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Old 08-27-2006, 01:22 PM   #1

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How valid is technical analysis?

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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Old 08-27-2006, 01:26 PM   #2

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Quote:
Originally Posted by Lopen »
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.
TA is folllowed religiously by many traders. From my experience TA works better on longer time frame charts such as the daily chart. Alot of price patterns on 1 minute and 3 minute timeframes are not as valid.

TA is the study of price patterns based on human behavior. It uses crowd behavior to its advantage. Remember, TA is not 100% exact science. Trading is a game of probability. As long as you have discipline to honor your stops and ride your winners you will come out ahead.

I don't rely heavily on TA for my trading. But some of the most powerful trading signals come when price patterns line up with pivot points. These setups I will take 100% of the time.
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Old 08-27-2006, 01:32 PM   #3

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Technical analysis is widely known to the public now. This causes alot of pattern failures. When technical analysis was known to a few traders back in the days, it was highly profitable. Now alot of patterns simply do not work because everyone is seeing the same thing. Try learning classic price patterns then devise pattern failure strategies. If you know what everyone else is looking at then you can use that information to your advantage.
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Old 11-23-2006, 12:53 PM   #4

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Re: How valid is technical analysis?

Quote:
Originally Posted by Lopen »
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.
I hate to be cynical about this, but there is no evidence to support the use of technical analysis as a way to be profitable. In fact the vast majority of traders who use TA lose money.
We can have a long discussion here as to why TA does not "work", but the bottom line is, TA is based on a linear representation of market data when in fact market data is very much non-linear in behavior.
You need only to draw a linear regression line through as many data points as you like and then note that as you add more data, the linear regression line changes. Another way to understand this is to look at the price or volume histogram of a series of price points and note that it is very much non gaussian (that is to say it doesn't have a NORMAL DISTRIBUTION). In addition whatever distribution it has today, will be different tomorrow. Since most TA is based on the distribution being NORMAL, any TA analysis will be a poor representation of the data.
What does that leave you with? Not much. What you can be sure of is what the distribution looks like right now (you can plot a histogram of it) and hope it will stay that way long enough for you to pull some money out of the market.
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Old 11-23-2006, 02:48 PM   #5

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Re: How valid is technical analysis?

Excellent point Jerry. I have to agree with you completely on this. I was in a pretty intense debate a few weeks back on how I thought technical analysis was useless in trading. Didnt quite want to start it here but oh well.... might as well.

My honest opinion: technical analysis is useless. There, I said it.

I dont think I have ever used TA to day trade the markets. By this I am reffering to price patterns and not TA tools such as pivots and S&R. I am reffering to common patterns that everyone knows such as triangles, flags, pennants, etc...

Im sure there are traders who trade these patterns successfully. However, I find it pretty useless in intraday trading the index futures.

Jerry, I want to ask you a question. Can you elaborate on your point of normal distribution? I would like to understand this concept a little better. Thank you
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Old 11-23-2006, 05:58 PM   #6

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Re: How valid is technical analysis?

1. This argument seems to be off the rails because:

You guys are incorrectly defining technical analysis. The simplest definition of TA in trading is to trade based on what happens Price and Volume alone.

That is you exclude fundamentals, the stars, what your dog did yesterday and tips. It doesn't have to mean patterns, it doesn't have to be linear, it basically differentiates price/volume based decisions from fundamental analysis.

So, buying support and resistance, using market profile, using volume at bid vs ask analysis and using indicators or patterns are all examples of technical analysis. Choosing targets, analysing MFEs and MAEs to determine stops and targets, points for tightening stops and determining RR of potential trades are all Technical Analysis.

2. Jerry is right that most traders are losers at any one time (some climb out of it) but its not because of TA. Most traders are losers because their brains are wired wrong. A trader may know what to do (semantic memory) but do the wrong thing repeatedly (procedural memory). It doesn't require FA, TA or any analysis at all ---- most traders will be losers just because

3. It is true that market price doesn't have a normal distribution but that doesn't prevent approximations to nds from being effective (otherwise why bother with market profile?) But other than market profile and statistical work most of technical analysis doesn't care what the distribution is - it doesn't give a flying xxxk!

Most TA that works with trends benefits from the fat tail distribution - we get an unreasonable number of long moves! Most TA that works with edges also doesn't care. TA is based on crude robust statistical assumptions and doesn't assume a distribution. And one of the differences between a long term winning trader and a burning star is that, rather than expect the distributions to stay the same, they adapt when the markets actions change in such a way that their method slips out of alignment.

If TA is useless then by definition Market Profile is useless!

TA (making trading decisions based on price and volume analysis) works for those that can make it work. I can't make MP work. Soultrader couldn't make patterns work. But that doesn't mean they don't work, it usually means we didn't do the work or get the teaching to make them work. It might also mean our brains have been wired incorrectly. But, TA can work for those that can make it work. That's my 2c
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Old 11-23-2006, 07:43 PM   #7

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Re: How valid is technical analysis?

I would have to agree with kiwi on many points here. Most traders one time or another use TA, but it's more than TA that cause them to lose, namely psychological makeup that cannot keep them disciplined or consistent enough to find out if TA really works or not. Most also don't make a carefully laid out plan to test out their TA-based strategies to make sure they work or not. But I think the most important factor is that most don't know how to use TA properly. In the end, they interpret them to fit their beliefs, exactly as kiwi says, "wired incorrectly". This is the biggest hurdle to overcome, not TA itself.
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Old 11-23-2006, 07:47 PM   #8

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Re: How valid is technical analysis?

Quote:
Originally Posted by Lopen »
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.
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).

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