Technical Analysis and Common Sense

I use Erlanger Quote software. It has a ATR function. I think most software has it. If I remember correctly Real Tick does not have it.

A good start is to use ATR for the time frame you are using. So if you are trading 15 min charts use the ATR for the 15 minute. Play around with it. Maybe apply a factor to it such as .618 or 1.272 or 1.618 etc.

One other point that I left out which is important is answering the question as what is a good pivot to apply the RSI too. Generally speaking, a playable counter trend move will make a short term stochastic, say 5,3,3, or the cci extended with the RSI still showing the trend intact. For example, overbought Stochastic with the RSI still less than 50. This would be for pivot highs.

John

 

thanks.

 

rs7, thank you for starting this thread, the philosophic aspects of trading that you are trying to explore (if I read you correctly) are one of the main reasons why I started trading a little more than a year ago. In the end, I don't think I will care whether I die rich or poor, but I will be content if I have learned something about how a market works.

That being said, I would like to start by wondering: What is TA and what is the object of interest for TA?

If we assume TA can ever work than we have to ask ourselves, why does it work? Why is there (assuming that there is) a certain kind of regularity in price development? And what is the fundamental (meaning principal, deeper), universal reason for any price action?

I don't know. And I don't think anyone knows, but I am offering an approach to what I think is TA, but you might argue even that. (It certainly has more to do with what most people here would probably call TA than fundamentals of the company.)

Let's look at something like the ES or NQ. There are hundreds, maybe thousands, maybe millions of people out there every day, every second that trade them. Most of them have one thing in common: They make emotional trading decisions. Some of them are "better" and less emotional than others, and they eliminate emotional decisions completely from their individual trades. But at the end of the day/month/year, they re-evaluate their unemotional system emotionally. If on the 1-minute chart a system has almost consistently lost money for a month, the people who trade it will decrease in number and size, and as soon as it starts to work again for a few days, the people trading it will increase again.

I am not good with TA terms, but one can often observe in price charts something which I believe is called a triangle (meaning large swings that get smaller and smaller until there is a breakout or breakdown at the tip of the triangle. I believe that every simple mechanical system (like MA crossovers) plays out like one such triangle: If a 20 EMA gives you an edge, lots of people will start trading the 20 EMA, and they will eventually have problems getting fills, therefore someone who trades a 19 EMA will be more profitable once there are lots of 20 EMA traders, the 20 EMA traders will start losing money (and therefore decrease in number/size), and the 19 EMA traders will prosper, until the 18 EMA traders take over etc.

I agree this is extremely simplified, but I hope you see what I am trying to get across.

Now the problem is that you can take the whole thing one step further: Assuming everyone knows and accepts what I have just said about the steadily decreasing EMAs' profitability, everyone will try to be one step ahead before the whole pattern of consecutive EMAs even has a chance to develop.

So how do you stay ahead of the game or at least don't fall behind?

I think it's just like in almost any business: You have to have something that a sufficient quantity of competitors does not have. At a time when computers were rooms filled with tubes, nobody even had price charts, except for the very few traders who went through the trouble of drawing them by hand. That gave them a sufficient advantage. Nowadays everyone has access to charts, and it's not big enough an advantage anymore.

Man, you almost had me divulge my strategy here. Honestly, I had it all spelled out right here in three long and detailes paragraphs, but then I was thinking about the first chartist. If he had given everyone a computer that can produce charts, he would have given up his competitive edge. And the kind of TA that I use is about as revolutionary compared to all the indicators that I have read about as charts themselves must have been when they were first used for TA. So far, it has been working, and I just don't want to risk ruining something that might turn out to work for years (as long as not too many people know of it) by having everyone using this approach.

Maybe, if I find out in a few months that it doesn't work consistently, I will start selling it as a "system", but right now I am making 2 ES points practically every day, and I believe everyone would agree that such a strategy (if consistent) would be worth more that the few thousand bucks I could ask for it.

It's like, why would you sell WizeTrade (or whatever the multi-thousand-dollar software with the red and green lights is called) if it really worked?

