What is the study of technical analysis?

[constable]

This opens up a whole new dimension for me anyway. Thankyou for sharing tech!

 

[Pager]

What is the study of technical analysis?

It’s something different to each and every one of us, if using T/A we all choose to interpret or read the future direction of a particular stock or market based on this Method, that oscillator or indicator or a combination.

Give 100 people the same chart and the same indicators and each and everyone of them will see something different, many maybe very close but others the very opposite, some will be bullish some bearish.

Like the market itself we all interpret the market in a different way, any market, stocks, futures, fruit and veg, if we didn’t there simply wouldn’t be a market.

Some say its absolute Bull****, others say they would not do without it and make good money following there particular method.

 

[Mofra]

"The effect of information on the psyche of a (preferably) large crowd resulting in the graphical display of their reactions to said information"

 

[coyotte]

Actually the whole thing boils down to that the hours/cost spent on analysis (any form) would be far better utilised on learning how to trade:

No 1: Psychology

No 2: Money Management

Way down the list No 3: Analysis --- bought, borrowed or your own.
It doesn't matter -- if you have not got the first two parts right, then if you're good at analysis you would be far better off starting a service.


After all, just pick a stock at random and if you have 1 & 2 right, the rest will fall into place.


Cheers

 

[bean]

---NUMBERS - the market and stocks trade in numbers - technical anaylsis works on the numbers.
Then it uses numbers from the numbers as probabilities
and like everything out there it works to a degree, and can give an indication or a trend - better than nothing.

 

[chops_a_must]

The theory [or philosophy] of *Determinism*
jog on
d998

I disagree, but understand. Interestingly, both sides of the coin are Popperarian in nature.

In a way, charting is a form of applying determinism. But, as we know, there is poverty in historicism. And that is why charting/ analysis isn't always/ ever correct. History provides no guarantee for future outcomes. And as tech pointed out before, the behaviour of crowds change. That's exactly the same reason why social sciences and their inductively based theories are invalid.

So, what are we left with? An attempt to look at probabilities perhaps? Limiting risk for entries/ outcomes? And to me, that is what it is about. Working out probabalistic outcomes.

 

[barney]

ASX
OK.

I believe there are 2 parts one seemingly well known and one I believe largely over looked.

I'll use the questions above to demonstrate (Hopefully in greater depth) the seemingly simplicity of my beliefs,---based I'll add from 12 yrs of study of various technical forms.

Part (1) Technical Analysis is the STUDY of Crowd Behaviour/Thinking/Action/Reaction
Part (2) Is the Application of the Crowd STRUCTURE,Formation/Constituents.

So when reading my explainations you'll see where both (1) and (2) cross.

(1) The reason most find trading Small caps profitably so difficult.

Crowds come in various sizes and I would argue that the larger the crowd the more predictable that crowd will be.
Often in small caps there will be as little as 25 trades,the crowd is 25 (Maybe less if participants bought or sold more than 1 trade). If we have a crowd of 2 then its highly likely that the actions of one will effect the actions of the other.
In a crowd of 2000 the actions of 1 will more than likely go un noticed.(Unless that constituent is one of the leaders) It takes more action from within the crowd to move the crowd as a whole.
It also takes more effort from outside of the crowd to effect the crowd as a whole.
With a Small cap a sudden reaction from a larger than normal number of participants within the Crowd will have a greater effect on those in it.
Further an increase in numbers from outside into the crowd will move those in it along with their view,and when they exit--same applies.

The participants in the crowd in a small cap will generally have ON AVERAGE a very differing veiw within the crowd. Where as in a larger crowd there will be more who hold a similar view.

IN GENERAL technical analysis has trouble in larger timeframes tracking and predicting future crowd behaviour.---IN SMALL CAPS.

There is no point photographing a fast moving object with a 1 sec frame speed--which is what most Small cap traders do.

Those who buy for future growth generally make up the minority of those who will move in and out of the crowd---until it swells with like minded members the crowd will be less predictable.

As an example Ill use a small cap again. If the average number of trades is say 150 a day and all of a sudden 3000 buyers storm the share pushing prices wildly higher---You can be sure that 3000 of them WONT wish to be longterm holders.

(2) Why Experts like Prechter get very long term analysis so wrong.

