financials I require a hgiher margin of safety before I will buy in, In this case 20% discount to intrinsic value. Safer less volatile stocks such as food retailers etc my intrinsic valuation would only require a valuation near intrinsic value. Therefore if I purchased a stock at discount, theoretically the stock should not retract further. Does this always work in practice of course not but the trick is analysing why the stock is at discount or near discount in the first place. If it is due to market weakness this presents a wonderful opportunity, if it is due to share weakness, then I am more wary but still intrested if I can analyse the impact and possible outcomes of the weakness. Perhaps the biggest mistake I have made in the past was jumping into a stock on my favoured businesses watch list and not timing my entry. Previously I did not have any discipline to buy except based on my valuation which can have it's problems as SP weakness is often due to sentiment. For this reason I start looking to time my entrys with a technical indicator. I look for a bit of support before buying in. Buying this way gives me twice the confirmation of my conviction or maybe twice as much chance of getting it wrong.

I am a fundie who is about to fess up to an incorrect valuation. When I first started out 7 years ago I bought based on P/E ratios and whether the company was at a discount to their industry average. This method is wrong!!! It is misleading. This is not a calculation of intrinsic value. Intrinsic value can be calculated using Discounted Cash Flow techniques as some on here employ or can be calculated using Equity growth in combination with a required rate of return. For instance I might require a return on a stock of 15% becasue it is higher risk than another stock which I might only require a 12% return. Again it depends on industry etc. Once I know what amount of compensation I require for the risk I am about to undertake I can calculate Sp based on hsitorical equity growth in a business. Equity growth (% change in Retained equity of time) in a company can't be bought but Earnings certainly can be as is the case with a number of ASX200 companies. If you buy another business with higher earnings than yourself it doesn't take a genius to figure out that the buying companies earnings will go up but so to will debt or dilution of equity will occur through a placement. Everyone looks to earnings as a guide to Sp movement but ultimately earnings are misleading. Once I understood this concept I have been able to value stocks more precisely but they require atleast 7 years of historical data to do so.

Internals in a company can certainly change within a year that can change Sp, I will conceed this point. Usually though the internals will not affect long term growth if you have selected the company correctly. But having an exit strategy is important also. I use stop losses but as I mentioned before if there is no specific fundamental change but Sp weakness is due to market weakness I will not intiate them as I will be taking open profits and creating a Gain. I would much prefer to hold for atleast 1 year to get 50% discount. I have two positions held for 2 years now and hope to hold indefinately.

In terms of money management I do not diversify across ten positions of equal sizing. I split my sizing based on the potential risk reward. If I find a company at a large discount to intrinsic value for a reason which is insignificant to long term equity growth I will allocate a greater % of capital to this share. If I don't have money (Usually keep 20% in cash though) I will borrow. I have three shares in my portfolio that make up 70% of my portfolio allocation.

I agree you can't compare the methods, that's why I try to use both methods so that I get the best of both worlds.

By the way for the record it has taken me atleast 6years of mistakes to start to develop a plan for my investing/ Trading.

DYOR
 
Oh and TechA, I dont think that by backtesting any 'system' you can prove any 'mechanical system' will make money. Don't be fooled by randomness.
Click to expand...

Just on this.
Systems testing design and implementation is generally misunderstood.

A system is simply a set of conditions with varying parameters (if you optimise),which if tested with sufficient data in in a robust manner and returns a positive expectancy---will return a profit within the range returned in Montecarlo testing---provided market condition do not fall outside the parameters used in testing.

All systems evidently will eventually fail as over the very long run market conditions alter---this could in the future be very much to do with technology as much as economic forces.

Has its place in trading.
Rage we crossed I'll have a read.
Thanks
 
Rage.

Thanks for the comprehensive all be it condensed look at a fundies path.
I guess like a techie who has looked at 1000s of charts you can spot interesting annomolies very quickly,then spend the time honing a prospect.

Further question.
If the market or stock proves the analysis wrong (as it does with us techies) when do you "cop it" so to speak?
OR
When do you re value. If re valuation indicates still fair value have you or do you buy more?---regardless of market or company position---ie its falling in price for no apparent reason?
 

Tech you are making me think this morning aren't you .

You have identified what I call the faith aspect of a fundies conviciton. You are a clever possum for asking that. From my limited experience Sp fall is generally for a reason. Sometimes the reason doesn't become apparent until later on and hence why tech traders have exit points. Centro is perhaps a very good example of this. Sp weakness was there well before disclosure. However from a fundamentalist point of view Centro's intrinsic value was no where near $10. It was much lower especially given the risk involved. Highly leverage compaines like LPT's need a high return for me to be interested. I guess I haven't had a continually spiralling stock that I have had to contend with since improving my application. I don't buy falling knifes anymore. Use to but not anymore. The simple answer is if I bought at 20% discount to intrinsic value and Market fell 20% and Share did the same I would not sell. If share fell 10% for no apparent reason during an improving market, making it 30% to discount I would not proceed to buy more I would sell and see what was causing the ruckus and maybe wait for the waters to settle. Hasn't happened yet but I am aware that it might.

I revalue stocks at half yearly intervals when reports come out. Valuation should not change too dramatically because you have forecast the continuing assumption that the business will perform to your expecatation. If it does not then a revaluation is done and if the margin of safety no longer remains again time to sell. Hasn't happened yet but might. Again the technical indicators probably give some sign of this occuring before I have had time to analyse it and why I still look at them. If there is a definative downward trend forming in the absence of a general market downtrend I would sell. You are probably then going to ask me why wouldn't I just sell all of my positions in a falling market and buy back in when the dust settles. I guess this is something that I need to devise a calculation for what amount of further gain would be required to offset any potential tax. Once I have done this then maybe my reluctance for selling out during market weakness may not be so great. I hate paying tax and maybe this is my downfall in my applicaiton.
 
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