Actually, why would you? Anyone care to comment? Especially those members that praise WizeTrade on Elitetrader without ever posting anything? This would be your chance to make a post!

 

r7
I would argue that any trader who is consistently profitable is proof that an indicator is working for them. That indicator could be anything, chart patterns, price action, whatever. Unless they close their eyes and click at random, they are using some sort of indicator. You use relative strength. Is that not a technical indicator?

 

Lobster, you are being a "crab" by not divulging your revolutionary approach to trading. Shame on you!

Actually you could spell out in exquisite detail every nuance of your system and very few would use it and very few of them would make money at it. The old saying about leading a horse to water but you can not make it drink has its roots sunk deep in human behavior.

O.K. why would the people who used it not duplicate your success? Well in the end the vast majority of people would throw it out and buy or sell on emotions and not the system. Actually in this is the key to behavior in the markets. Yes everyone has charts and the same indicators. If everyone used them the same way we would have no market so apparently the widespread use of charts and indicators does little to explain price behavior. So what is driving the markets?? Ok, here is my little secret. The markets are chaos but even chaos obeys statistical laws. The fact that indicators apparently indicate where and when price changes will or have occured is pure concidence. They just happen to coincide with statistical boundaries embedded in the market, generally in the next time frame. The market will only go so far so fast subject to statistical laws.

O.k. What do statistical laws indicate or measure or record or predict or interpet? Interaction pure and simple. This data is related to that data. This series of events is correlated to that series of events, and so forth. How does this apply to the markets? The markets are a manifestation of the constant interaction between human beings. It therefore shares its attributes. Human beings have ingrained in them over the yearss what is benefical to their sucess and what is not. Unfortuanlly with trading we are relying on caveman reflexes which get us killed when hunting humans. This is where the "we all think a like" comes in. We all think alike but the timing is different. The key is finding out when more people get to thinking the same. Also to finding when the behavior at the time should not last. This is where trends start.

Now, I know that the above does little to make money in a practical sense but I did want to share my insanity with you.

John

 

First I am sorry for the long post but I do get to the question of TA and why I use these two quotes by the end.

Zentrader said "To me, all a chart shows is what the market did in the past."

In 1979 I started as a fundamental "INVESTOR" (investor meaning my intent was to hold long term). Over time as I became successful with this method, I realized often no matter how great the fundamentals and the prospects were for a stock (company) as the general market went down so did my investment (stock). Therefore, I could have taken much more profit out of the same point movement if I had been willing to trade in and out of the position. I discovered that if the market was trending down (I used lower highs and lower lows on a weekly chart {technical} and interest rates were rising {fundamental} I was better off in cash. It wasn't long before I started using daily charts to determine trend and traded my positions even more actively. Over time as I encountered more and more earnings and revenue disappointments with my stocks and began to realize that often these "surprises" had already been indicated in the price chart I began to rely more and more on the price chart (trend) and this trend relative to the market (I used S&P and AMEX composite at that time). In my quest to take more and more profit out of the same point move I began to look for stocks which had underperformed during up moves to short during down trends in the overall market and economy. As my trading time frame shortened, I became less and less concerned about both economic and company fundamentals. Although I must say I still believe these are very valid methods for profiting from the markets. It is just that experience has taught me that I am able to take much much more profit out of the same move using other methods and with much less risk. With the advent of direct access, lower commissions and narrower spreads, I have continually shortened my time frame from being a longer term daytrader, to day trading using 30, 15, 5, and 1 minute charts with my entries and exits coming form the 1 minute charts.

I am continually trying to learn to take more profit with the same or less risk from the same opportunity.
http://www.amazon.com/exec/obidos/t...418/reader/14/002-8326842-2684052#reader-link Read the last paragraph of this page of the book sample.
I am not recommending this book. I haven't bought or read it yet although I plan to. If any one has, I would like to know your thoughts on it.

I have learned to be successful with very short term technical indicators.

This is a small part of what I have learned.

I use mainly candlestick price charts moving averages with various settings.

I use stochastic with various settings.

