Is there any reason why technical analysis would work

Discussion in 'Technical Analysis' started by nycderivtrader, Aug 20, 2003.

  1. I'd like to hear some of you explain to me just one-

    Is there any reason why technical analysis would ever work, other than people believing in it working? The only reason I consider technical indicators is because some people use them for their investment decisions.

    Fundamental is useful in finding the true value of the underlying.

    I'd like to just hear about this from some people who simply use technical......

  2. no one knows what the fundamental value of a stock is. its all supply and demand.
  3. Jake777


    I think technical analysis works because of reasons other than the reasons people ususally think it works.

    I do believe that TA works because of validity in the patterns, etc. But I really think it works because it gives, for the first time in many traders' lives, some kind of plan to trade stocks (or whatever else).

    TA gives you discipline. It gives you guidelines. It gives you rules. It tells you to be patient. We talk about people not being able to stick to rules. But in order to even not adhere to rules, you gotta have some rules to violate first.

    And people think of TA as having some validity and authority - so it gives additional force in people accepting the rules, and adhering to the rules.

    Whether you actually stick to those rules is a different matter. But TA gives you something to begin with.

    When I talk about TA, i just talk about Edwards and McGee. I don't understand all this other stuff (I'm not saying that there's no validity to them).

  4. Shifted this post from the other thread.
  5. When you use the term "work" as applied to technical analysis, I think you begin with the wrong premise.

    We all look at prices. Those prices give you information. That information may lead you to draw a conclusion about the future. If you act on that conclusion, and act incorrectly, then you might think that technical analysis does not "work"...when in actually, what does not work may well be your thought processes.

    But certainly prices give you information. For instance, let's imagine the price trading between 990 and 1000. As the prices travel between these two boundaries, we might conclude that the buyers step in to buy at 990, and the sellers step in to sell at 1000. This is information.

    Then one day, the price moves past 1000. More information. Evidently the sellers are no longer willing or able to sell at 1000. Or perhaps the buyers have bought all of their offerings at 1000. This gives you information that for the time being demand has exceeded supply at a previous point of contention. From this you might conclude that the price is headed to some higher point where sellers are willing to make a stand once again. Meanwhile, you may also conclude that the 1000 area will be an area where all those people who sold at 1000 in the past may be willing to buy.

    Now notice we are not talking about whether "it works". We're talking about information, and conclusions based on the information.

    Going on, we have concluded that the 1000 area was an area where buyers eventually overwhelmed sellers. But the market is not always easy. Sometimes it moves back down through 1000. Now if that were to happen, you might throw your hands up and say "it doesn't work". But again, the price is simply giving you information. It was temporarily true that buyers overwhelmed sellers at 1000. But then they evidently ran out of steam, and the sellers reemerged. More information. The sellers were able to move the price back down through 1000. You might conclude from this that the sellers are back in charge. In fact, you might conclude that the buyers are in trouble in that they were unable to defend an important point.

    But again, it's not a question of "whether it works". Its a question of information, drawing conclusions from that information, acting on the conclusions, knowing that such action is based on information which may change in the future and lead you in a different direction.

    The point of technical analysis is to discern information and draw a conclusion which will lead you to an action at an important point. If that action turns out to be incorrect, you will know it, and will know what to do as a result.

    There is no holy grail however....not technical, not fundamental. If everyone agreed on the underlying fundamentals, then there would be no trading. High cash on the balance sheet may lead you to conclude that there is "value". But if that cash cannot be employed in a business that generates profit, then ultimately the business will eat the cash, and the value will not be there, thus rendering your conclusion wrong.

    There we are again, conclusion, action, results. Doesn't make much difference which method you use, technical or fundamental, as long as you have a way to recognize information, draw conclusions, and then recognize when you're wrong.

  6. swimmus


    great post
  7. Nice post oldtrader.

    I think the "classic" patterns out of McGee Edwards used to work because at the time of publication not too many people had access to instant historical information, and the movements which frequently occured were just naturally based on exhaustion of supply and demand. Nowadays however, many people enter trades purely based on technical formations, and it is very easy to identify where those traders will stop out. Hence, many times obvious support and resistance levels will usually always get taken out but not necessarily continue, and for many patterns the number of failures either equal or outweigh the number of times the charts go "according to book".
  8. Oldtrader,

    I appreciate your lengthy and informative post.

    See, I do agree with you that there may be some "resistance" points, and that they do provide information. What I would think they tell you is that without some kind of new consensus or some news about the stock/economy/markets, the underlying will stay in that range.

    What I don't think that these technical indicators tell you is the reason why the market/stock is trading where it is, and the CHANCES of it going up or down in the future. All this is measuring is how people feel about the underlying- and I have heard TIME and TIME again how important it is for individual investors/traders to form their OWN opinion on the stock/market, and trade/value from there.

    Thanks again for your insight.

  9. In my experience, if the price is headed up, the "chance" is that it will continue on in that direction in the future. But let's make a distinction here...the direction that the market is headed may not have a thing to do with "technical indicators". "Technical indicators" are derived from price in one fashion or another, but they can be as misleading about price as informative. What I'm talking about here is not "technical indicators". I'm simply talking about price and volume, their action over time.

    And it is true that price simply measures people feelings, expectations, etc. It reflects the shrewd investors idea about value. It reflects the economist idea of the future. The collective thought process of interested parties and their action or lack thereof is reflected daily in price and volume. And this is what the technician looks at for information.

    Not sure where you were headed with the "opinion" idea, but I'd be careful. It's one thing to have an opinion about what the market IS DOING, as opposed to having an opinion about what it SHOULD be doing.

  10. Fear and greed, supply and demand, cause and effect and effort/result are all that principles that are needed to predict future prices.

    Looking at second derivatives does not work and only complicates the issue. Funnymentals with get you on a macro trade but exit and entries are all based on technicals.

    The books are cooked. the number mean noda.
    #10     Aug 21, 2003