Is technical analysis just a self-fulfilling prophecy?

Discussion in 'Trading' started by hedgez, Sep 10, 2002.

  1. hedgez


    It seems as though if enough traders are paying attention to the same indicators and basing decisions from the same information, technical analysis is only as important as how popular the indicators are.

    Does TA have any meaningful validity? All I use is short and long-term charts for stocks and futures, quotes and news, and I manage to do much better then most of my peers.... especially better then the ones that have 50 different trend lines and bands on their charts. It really doesn't make sense to me. Maybe it's just a security blanket that some traders need in order to gain some type of confirmation to pull the trigger on a trade. Seems like kind of a waste of time and energy to me.

    Are there traders out there that do well trading with stochastics, rsi, bands, and trend lines?
  2. LeesonTrader

    LeesonTrader Guest

  3. Prior to the proliferaton of internet-based charting programs and the mass dissemination of intraday data, I would have said absolutely no to your question.

    Now my answer is yes and no.

    It must be remembered first and foremost that the current price is a result of everything that is known and anticipated about a stock. Price represents nothing more than a balance of this information, which simultaneously creates hope and fear.

    Thus the high of the day is the maximum amount of hope generated, the low is the maximum amount of fear, and the close is the prevailing balance of those sentiments.

    Therefore, as most indicators are derived from the H, L, C over time, these indicators represent quantified human behavior. And as Solomon said, paraphrased, "History repeats itself. There is nothing new under the sun." As such, human behavior repeats itself. It is this repetition that allows for the usefullness of quantified human behavior.

    Much more convincing evidence is revealed with price patterns. Triangles, pennants, flags, wedges, etc., all represent periods of indecision. And they repeat, forming at similar spots in the performance of a stock's price movement. Again and again.

    One thing remains true, and has always been true, and that is...
  4. Yes, TA is a self fulfilling prophecy, and you'd better hope that it keeps on fulfilling itself. We rely on seasonality and predictably repetitive conduct between the Size-Accounts and All-The-Rest. We rely on the demands by the masses to withdraw monies / deposit monies into/from the Mutual Funds, whom then have to place those monies to work in the selected securities that the fund represents. We rely on the counter hedge, double hedge and cancelling hedge strategies that are the other leg to the hedged commodities markets. We rely on the predictable nature of the gap and gap failure trading patterns.

    In fact I heard of one trader that has at least two assistants, and he specializes in Gap theory and makes close to $30MM yearly. Those TA's make better than $300k yearly. His strategy is primarily fulfillment of the Gap Theory. Its easy to conclude that since Gap Theorum is simple enough and actually does work in realithy, and without much mathematical explanations, then this would be as good a place to trade as any.

    Gap Theorum works in real life. It was said, that the Japanese, when they flooded this country with their cheap Auto dollars, and bought all those American Icons (Pebble Beach, Rockefeller Center, etc.) that their primary investment strategy was to buy the top brand name, never the second or third. Hence, when an asset spiked, there was usually front running from informed individuals running in front of the larger purchase of the actual assets.

    Self fulfilling or simply charting "natural patterns". Steve Nissan who touts Candlestick theorum would have far more to say on this linkage between Tech Analysis and self fulfilment.
  5. Is the tail wagging the dog, you're asking? Up to a point and mostly in shorter time-frames it probably does, since every flea on the dog thinks that it is much smarter than the other fleas. On how the fleas control the movements of the tail, give me a break 'cause there is only so far I can push this analogy without crashing in flames, which is just about now....

    It reminds me of a story: two fleas are coming out of a movie house. One says to the other: "Do you want to walk, or do we take a dog?".

  6. problem is that many people read a chart differently...and many people don't understand what a chart really represents or how the technical indicators are formed or derived.
    People read a book plot a chart and an RSI and a Stochastic. But if anyone knew how these indicators were formed, they;d realise that they are essentially the same. (And if they actually bothered to analyse price movement then they'd realise they don't need either - except to perhaps use as a filter for a large automated scan).
  7. it absolutley doesn't matter why it works, only if it works, and even that is a matter of opinion.
  8. Seems like almost everyone uses technical analysis and chart analysis interchangeably. What I do is probably 99% technical. I don't have to see the charts at all to do it....
  9. Lets take one technical indicator, the 200 day moving average. Yes the action of people looking at it makes a difference, in that people will buy a breakout, or bounce from it, and also sell a breakdown through it.

    But it also matters to people who don't look at charts at all, or even know where that line is, namely the average person who bought in the last 200 days, and the average price they bought is on that line.

    If the price is above it, they are happy they bought, and their psychology is that of a winner. If it drops below that line, they wish they hadnt bought it, and all they really want is to "get their money back and get the heck out". Isnt that how all of you feel? (unless you have disciplined yourself to act otherwise) This sentiment does have a pull on the price.

    This may seem to be stating the obvious, but its whay (to me anyway) that this indicator would have influence whether people watched it or not.
  10. YES ...NO...... I DAYTRADE and i use technical analysis very much when analyzing the 60 min and daily charts but when actually trading itself ( 1 min and 5 min charts) the price action itself is what counts.
    #10     Sep 10, 2002