I use ADX (DMI) with various settings.

Note there are no fundamentals in my list.

More than any one indicator it is the relationship among the indicators that is important.
I can take this handful of indicators and take tremendous profit out of stock moves during any period I have tried or back tested. Pre 1929 post 1929, 60s, 70s, 80s, 90s, 2000, 2001, 2002, it does work and has worked in all of them. I am quite confident it will work for me in any future market.

As NihabaAshi pointed out, TA is a tool. I like to consider my TA as an instrument which must be calibrated. This is why I say with various settings for each of my indicators. I trade a very small group of indexes and stocks. Before I begin trading and periodically (at least weekly) thereafter I calibrate the settings of my indicators and moving averages based on a best fit (for my trading style) of the recent past. This insures as market conditions change my small universe of indicators are calibrated for optimal performance.

It is sort of like in the movie "Tin Cup" when Kevin Costner took the garden tools to play golf and beat the other guy using golf clubs. I suspect you could pull three indicators out of a hat let NihabaAshi or a few other traders on this site use only those three and they could out trade 95% of the other traders on this site using anything they want to.

Someone mentioned earlier because of money and trade (position) management it might be possible to make money by flipping a coin for initial buy or sell. I think for some profitable traders this would be no problem. I know for me these are at least 50% of my success formula.

As Zentrader and Dotslashfuture prove, not every one uses or needs to use the same indicators or time frames. But also, just because you are unable to consistently beat par (be profitable trading a specific timeframe) doesn't mean it can not be done or that you should even want to.

 

I use omega supercharts real/time. You can also
use Tradestation. Omega doesn't sell their products
in the US anymore. They promote an online version
now that you pay a monthly fee to use.


However, you can find copies occasionally on Ebay for sale.


Be warned though...you won't get any omega support.


http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=2040314253

 

Most people trade some index or stock or future that others have access to in order to trade it too.

So, I came up with my own indexes which NOBODY has. I can adjust their behavior suitable to the way I trade. (this is accomplished with a set of 30-100 stocks)

Most people use indicators (ma, rsi, stoch, atr, etc.) which factor in N number of bars or are derived using time.

So, I eliminated time-based indicators.

So now I'm trading/using (several) custom indexes and custom indicators that nobody has.

The reason for this post is simply to state that some of you guys may need to step out of the cookie-cutter mentality pushed by all these software/chart programs and come up with unique ways at looking/trading the markets.

IndexTrader

 

My point exactly. Except that I stayed with trading the ES (instead of customized stock baskets) for liquidity/commissions. I was thinking long and hard about whether or not to completely eliminate time out of my indicators, but I arrived at a compromise, where time is still factored in at a certain level. I do, however, agree that sticking with 1-, 3- or 5-minute bars or candlesticks would make it very hard to mechanically find an edge over the masses.

On the other hand, point and figure charts already exist, and they ignore time completely, so it is nothing really new to just decide for yourself you want to ignore time.

That custom index thingy you talk about sounds like an excellent idea for indicators. Now that I think about it, when trading stocks I have always watched certain groups of stocks and compared individual intra-day chart patterns against the "guesstimated" average of those groups. Just defining and calculating your own indices would formalize this idea and therefore make it more objective and efficient.

Great thoughts, thank you, IndexTrader!

 

Just to clear something up.....I DO LOOK AT INDICATORS! I am not trying to debunk TA here at all. I only find that I make my trading decisions on too much input to really make a list of. I think that is the difference between myself, and what I (perhaps unfairly) consider to be a TA trader.

So just for the record, my belief that someone can use a very short list of indicators, and trade off anticipated short term moves is performing magic. This is probably because they are smarter than I am. I grant this. I couldn't read a book on TA and not fall asleep after 2 or 3 pages. So obviously I just don't have the mentality for it. Anyone who has labored through my posts already knows I am not the brightest light in the sky.

Now I know what all the indicators are. I have access to them all. I mean there are so many studies available on the software I run, I could have so many lines going that my charts would turn solid if I was using a white background.