Crowds change.In the Micro (Shorter timeframe) in a Larger cap perhaps not all that much (Small caps massively)---but over 10s of Years the Crowd changes DRAMATICALLY.
As the structure of a stock or index matures so to will the participants.
Those involved in the WAVE 1 of the All Ords super cycle back in the 30s arent trading today.There were no baby boomers then,20 yrs ago there wasnt Compulsary Super Annuation,I'll argue that traders werent as savvy as they are now. Computers---sorry I dont have a building!
Funds werent as rich and banks didnt have control of as much money.

As the crowd gets bigger and their wealth and knowledge expand the harder it is to have it change direction---either way but the more predictable and easier to analyse it becomes.

(3) Why certain forms of analysis will be more accurate.

Crowd ARE predictable.The bigger the crowd the more predictable it is.
In the example of the Running Small cap above the crowd goes from small to large very quickly---it DOES become easier to read.
The theory of Large numbers applies here as well.Take fibonacci as an example---Fib works in my view as the levels (Without prior thought) fall at areas where the crowd will decide that appropriate action will take place.Take a Strong moving trending(Long) stock which falls in a market where its generally percieved to be healthy.Often that retracement is at a shallow level,here people either want a bigger share than others in the crowd or wish to join it at a better than normal entry level.

At 50% level the crowd has thinned to a point where new or old members see the instrument as great value again.I'm sure that you can apply "What the crowd is DOING" in all analysis
The smaller the crowd the less predictable.---A large influx of new crowd members makes it MORE predictable.

(4) Why all forms of analysis WILL get it wrong from time to time

My view is because MOST analysis doesnt identify the constituents/Structure of the crowd.
A sudden sell off by a large stake holder in the crowd can spark a downturn which will generally go un noticed by MOST analysis. Its in ability to measure whats happening IN the crowd.

(5) Why understanding the Core will improve discretionary trading results---Id go as far as saying Dramatically.

By understanding that its the crowd--or lack of--the likely constituents of the crowd and that their behaviour is similar time and again--everytime you use a technical tool to LOOK at that crowd---will give you a large edge.Youll look at the analysis in a different light.---I sure do. It wont be long and you'll become very intuitive to crowd behaviour and to the DIFFERENT structures of Crowds.

(6) Why I believe and it seems so do others that miners approach to Elliot (as an example) is better.

Elliot/Steidelmayer/VSA and I'm sure some other forms of analysis are based around this premise (Crowd behaviour and structure).The structures and Levels are repeated time and again by crowds. Nearer term analysis (3 yrs or so) are more in touch with the Populance that make up the crowds. They inherently know that if a crowd generally does one thing like reach a level (Even un consciously) that if exceeded it is likely to advance or fall to the next level.
It can and does measure the CROWD and some those that populate it.

(7) Why YOU NEED technical analysis!!!

Technical analysis is the ONLY medium I know of that can CONSISTENTLY measuer and PREDICT crowd behaviour,in a way that we can take advantage of it in ANY given timeframe. Without it it really is hope that the crowd OR a new crowd will agree/or join you to make your opinion of some value.

In Summary

This is to me what analysis is ALL about.
How you use it and how good you will be at applying it to the market will be determined by the experience of the practitioner.
Get this right and then running your business like a business (Money management principals) will become much easier.

All of the answers above most very relevant can and should be seen in this context.One which I believe is SUCCINCT.

My views only and written by a Duck! Do with them as you wish.

Good insight Tech, Can I ask your opinion regarding the "crowd" .........

Obviously when trading the small-caps (which I don't do nowdays) there will/may be a higher percentage of "regular punters/traders" in on the action, whereas the mid-large caps are driven predominantly by the big players/mutual funds etc, so trading either would have its own "brand" of crowd behaviour. Therefore a different strategy is required for each?? .......... maybe that is why lots of us have trouble; because we are trying to trade small caps like big caps?? ........... Thats kind of what you are saying isn't it??? .............

Agree with Coyotte above, which is an extension of the same idea ......... understanding the psychology of both ourselves and the other punters, is paramount to good trading (and investing!!) in the long run (still working on all this stuff .... it doesn't happen overnight thats for sure) ............... Cheers.

 

[ducati916]

ASX
OK.

I believe there are 2 parts one seemingly well known and one I believe largely over looked.

