Has TA ever been proven?

Discussion in 'Technical Analysis' started by garfangle, Oct 28, 2003.

  1. Would like to know whether there have been research papers from top finance journals that document and statistically prove a significant correlation (R^2 > .70) in any number of technical analysis variables (MA, MACD, RSI, charting, et al) across a broad variety of markets: equities, futures, bonds, forex, etc.

    If there is no such data or the data is mixed/misleading then how can one rely on such techniques to trade?

  2. Seems to me the very "proof" that something works would kill it as everyone would engage in the same program.

    Most of the long time traders I know (survivors) are discretionary traders who use all these things as tools to help interpret markets and come to a conclusion.
  3. ktm


    All the papers I've seen have failed to prove any correlation whatsoever. Part of the problem is the lack of definitive guidelines on what constitutes certain "patterns". What is the mathematical definition of "head and shoulders" and how could one use that definition to find examples of it?

    Many of the trailing indicators (stoch, MACD, etc...) rely on reversion to the mean tendancies to predict trend changes. If you're looking to quantify something, I would dig deeper into the latter. Wilmott has some interesting reading on the subject as well if you search the archives.
  4. gnome


    The broadest definition of *technical* is, "information derived from the market". What do you suggest as an alternative?
  5. [
    If there is no such data or the data is mixed/misleading then how can one rely on such techniques to trade?

    Ciao. [/B][/QUOTE]

    Because one sees other traders using it and making money?
  6. Here is my thought on this: Technical Analysis has so much to it other then just classic chart patterns as most all know them.
    Yes it is true that ascending Triangles, Flags, Head&Shoulders, Etc and all the other major formations have validity and I most certainly utilize them. Why do they show up time and time again since the existence of the stock market itself? Is it random? Is it just luck? No

    The answer is that these Price Patterns as they have been generally named over the decades are formed in their distinctive shapes because of the human emotions of greed and fear that are actually molding them. In other words 1000 years from now the same patterns will exist unless for some reason all human beings decide to develop the Vulcan (Star Trek example) methodology and abandon emotions altogether for pure logic.

    Now how can one profit using TA now that we know what makes, shapes, and forms TA pricing patterns. Very simple learn to become a master of human emotion. That is why controlling your emotions is so important in this game (and this requires discipline). You don't want to be one of the market participants shaping the formations you want to me a master of them and learn how to profit and exploit them. This is where really getting in to certain details of TA become enormous factors in trading success.

    Examples include:
    Slopes of the MA's
    Are your securities trading above or below them? Bullish or Bearish?
    MA's are they crossing over each other in a rainbow effect and spreading out properly in the direction of your trade?
    Learning the trampoline effect of MA's and how long it lasts?

    Bollinger Bands are they tight? Are they turning up to the inside or out? Are they wide? Are they parallel?

    Gap Support and resistance. Gap Fills.

    Stochastics Divergence. MACD Divergence.

    Volume Patterns...OBV and VWAP and MA of Volume.
    Rate Of Volume change on any given day. Volume on up days or down days. Volume out of patterns.

    Learning to find convergence with Fib Patterns.

    Learning how to look at pullbacks or retracements and see patterns in the number of bars from prior events

    Learning how to look at both higher and lower time frames before you take any trades

    Learning how to read the indices so that the your flowing with the overall current.

    Learning that because of market psychology history repeats itself over and over and how to sit there like a Tiger quietly waiting to pick of the weak prey.

    Learning Money Mgmt skills to the highest form of expertise

    Learning how to read a balance sheet and income statement and learn how to understand why cash per share is important. Learning about sequential earnings growth and revenue growth and how combining these FA principles with TA create powerful long term trades.

    Learning how to read candle, bar, and line charts properly

    Learning how to tape read.

    I could go on and on...basic TA as many know it from a 50 dollar book at Barnes and Noble is a start but its like kindergarten for those who have been trading for 10 years or more and are consistently profitable. There is so much to it.
  7. Exactly. If no one was making any money using TA, no one else would use it. However, there are people that make a good living using TA, which is proof enough for many people...

    TA is merely a tool, not a crystal ball. While TA may not be able to predict the exact place a market is going, it can give traders guidelines with more probability than not using TA at all...
  8. ============================
    Even though moving averages can be helpful including sources more valuable than ''research papers'';
    plenty of evidence shown by public research showing plenty of wrong ways to use them also .:cool:

    Dont trade bonds ;
    wouldnt know about that.
    Gar- f -angle;[garfangle]
    Interesting nickname ;

    Does the fact that
    some people and dictionarys, & spelling checkers not include your nickname & also ''alligator gar'' invalidate you or creation ???


    Love learning -Solomon, trader king
  9. I,m trading breakout today. Don't have enough room on my charts for all that stuff.
  10. CalTrader

    CalTrader Guest

    How much do you need to think about this ?

    Without complicating things you can just assume that all you have at the most basic level is price and volume of transactions - and the volume of transactions at a particular price.

    If x number shares are transacted at a particular price and on either side of this price the volume of transactions differ in a significant way it is certainly reasonable to assume that there is more resistance to price movement at the significantly larger volume price point.

    On top of all this you can overlay all types of things but if you concentrate on just the basics you really dont need external validation to what your intuition should be telling you .....
    #10     Oct 28, 2003