So yeah, I look at stochastics, and MA's and Bolinger Bands, and RSI and MACD's. I can see generally recognized patterns...flags, head and shoulders, pennants, wedges. And I dare not forget double tops, double bottoms, rounded tops and bottoms (saucers?). Reverses of many of the aforemetioned. Maybe these aren't enough. They're what I am familiar with. Do I look at charts? I do. Do I look for patterns? I do. Do I look at oscillators? Sometimes if I am going badly and go back and study where I went wrong. Then I will fool around with some studies and see if anything pops out at me.

So, to make it simple (I know it's really to late for that), I basically use TA when I am looking BACK on my trades. I do use them prior to trades just to get a feel for whatever it is I am trading. Does it look weak or strong. But intraday, I just don't feel that technical oscillators have any meaning. Nor do most of the other "post- computer era" indicators. They are just too sensitive to too much information. Information that flows constantly and unpredictably. Jficquette said he could draw the oscillators by hand on a chart. I agree. I think I could as well. But only after the day is over. I think most of us can if we are allowed to look back.

So what do the oscillators tell us? We are overbought on the day? Oversold? Yes, that is exactly what they tell us. But only based on what has already happened. If anyone disagrees with this, I would love to hear why!!!

Now obviously if you are going to use these indicators, you have to believe that they will give you an edge. If you find one single thing that works with predictability more times than it does not, you need not ever worry about making money trading. If you can assemble a combination of these indicators, than obviously you will be a superstar.

So here is my "common sense" (probably only to me) take on the whole thing: If something works, you stick with it until it stops working. Then look for what is working, and switch to it. LOBSTER said absolutely the best thing I have ever read on ET! Lobster gets the GOLD MEDAL!!! Ok..gotta quote him directly...credit is well deserved:


Maybe, if I find out in a few months that it doesn't work consistently, I will start selling it as a "system", but right now I am making 2 ES points practically every day, and I believe everyone would agree that such a strategy (if consistent) would be worth more that the few thousand bucks I could ask for it.

It's like, why would you sell WizeTrade (or whatever the multi-thousand-dollar software with the red and green lights is called) if it really worked?

So yeah, I agree that a ''system" can work for a while. I don't believe anything works for any significant length of time.
I said here before, it is CRUCIAL to recognize patterns in the market. When you see something happening with any regularity, you MUST take advantage of that observation. This is not limited to TA. For example, if you notice that the market always seems to dip or run at a certain time of day, take advantage. If you notice ANTYTHING AT ALL, use that observation. I know a lot of you play poker. What seperates the good players from bad is certainly not the cards. Everyone has an equal chance there. The good players have discipline. The better players notice what we call "tells". If you know what I am talking about, then think of the market giving you "tells" on what it will do. If you can glean repetitive behavior from charts, or oscillators, or moving averages, or relative strength, or volume or any combination, these are the real "tells". As are many other characteristics of the market. Over time, you will begin to recognize more of them and see them better and better. They are what you should be trading on. And they change. As do the "tells" in poker. People wise up, people change their styles, people adapt in poker. So whatever works there also changes. The very best poker players adapt. Sometimes it takes a setback to get them to change their perceptions. But the great ones do.

Now, if you are not familiar enough with poker to know what a "tell" is, than I don't know how to relate to you as a trader. This is just me. I guess there must be Wharton PhD's that will read charts and out trade me and never have played a hand of poker in their lives. But I am not easily conversant in trading with a guy that got 1600 on his boards and holds an Ivy League PhD. (Though I have seen a few trade poorly). So I just do my blue collar type of trading. I guess I am like an old time barnstormer. I fly by feel. Works for me. I wouldn't be comfortable letting a computer land my plane. I know it can, but still......

So good luck and good trading to all. I think I have finished expressing my feelings regarding the subject of this thread. I will anxiously be reading any further posts hoping maybe I will have a revelation. Believe me, nothing would be better than a "holy grail". I have been working too hard for too long!! I want the magic bullet!!!

(wife just home from a shiva call....that's it for me on a sat. night anyway)

RS7