I'll use the questions above to demonstrate (Hopefully in greater depth) the seemingly simplicity of my beliefs,---based I'll add from 12 yrs of study of various technical forms.

Part (1) Technical Analysis is the STUDY of Crowd Behaviour/Thinking/Action/Reaction
Part (2) Is the Application of the Crowd STRUCTURE,Formation/Constituents.

So when reading my explainations you'll see where both (1) and (2) cross.

(1) The reason most find trading Small caps profitably so difficult.

Crowds come in various sizes and I would argue that the larger the crowd the more predictable that crowd will be.
Often in small caps there will be as little as 25 trades,the crowd is 25 (Maybe less if participants bought or sold more than 1 trade). If we have a crowd of 2 then its highly likely that the actions of one will effect the actions of the other.
In a crowd of 2000 the actions of 1 will more than likely go un noticed.(Unless that constituent is one of the leaders) It takes more action from within the crowd to move the crowd as a whole.
It also takes more effort from outside of the crowd to effect the crowd as a whole.
With a Small cap a sudden reaction from a larger than normal number of participants within the Crowd will have a greater effect on those in it.
Further an increase in numbers from outside into the crowd will move those in it along with their view,and when they exit--same applies.

The participants in the crowd in a small cap will generally have ON AVERAGE a very differing veiw within the crowd. Where as in a larger crowd there will be more who hold a similar view.

IN GENERAL technical analysis has trouble in larger timeframes tracking and predicting future crowd behaviour.---IN SMALL CAPS.

There is no point photographing a fast moving object with a 1 sec frame speed--which is what most Small cap traders do.

Those who buy for future growth generally make up the minority of those who will move in and out of the crowd---until it swells with like minded members the crowd will be less predictable.

As an example Ill use a small cap again. If the average number of trades is say 150 a day and all of a sudden 3000 buyers storm the share pushing prices wildly higher---You can be sure that 3000 of them WONT wish to be longterm holders.

(2) Why Experts like Prechter get very long term analysis so wrong.

Crowds change.In the Micro (Shorter timeframe) in a Larger cap perhaps not all that much (Small caps massively)---but over 10s of Years the Crowd changes DRAMATICALLY.
As the structure of a stock or index matures so to will the participants.
Those involved in the WAVE 1 of the All Ords super cycle back in the 30s arent trading today.There were no baby boomers then,20 yrs ago there wasnt Compulsary Super Annuation,I'll argue that traders werent as savvy as they are now. Computers---sorry I dont have a building!
Funds werent as rich and banks didnt have control of as much money.

As the crowd gets bigger and their wealth and knowledge expand the harder it is to have it change direction---either way but the more predictable and easier to analyse it becomes.

(3) Why certain forms of analysis will be more accurate.

Crowd ARE predictable.The bigger the crowd the more predictable it is.
In the example of the Running Small cap above the crowd goes from small to large very quickly---it DOES become easier to read.
The theory of Large numbers applies here as well.Take fibonacci as an example---Fib works in my view as the levels (Without prior thought) fall at areas where the crowd will decide that appropriate action will take place.Take a Strong moving trending(Long) stock which falls in a market where its generally percieved to be healthy.Often that retracement is at a shallow level,here people either want a bigger share than others in the crowd or wish to join it at a better than normal entry level.

At 50% level the crowd has thinned to a point where new or old members see the instrument as great value again.I'm sure that you can apply "What the crowd is DOING" in all analysis
The smaller the crowd the less predictable.---A large influx of new crowd members makes it MORE predictable.

(4) Why all forms of analysis WILL get it wrong from time to time

My view is because MOST analysis doesnt identify the constituents/Structure of the crowd.
A sudden sell off by a large stake holder in the crowd can spark a downturn which will generally go un noticed by MOST analysis. Its in ability to measure whats happening IN the crowd.

(5) Why understanding the Core will improve discretionary trading results---Id go as far as saying Dramatically.

By understanding that its the crowd--or lack of--the likely constituents of the crowd and that their behaviour is similar time and again--everytime you use a technical tool to LOOK at that crowd---will give you a large edge.Youll look at the analysis in a different light.---I sure do. It wont be long and you'll become very intuitive to crowd behaviour and to the DIFFERENT structures of Crowds.

