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Im still new to technical analysis but would like to know if this really works? This whole concept seems to work just because traders believe in it. |
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Sorry, I forgot to answer the original question. Nice to see your agreement Torero, I had read a number of your posts and found myself nodding while reading so I suspect our market views are not dissimilar.
1. Elements of technical analysis are reinforced because other traders believe in them. Examples are most forms of support and resistance including prior swings, mas and fib ratios. So the more users then the more support there will be -
but this doesn't say that the original observations, study and testing were wrong just that reinforcement helps.
2. Elements of technical analysis are damaged because other traders believe it it - sooner or later people figure out what the failure of a particular ta style looks like and will either fade the style, build on the failure or both. You see this with market profile enthusiasts who will perhaps short resistance at the hva but if it fails will jump on long to ride the failure. Failures can be some of the very best trades. Good TAs use both success and failure structures to their advantage as often as possible.
So things work both ways. The key for a trader is (IMHO) to take some ideas that appeal to them, observe them in real time, test them, build trading rules, test them, and then make some money. Then over time you expect that the two factors above (and others) will distort market behaviours so you will need to evolve slowly (maybe you just have to have 1pt bigger stops this year than last year) or quickly if market character varies dramatically to continue to be profitable.
I trade HSI and adjust my trading slightly every day ... some days my standard stops will work perfectly. Other days they don't but by watching the first few trades I can tell whether the day will be characterized by larger retracements or not (if it is I buy further back from my signal and put my stop further back as well). That's Technical Analysis in Action (and Evolution in Action).
