Hi, I have another newbie question, so plese go easy on me if it seems too stupid/obvious. I know not all of you agree with efficient market hypothesis, but lets just work with it for this question. So from my understanding, to extract money from the market, one has to be more efficient than the market is. How efficient is this? - I have no idea. But apparently more efficient than 95% of people trying their hand at trading. Leaving a number of people breaking eve, and even a smaller number profitable (people on ET generally seem to be ok with the 95% failure rate concept). From my understanding, the markets (options, futures, and maybe FX) are all zero sum, except equities. Not sure about FX tho... To make money in the market, you have to exploit an effificiency which I heard lasts about three years after its discovery until the returns are seriously diminished (dont quote me on the number, but the concept is correct i assume). Anyway, I realize a lot of you probably take fundamental data into account with your trading, and everyone has different indicators, patterns they use in their TA. BUT, doesnt there reach a point where enough people are using TA in the same manner, that the initial purpose of TA - to react to market psychology based off of past patterns becomes a market mover itself? I have seen numbers saying something like 80% of the FX market is speculative (or at least a large percentage), and retail traders as well as institutional traders use TA for FX markets. Since there are only a few heavily traded currency pairs, and people are all having the same data, wont the TA people move the markets themselves? Of course every technician sees patterns and uses indicators differently, but were talking about lots of people trying to exploit the same inefficiencies. It seems kind of odd that the purpose of "traders" or short term investors is to price the market as best as possible, yet people realize that is not in their best interest and keep their trading method secret, thus theoretically keeping the market less efficiency by closing off flow of information. Anyway, that kind of came out as stream-of-consciousness, i dont even know what my exact question is from that, but any insights or thoughts would be appreciated and well read by this newbie. Thanks!
I would express the efficient market hypothesis somewhat differently: "Those who make the markets are 95% efficient at extracting money from those who don't."
Over saturated with TA chartists? Not at all, but that's the big secret. We badly need them TA chartists in order to help fill that 95% quota. Some at ET's do a great job on this.
it would be interesting to try and figure out the effects of TA on a security. To see if there is an obvious pattern, if everyone goes for it effecting the price. That should be the evolution of TA, correct?
What my feeble old brain sees through rheumy eyes in most TA is that it calls turns that are perfectly obvious to the eye alone. The great good fortune in this is that price more often than not slowly and inexorably retraces to or beyond those obvious entry points. This delightfully shakes the crowd of astute TA followers out of their good entries. The only things I have ever found which sort of work have nothing to do with classical TA.
For "Efficient Market Theory" to function in the reality of the market, by definition more people must refute the theory than susbcribe to the theory. The best example would be "Value investors" who look for undervalued or "inefficiently" priced securities. Their buying will then provide a floor, or a "technical support level" thus attracting early bird, or bottom fishing chart traders. Eventually, some momentum will add to the mix, returning the security to "fair value" or "efficient pricing", here the Value investors start to leave. At this point, you have "Efficiency" and the future direction involves the random flow of information, thus the "sentiment" and interpretation of future information drives the price at this point. Taking GOOG as an example, at $300+ it is grossly overvalued. The earnings came out, and it jumps $30+ becoming even more overvalued. Prior to "price" jumping, there was a thread "speculating" as to outcomes. Would earnings be up? If they were, would price rise or fall? This is typical of an "efficient market", news, and interpretation become impossible to analyze in any thoughtful manner, as you are trying to analyze a psychological reaction, and they tend to the random outcome. Technical analysis by definition is Efficient Market Theory in it's purest expression within the market. cheers d998