TA - Self-fulfilling prophesy?

Discussion in 'Technical Analysis' started by rodden, Nov 30, 2003.

  1. rodden


    Once upon a time TA was simple - and it worked. When TA traders referred to simple consolidation patterns, multiple tops/bottoms, volume-trend patterns and other such unsophisticated chart phenomena they had a definite advantage over the general - and generally disorganized - investing population.

    Today, almost all transactions are guided by TA considerations (eg.: what fund is managed by the TA-ignorant?) and, for practical purposes, the trading population has distilled down to funds managers and professional 'day-traders'.

    Today we have hundreds (thousands?) of TA terms in the trading lexicon; one requires the equivalent to a Ph.D. to comprehend it all.

    Proposition: Today's market action is increasingly distorted by way of a feedback loop between the markets and TA application. The markets collective is in a state of transition from what it was to what it will be; what it will be is literally anybody's guess. I'm talking a change in the identity of the system here - and if you're acquainted with Chaos Theory 101, you know that that means danger!

    The original basic psychology behind TA has been replaced by a still admittedly inchoate but ever-increasingly organized body of recondite theory; the markets are tending to become a balloon ungrounded in reality.

    For example: The Fibonacci series is a pretty little progression, but why on earth should it be applicable to market action? What has it to do with market psychology? If it does work, it's because it indicates that the market is becoming more and more an internally-referencing mathematical phenomenon and less and less a function of grass-roots investor perceptions.

    No wonder RSP season is losing its impact.
  2. weld1


    i hope a trader can still make a buck by using simple old chart patterns that repeat (or used to) on a pretty regular basis.
  3. All traders need a framework in which to base trading decisions on.

    This is what TA is, and it is as mythical as the markets are.

    After all, what is a futures contract, really? It is an instument that is esentially a figment of our imagination, just as money is. It exists only because we think it does.

    TA is merely framework for a trader to establish "decision points", places where the trader will buy or sell.

    Most traders fail because they keep changing their method of making decisions, so probability never gets a chance to work in their favor.

    Of course, all of this is just philisophical rambling about reality:D
  4. Tea


    People are always saying that "this is the worst market in history" and "technical analysis doesn't work anymore".

    Not trying to be trite, its just that I have heard this over and over again during the last 17 years.
  5. weld1


    maybe theres hope after all, fact of the matter is i read not long ago that since the bubble support and resistance levels hold better due to traders looking at real value more??????? only the shadow knows
  6. Let's take TA for what it is, an analysis of the past, nothing more, nothing less. Looking behind the charts to the reasons for the patterns will help you see what the market is really doing...after all, the market is really nothing more than supply and demand.

    Seeing stock following a simple support and resistance trough, for example, may be nothing more than positive vs. negative dividend yield (vs. current interest rates).

    And, yes, I agree with the initial premise of self-fulfilling prophecy to a point, especially for longer term trading. Most serious traders have a rudimentary understanding of TA, and use it along with the other tools in their toolbox while trading. We all know that one single view will not "beat the market." ...and it is foolish to think it will. We must respond to what the market throws at us, on a daily basis...and when there are so many variables, many of which can turn things completely upside down, then we cannot truly "plan" any strategy through fruition.

    Use TA to see what "might happen" what "could happen" and be ready to respond if it "does happen"....at least you'll be better prepared than those who don't prepare at all.

  7. rodden


    Actually, Tea, I'm not suggesting that TA doesn't work anymore - just that it's less accessible by way of being much more complex than it once was. The reason that it's more complex is that, in the good ol' days, TA was based on stock movements motivated primarily by ordinary investors' perceptions of fundamentals; but now - stock movements are motivated primarily by Technical Analysts' perceptions of the stock movements initiated by Technical Analysts themselves! It's a giant feedback loop that's getting further and further from fundamentals.

    That, at least, is one of the points I was attempting to make. Apologies if I wasn't expressing it clearly.
  8. weld1


    is that because of an increase in program trading?????? does the shadow even know??
  9. rodden


    Unquestionably program trading is a major contributor to the new trading rationale. The first explanation I heard for the crash of '87 was program trading. '87 was ostensibly caused by a cascade of triggered stop-losses that were loaded into computers around the trading world.

    In answer to your earlier post: sure - there are lots of stocks making old-fashioned patterns, but how easy is it to trade these things when a million TA experts are making their moves in anticipation of chart developments? A neat ascending triangle, for instance, might transform into a wedge just because TA traders think they detect something happening within the formation on some particular day and they all stampede to the downside. The stock might eventually carry on upward anyway, simply because its fundamentals are too strong for it not to.

    I'm not saying you can't make money using TA, just that it's more complicated than it used to be because of TA Feedback.
  10. Rodden,

    Ever read GEB?

    PEACE and good-specul8tion...

    #10     Nov 30, 2003