To begin with, there are three general areas of focus in TA. One is based on price action, and usually volume, and can be approached either through tape reading or charts. The second is based on pattern recognition, popularized and codified by Schabacker. The third is based on "indicators", i.e., mathematical manipulations of price such as RSI, MACD, stochastics, etc. "TA", therefore, becomes a loaded word and triggers reactions based on what one associates with the word, and the associations which one applies may be very different from the associations applied by someone else. Which is why discussions of "TA" rarely get anywhere unless somebody establishes what is meant by the term. Fundamental Analysis isn't affected by the same confusion since everyone understands that it addresses "fundamental" issues such as earnings, sales, cash flow, etc., though any given fundamental analyst may stress one aspect of the balance sheet over another. Comments such as "TA doesn't work", therefore, have no meaning in and of themselves. One must define just what it is that he believes doesn't work, which leads to the system. The system must provide an edge, meaning that it must provide a better-than-chance outcome of executions over a period of trades long enough to yield reliable data. Regarless of how good the system is, though, there is always the chance that the next trade will fail since the system can tell you only that, over time, you will have X% success, not which specific trades will be successful and which won't. The problem many traders have is their inability to take every trade. They try to guess in advance which will be successful and which won't, i.e., they try to beat their own systems, which pretty much negates the advantage of having a system in the first place. Therefore, when looking for theoretical bases, you've got two general avenues of inquiry, one having to do with probability and the other having to do with certain aspects of psychology, such as behavioral and developmental. But all this would entail quite a lot of work, and may not be worth the effort to you. If it is, you could start with Magee's "Winning the Mental Game on Wall Street", Douglas' "Trading in the Zone", and Taleb's "Fooled by Randomness".
Please asquint yourselves with the 21st century physics. It has been proven for OVER 70 years now that the universe does NOT operate on causality. It operates on tendencies and associations. So stop looking for âcausesâ for everything. If directional price action has a tendency to have a very high degree of association/correlation with a particular indicator, then that relationship presents an opportunity for profit over the long run. Act on the opportunity and stop looking for hidden âcausesâ every where you look. You might want to act on opportunities as they present themselves rather than try to investigate their âcausesâ and watch the them go by-bye.
If you consider investing and trading, you can compare it to other applications of capital and business standards. Some of the ones I have used are: 1. Comparing my investing to my professional capabilities. My cross over starting from scratch in each case was three years. Two degrees whose combination made me fairly unique and 300 bucks and Magee. 2. Comparing my worth as an amateur and as a hired gun. I earned portal to portal (Greenwich, Conn) in the NYc arena from an institutional investment firm in 1960. @ 100/hr. My specialties became : paper, pharmaceuticals, textiles and machine tools. I critiqued white papers, interviewed top brass in sectors, attended professional sector work luncheons to pose prepared questions. I was offered partnership and require to go to Europe quarterly as a technical staff support person; I declined because of constraints on my life style. 3. SEC citations. I was cited frequently and continually by the SEC re: insider trading. I was not an insider but I practiced an anticipatory investment stategy that was a flag to the SEC. I had POA's and many accounts I treaded for others as a courtesy to them. When these accounts triggered and the trades showed large short term profits, the SEC cited me. No citations ever hald water and after a sufficient training period of years, the SEC learned to forego citing me. 4. Corporate complaints. execs of corporations that I traded complained likewise vis a vis 3. I was providing four emails a day that supporteda network of coattail trading. People forwarded these and corporations monitored me. accusations persisted that I had contacts within corporations. 5. Wealth building. I build wealth rapidly compared to business and financial standards. 6. Youth Transference. sixth formers, electively and year upon year, earned enough money to capitalize their education. 7. Adult transference. Using self programmed software derived from emails of 4 above an average over 6 months of 11.1% profit per 6.6 day cycle. The email reached the person through 3 forwardings. 8. Use of time. I have spent my life doing as I wish as a consequence of being free so to do.