(6) Why I believe and it seems so do others that miners approach to Elliot (as an example) is better.

Elliot/Steidelmayer/VSA and I'm sure some other forms of analysis are based around this premise (Crowd behaviour and structure).The structures and Levels are repeated time and again by crowds. Nearer term analysis (3 yrs or so) are more in touch with the Populance that make up the crowds. They inherently know that if a crowd generally does one thing like reach a level (Even un consciously) that if exceeded it is likely to advance or fall to the next level.
It can and does measure the CROWD and some those that populate it.

(7) Why YOU NEED technical analysis!!!

Technical analysis is the ONLY medium I know of that can CONSISTENTLY measuer and PREDICT crowd behaviour,in a way that we can take advantage of it in ANY given timeframe. Without it it really is hope that the crowd OR a new crowd will agree/or join you to make your opinion of some value.

In Summary

This is to me what analysis is ALL about.
How you use it and how good you will be at applying it to the market will be determined by the experience of the practitioner.
Get this right and then running your business like a business (Money management principals) will become much easier.

All of the answers above most very relevant can and should be seen in this context.One which I believe is SUCCINCT.

My views only and written by a Duck! Do with them as you wish.

tech/a

Your basic premise is flawed.
It matters not how many in the crowd, what matters is how much money flows from the crowd.

If there are 1000 sellers, each selling $1000 of stock = $1M
But 1 buyer, who is buying $20M of stock, which way do you think price will go?

This is why information, or analysis is more important than just pure sentiment.

jog on
d998

 

[ducati916]

I disagree, but understand. Interestingly, both sides of the coin are Popperarian in nature.

In a way, charting is a form of applying determinism. But, as we know, there is poverty in historicism. And that is why charting/ analysis isn't always/ ever correct. History provides no guarantee for future outcomes. And as tech pointed out before, the behaviour of crowds change. That's exactly the same reason why social sciences and their inductively based theories are invalid.

So, what are we left with? An attempt to look at probabilities perhaps? Limiting risk for entries/ outcomes? And to me, that is what it is about. Working out probabalistic outcomes.

chops

Determinism as a function of chart analysis is utter tosh, so we are in agreement.

Determinism as a function of Fundamental Analysis has a much better record, and thus I accept for the most part a deterministic probability.

Crowds are almost invariably the *peanut* in regards to financial markets.

jog on
d998

 

[barney]

tech/a


If there are 1000 sellers, each selling $1000 of stock = $1M
But 1 buyer, who is buying $20M of stock, which way do you think price will go?


jog on
d998

That is a good point. Perhaps therefore observing the ratio of actual trades made and the dollar average of those trades could act as some kind of filter as to whether a trade should/shouldn't be taken as well. Of course there could still be scope for manipulation by a big player in a small stock??

 

[tech/a]

tech/a

Your basic premise is flawed.
It matters not how many in the crowd, what matters is how much money flows from the crowd.

No its considered.

All part of STRUCTURE---IE who makes up the crowd.
10000 small investors and 2 Funds holding as much stock as the 10000,when they start selling-----

 

[theasxgorilla]

tech/a

Your basic premise is flawed.
It matters not how many in the crowd, what matters is how much money flows from the crowd.

If there are 1000 sellers, each selling $1000 of stock = $1M
But 1 buyer, who is buying $20M of stock, which way do you think price will go?

I think you both continue to be right.

In your example Duc, it depends on market depth. If there is a sell order sitting at the offer of $20M in value it would be half filled in the first example and fully filled in the second but in either case the price doesn't move.

I believe that this is why tech/a made the distinction between small-caps and large-cap companies.

What you touch on with regards to money flows brings me to the only point I can add to tech/a's post regarding why I believe longer term forecasting with things like Elliott Wave is so difficult...the relative value of the underlying currency that is used to measure price can shift. Therefore so can factors that affect sentiment such as the purchasing power of that currency within the local or world economy (due to inflation, deflation, exchange rates etc.). Over long enough periods of time I believe that these shifts in the underlying distort the charts we use to measure sentiment.

So my response to point 2, yes, crowds do change, but more importantly the potency of the currency that constitutes the money flow that Duc talks about changes. This can reduce the long term effectiveness of Elliott Wave price targets and the like, but it all still shows up on the chart one way or another...the charts can't lie.

