TA becomes self defeating??

My trading experience, albeit limited, clearly indicates that the use of TA becomes self defeating. I have read the forums for a while now and it has come to my attention that TA, although useful, becomes self defeating because many traders misuse them. For example, some traders use several TA's on top of each other and it backfires on them because they sort of cancel each other out. In addition, a trader will tend to focus on the TA too much and therefore lose sight of the larger picture for the day.

What are your thoughts?

IMHO, the rule is: Keep It Simple Stupid

 

I agree, keep it simple. All technical indicators are derived from only three things: time, volume and price. Whatever indicators you put on your charts, you're just looking at the information from a different angle. It's easy to suffer from information overload.

 

OK... then where is the larger picture for the day coming from?

Saying "simple stupid" is easy to say... What is "Simple Stupid"?

Have you ever asked that question???

Though, I do agree with your post.

The most simple stupid you can go into is TOS... it's just time, price and volume of the transaction. Let's try trading that...

I'm not flaming but rather asking a question...

 

This is how I would change your quote to make it more accurate:

I pack very lite when going on vacation too.

 

Paradoxically, TA can be self-defeating because too many traders know about it.

For example, if too many people buy a technical breakout near the pivot, there'll be a brief rally and then prices will collapse. All the pent-up demand would have been absorbed near the breakout pivot. Technical breakouts work best when people are lured in gradually, rather than all at once -- and that means we need some ignoramuses who aren't aware of TA.

Widespread knowledge of TA also allows for manipulation. Market makers often nudge stocks through obvious technical pivots, so that huge share blocks can be unloaded onto the unsuspecting. That's one cause of false breakouts/breakdowns.

It's my experience that technical indicators/patterns based on self-fulfilling prophecies (like moving averages) are more likely to be self-defeating than those patterns which are true manifestations of human psychology (double top, head & shoulders, etc.).

You can also avoid getting sucked into false breakouts by using multi-time frame analysis. As a position trader, I look at the 60min, daily, and weekly charts to make sure that the technicals line up on each of them.

Tycoon

 

no it is can not be self defeating, it only appears to be when improperly used..... example---- a large trend following hedge fund is watching the resistance line at 8777 on the djia. price breaks the line by the funds parameters, the fund begins to purchase large blocks of diamonds, the dow basket, and dow futures, forcing the prices UP. more and more traders jump on board seeing the acceleration of price shattering whatever resistance they have on their technical charts, forcing prices higher. the more people who would buy on a technical signal, the better the signal. there is NO SUCH THING as a FALSE BREAKOUT--- it all depends on your time frame, a false breakout on your 15 minute chart, will earn profits on a 1-3 minute chart. a false break out on a minute chart can earn profits for tape readers, ad infinium.

best,

surfer

 

Nice surf

 

I recognize this "seems" that it would be true, but I would like to see a study, or some sort of proof of that statement.

If empirical deduction is the basis of the statement, then I would offer surfer's statement that there is no such thing as a false breakout as empirical rebuttal.

 

Anecdotally, it seems that technical trading during the advent of instant information via computers and the net is much more difficult when compared to the old days of hand-drawn charts ala that book from MacGee (sp?) and friends. I would think that these days, self-fulfilling prophecy of anticipated technical movements would cause a much larger number of failed breakouts, as those buying purely on technical reasons are the weakest hands, so to speak -- all you need to do is push the price back through a certain level and the technical buyers are stopped out. I suppose in some cases momentum funds can dominate the tape in the more illiquid markets, and so technical buyers/sellers would become the prime impetus behind a move.

In contrast to marketsurfer's assertion that there are no failed breakouts, imo a failed breakout is one in which the majority of those who entered a trade based on that breakout would be unable to exit with a profit. For example, a fund that offers out 10 million shares of XYZ into a 52-wk high breakout, absorbs 1MM shares of mostly technical buyers, before offering down the rest at steadily lower levels -- for those 1MM shares, it would be a failed breakout indeed.

Lately it seems that more and more spikes are marking the tops/bottoms of major trends, but I guess one could also say that in some cases its the trapped momentum traders, desperate to cut losses, who provide the ammunition necessary to reverse a strong trend.

 

To verify my claim, we can use a thought experiment in which everyone is using TA. In that case, surfer's example would not work at all.

According to surfer: "a large trend following hedge fund is watching the resistance line at 8777 on the djia. price breaks the line by the funds parameters..." But how does price break through resistance if everyone is waiting for the breakout? Surely, there must be some non-TA traders to push it through that level. And that flies in the face of the assertion that as more people use TA, it works better.

Also, if surfer really holds the view that "there are no false breakouts", why must he qualify his statement with "it depends on your time frame"?. You can't say, dogmatically, that there are no false breakouts, and then say it "depends" on something, because the latter statement suggests that false breakouts sometimes exist. And they do. A breakout may appear valid to a tape reader, but it can simultaneously be false to a swing trader using the daily chart.

To wit, if a double bottom has an implied technical target 10 points above the pivot, but price only goes up 50 cents before collapsing, that qualifies as a false breakout in my book. It's always possible to argue otherwise depending on one's definition of a "false breakout", but that misses the key point of this discussion: sometimes TA doesn't work as intended, and we're trying to determine why that's the case.