Whateverâ¦Since when does cause=tendency and effect = association. You might want to look the terms up before presenting such a mathematical relationship. http://dictionary.reference.com/
Interesting post. An alternative is to do a rational and logical analysis of the subjects of Fundamental Analysis and Technical Analysis simply as cells having possibility in the Universe of Markets for Making Money. You might come up with some stuff that relates holistically to the opportunities. When the post above settled on a scope limited to "edge", it approached a level as to be focused on a singular small matter related to what an individual might do to siphon some money from a marginal supply. Setting up a bunch of buckets as a defining basis for FA and TA is not comprehensive either. What is the alternative? In any field of endeavor there are large general foundations upon which to build. FA builds on the free enterprise system's business models and the law. TA builds upon market theory. fish sauce is screwed in his contemporary environment because of how his colleagues have carved out niches counter to the principles of either FA or TA but rather on the mechanics of applied maths. You can clearly see how our comtemporaies who are skilled operate. For FA: look to Gates and Ellison. For TA: look to Buffett and Soros and the wizards. Making the point of how valueless saying "TA doesn't work" is trite. We all understand that the person is really saying something like: "TA is something, with my limitations, that I am not talented enough to apply to the market to make money". Edge talk is saying that a person cannot deal holistically; thats all. fish sauce is sitting in a place that has a lot of people who are stuck. They deal marginally (sorry) on the periphery of the Universe that is out there. FA is fraught with opportunity. Some of my buddies exchanged stock in the standard Time Corp (the company that built the time clocks cards went into) for a company's stock that printed time cards. The company found that by punching holes in the cards they could be read electrically (not electonicially even) later by machines and the readings could be processed as data once an electronic way was found. Gates did not give exclusivity to any one. TA is founded on one idea. How the market works. It all hinges on the relationship of value (usually price) and volume, the direct time based variables of the market. Fish sauces buddies missed thissomewhere along the way. Others have too.
When I was developing my system one question I felt important to answer was why the system should continue to work. What is the underlying reason for the edge. Although any particular system may work for any period of time I think anyone who uses a system should be able to say why it works, other wise you're just whistling in the dark. How about this..... There are fundamental reasons why technical analysis works.... But is best to know what those reasons are for your system so you can have faith in it and execute it without doubts. Yes you can drive a car without knowing how it works, but if there is a breakdown the one who knows the mechanics of it can get back on the road sooner.
Perhaps the word "cause and effect" might be a bad usage of words. I think "underlying assumption" might be apropos. Everything we act on must have some LOGICAL assumption guiding it. Going back to my original question, if you use TA, how do you know if the method is valid? What assumption are you assuming? Most trader believe that just by Backtesting, one can translate and interpret that into validity. It does not! In one of the article I posted, one of the underlying assumption of TA is the mere fact that RANDOM WALK produces TRENDS. <b>I think it's hard for some people to swallow this. All those trends: MA, RSI, MACD might be byproduct of Random walk. A harsh conclusion indeed. But the bright side is that random walk does not eliminate the possibility of TA.</b> The other article deals with psychological tendency, which I think is a haphazard assumption at best.
I think this may be more important than all the debate about cause & effect, etc. Does it work realtime???? Back testing is excellent for a system that is 100% automated as long it is tested over a significant time period that includes many different types of market environments. If you've back tested the last 100 years with good results, I suspect you are pretty safe going forward. However, where there is a degree of human "interpretation", or where the system is impossible for the user to program into a fully automated computerized program, then the only way to know is to use it real time long enough to convince one's self that it does indeed work. I have used my system in it's present form for nearly 3 years plus over 5 years in it's developmental forms. It has produced consistent, very positive results, without a losing week over that time period. I believe I can say with confidence that the system works. I can also say that I do not always follow it 100%. The single weakness in any system requiring any human intervention is the human. At times I have found that my personal bias, emotion, or whatever, slips in and causes me to misread what the system was saying. Very much like the way we misread a word or a sentence in a book. We don't realize it until we reread it or someone points it out to us. Bottom line, unless the system is computer generated and runs independent of human intervention, it is one thing to have a winning system, and another to have a winning performance. If anyone knows how I can find someone with the computer knowledge to automate my system and not abuse it, I would appreciate an PM.