percentage of real price action versus biases

Discussion in 'Technical Analysis' started by Ivano, Jan 13, 2022.

  1. Ivano


    If a hourly 20 Moving Average with this particular setup is bouncing on a certain stock, we are going to buy, if a security is crossing above the VWAP and/or other signals we should buy and there is a trending broken, and a resistance level and so on. All of us hear a new theory everyday, but I do not know how much the likeability to enter in a trade on technical signals is due in percentage terms 1)to a real price action between supply and demand, an imbalance of the market 2) the fact that traders believe that that signals are important so are all reacting in a certain way.

    Of course there is some point 1 and some point 2, but WHEN/HOW is more determinant one respect to another?

    Could you point me to a resource to learn more about this fascinating mechanism?
  2. SunTrader



    Price chart.
  3. Ivano


    mmh, I guess if a trend continues may be that is a real imbalance, instead of a simple bias, as everybody thinks: oh the MA123 has been touched so everybody is buying
  4. tiddlywinks


    I may be wrong, but it sounds like you are asking what percentage of price movement is due to self-fulfilling "herd mentality" versus actual technicals.

    If that is case, the "description" you presented has failed to realize that technicals alone are a driving force of the self-fulfilling herd mentality... It is a circuitous discussion.

    You speak of volume, but then mess it up with terms like "trend" and "resistance"...
    how do YOU determine that? How do other participants define?

    Through testing, you can determine probabilities of specific movements YOU recognize.
  5. Don't enter a trade because of the "technicals". You can use the price action to see what's going on, but it's only interesting if the move is beyond the standard deviation. And even then, you may want to compare vs. peers.

    For example, if stock A's hourly standard deviation is 0.5% in price (you can do this for volume too), and the stock price is moving within that range, then there's no real information for you from price. In order to build a view on the stock, you will want to know what the consensus view is, how investors are positioned, and what catalysts are coming up.

    For example, in stock A's case, if the price just moved 100 bps in the past 5 minutes (2x the normal move) that's in excess of peers (so not just a macro thing) and you know that earnings are coming up next week, you would want to look for 1) a corresponding move in volume, 2) news about the company or industry sales (or economic data release that's correlated) to get a sense on what's going on.

    Ultimately, your decision to buy in the short-term (hour or within the day) requires your view that subsequent volumes will rise (there will be someone else to sell to). In the mid-term (to the catalyst like earnings), you would need to have a view on earnings itself (will the stock beat or miss, etc. and how does that tie into the stock's story? Accelerating growth? Collapsing company? etc. because you also expect volume to change in the direction of your view on earnings). If you are a long-term investor, then you are some what contrarian -- you'd ideally like to buy stocks that you think will be a lot more popular (volumes for stock will rise) in the future, say 1-5 years out.

    Everything else, indicators, analysis, etc., is garbage without you having a view on whether there will be more or fewer people lining up to buy your stock within your time horizon.
    Snuskpelle likes this.
  6. Ivano


    Well first of all you get 100% question, so I am glad my message passed through cause was not easy to express.
    Then as not veteran I may just losing your time, so I socratically apologise in advance

    >technicals alone are a driving force of the self fulfilling herd mentality(cut..) circuitous >discussion
    OK is indeed a before the chicken of the egg discussion, because the nature of my question is exactly when finishes one phenomena and begin the other one, there is some interrelation but not so bilateral, inclusive as you say in my opinion.

    You have trader John Smith and trader Gordon Gekko, John will do the herd choice based on the book become quadriloniare and thousands of gamestoppers vicariously will follow that herd signal because should work, Gordon instead will see some consolidation in a cup and handle with some contraction of volume and relative strength, he sees big investors are buying, he deems the stock with some awesome intrinsic value for that price, both will start the trade for two different reasons, both will move the market influencing the price(here your circuitous ouroboros intuition).

    Now, how many Gordon Gekko and how many John Smith are in the market? I guess the Gordon Gekkos will go long with more money power so an X Gordon Gekko counts as a 10000 new generation retail traders Y, so we can weight 10000x +y / Volume

    Now that "20 Moving average bounce that works" will be dictated more from a real price that is below the perceived market value, because there is a real supply demand imbalance or because the John Smiths think that considering the regressed history of the stock, will bounce on that signal because is backtested/cool

    >You speak of volume, but then mess it up with terms like "trend" and "resistance"...
    >how do YOU determine that? How do other participants define?

    >Through testing, you can determine probabilities of specific movements YOU recognise.
    I see your point is a probabilistic game, is true that I cannot fight the market, but I can have MY OWN vision and backtest accordingly, so I will have an Edge but only based on my observations.
  7. Ivano


    mmh, here my accent is not on profitability, but on understanding the forces that move the market, namely if a create an indicator(or signal) xyz it will be powerful because a lot of people believe that the stock get momentum or because really that indicator/price level signals a real underlying probabilistic power.
  8. Here is the kicker: The fact a pattern is observable in price after the fact doesn't necessarily imply it predicted anything about the future. If price itself alone predicted a lot of price movement, it would be trivial to plug in an entry level machine learning algorithm from a barchart, tick stream, or whatever you have, and make money. It isn't if you've ever tried it.

    Importantly, for every buyer there is a seller (disregarding some special corporate events). Money is not magically created in markets, and I'm not talking about defined external influences like dividends (or Fed buying/selling). What it means is, an effective way of ruling out spurious patterns that said nothing about the future is to consider which mispricing is represented and what party is paying you to take on the risk of eliminating it through your trade, and why other parties are not sufficiently doing that already. That makes it is possible to reason about the soundness of a given approach, whether it is TA, PA, FA, or whatever.

    It's true that literally anything could potentially work if enough people believe in it as in it influencing their buy and sell decisions. An easy example is say crypto or currencies in general. The number of people believing that the price is going to drop because of the next night being a full moon is probably lower than the number of Bitcoin adherents believing it's "going to the moon" though. For that matter the number of adherents of an indicator with a catchy name that makes an arbitrary calculation based on a couple of past prices is probably pretty low as well given the infinite number of ways you can create stupid indicators. An indicator may pick up portions of a more general momentum or mean reversion effect, but the chance it is finding something else beyond that is limited to if other trader/investor knows about it in significant numbers, or it has real utility in terms of pinpointing activity of another type of market participant (e.g. options market maker hedging).
  9. Ivano


    Good point about the back evidence of the indicators, I read something interesting in a book called "mastering the trade".
    The crypto is a good example, now I start to understand the circularity @tiddlywinks was speaking about, If I have AAPL and from 100 crashes to 20, do not matter if is touching the 3years moving average, what is important is instead that at 20 AAPL is cheap and you will get a consolidation in the worse case, but and this is the point, that consolidation will influence the indicators and so the two phenomena are correlated, is all about Wyckoff if a stock is in phase 2 is going to go up from his base, if not black swan market events are going to come, and the technical analysis will influence that, so all in all @SunTrader with his/her short response was right, we look the chart, and the chart says the momentum. Indicators, fundamentals are relatively important. Personally I love to see a lot of timeframes, but in the end all drills down to price and demand.