 

[ducati916]

No its considered.

All part of STRUCTURE---IE who makes up the crowd.
10000 small investors and 2 Funds holding as much stock as the 10000,when they start selling-----

Not in the quoted example it's not.
So unless you have a part two to rectify the omission.

Cashflow makes any security move, the number of participants is purely incidental.

Studying market depth............
Hmmmmm, most big buyers or sellers will not telegraph their intentions.

jog on
d998

 

[tech/a]

If there are 1000 sellers, each selling $1000 of stock = $1M
But 1 buyer, who is buying $20M of stock, which way do you think price will go?

I would argue that initially not that far.
Large buyers dont buy at market.
They will instruct buying at a price level and in smaller parcels.
They will wish to buy in over a period of time at a price.
20mill @ 10c is worth the wait.

The case you present in isolation is very much on the extreme outlier of price movement.

While its true that the "Crowd" will be influenced by big holders,feel safer, more confident,it will be reflected in price---initiated by either a change in crowd behaviour or Crowd structure.

 

[ducati916]

I would argue that initially not that far.
Large buyers dont buy at market.
They will instruct buying at a price level and in smaller parcels.
They will wish to buy in over a period of time at a price.
20mill @ 10c is worth the wait.

The case you present in isolation is very much on the extreme outlier of price movement.

While its true that the "Crowd" will be influenced by big holders,feel safer, more confident,it will be reflected in price---initiated by either a change in crowd behaviour or Crowd structure.

I have exaggerated the somewhat to illustrate the point.
Large buyers will tend not to buy @ market I agree, however the net result is the same, $20M worth of shares are removed from the free float.

That WILL effect a change in the supply/demand curve.

jog on
d998

 

[tech/a]

Take VSA analysis it indicates where volume and selling relative to price alerts of possible change in price.It cares not how many are doing what.
In your case it wouldnt be long before the crowd noticed positive price action and volume.The crowd would be predictable.

That WILL effect a change in the supply/demand curve.

Yes by altering the structure of the crowd.The Crowd now has a 20million holder with in it.If structure is not considered and this holder is likely to be a short term player then those that "Follow" the crowd may get caught buying his sells.

Seen it on a smaller scale often with small caps.
Someone buys 5 million and loads sells of 500,000 all the way up.

 

[ducati916]

Take VSA analysis it indicates where volume and selling relative to price alerts of possible change in price.It cares not how many are doing what.
In your case it wouldnt be long before the crowd noticed positive price action and volume.The crowd would be predictable.

That may well be.

The point is that the minority of the crowd [in number] dominated the majority of the crowd [in number] because of having deeper pockets.

Money talks.
All else walks.

jog on
d998

 

[ducati916]

Yes by altering the structure of the crowd.The Crowd now has a 20million holder with in it.If structure is not considered and this holder is likely to be a short term player then those that "Follow" the crowd may get caught buying his sells.

Seen it on a smaller scale often with small caps.
Someone buys 5 million and loads sells of 500,000 all the way up.

But we have just agreed that you are very unlikely to *see* the big-guy in the crowd........he won't advertise by sitting in the que will he?

Sitting in the que is for muppets.

jog on
d998

 

[tech/a]

That may well be.

The point is that the minority of the crowd [in number] dominated the majority of the crowd [in number] because of having deeper pockets.

Money talks.
All else walks.

jog on
d998

Yes and thats the way THAT crowd is structured and behaves in that instance.Thats why you will get outlier moves.

Simply explained by Crowd behaviour.

 

[ducati916]

(5) Why understanding the Core will improve discretionary trading results---Id go as far as saying Dramatically.

By understanding that its the crowd--or lack of--the likely constituents of the crowd and that their behaviour is similar time and again--everytime you use a technical tool to LOOK at that crowd---will give you a large edge.Youll look at the analysis in a different light.---I sure do. It wont be long and you'll become very intuitive to crowd behaviour and to the DIFFERENT structures of Crowds.

Studying volume tells you little to nothing of the *crowd*.
Studying T&S will tell you little of the crowd.
Studying 8Q's will tell you about the structure of the crowd.
Studying the 10Q's will tell you about the structure of the crowd.

Technical analysis is a 50/50 proposition.
Always has been, always will be.

jog on
d998