Technical Analysis Doesn't Work

Discussion in 'Technical Analysis' started by rcanfiel, Jul 16, 2007.

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  1. This is a thread dedicated to the principle that Technical Analysis (by and large) has little to no value. It is contended that people continue to learn, sell, promote or believe in technical analysis, contrary to the many studies that continually demonstrate little to no <i>special</i> predictive value from TA indicators or chart patterns [also including Fibonacci levels, Elliott Wave, Gann, and probably Volume.]

    The consideration of Price action, free of all indicators or other philosophies mentioned above, is not included in the definition for purposes of this thread. This seems to be one of the few ways that many successful traders use that actually works.

    Those dissenting will usually try to defend TA via some of the following methods:

    1) Stating "of course method a or indicator b has value. You just have to know how to apply it."

    2) Anecdotal or testimonial evidence (often unverifiable or presented in an unrealistically positive light), in which a poster says "it works for me" or "I know a successful trader who..." or other variations on this theme. Often the person known may only use a certain technique or a (small) part of his trading method.

    3) Throwing mud at a well-designed test by pointing out a perceived flaw or parroting the fine print of such a test. Usually, the poster will ignore other parts of the survey and offer little evidence of their own. This is mostly a distractive technique, not something that would hold up under academic/scientific rigor. To fully discredit something requires equally rigorous evidence, that is accepted by the other knowledgeable individuals in the invest community.

    4) Point to some successful guru "who I know used it" However, rigorous independent monitoring is usually absent and longterm tracked performance results will generally be missing, spotty, ancient, or questionable. Or again, the particular method might only be a fraction of the trading methodology, where something else such as money management might explain the outperformance.

    5) Use other distracting or verbose arguments that have little value if examined "under the hot lights."

    6) Point to a few well-chosen examples of success, when a true test requires a large sample to demonstrate value.

    None of these arguments would hold much weight as compared to longterm, rigorous statistical sampling & testing of a mentioned method or indicator, over a diversity of markets and market time periods.

    It is further noted that since some 95% of leveraged traders are said to lose their trading capital, and that technical analysis is the preferred method by most traders, that there is a primary link between these two facts.

    One definition of Technical Analysis is:

    <i>Technical analysts (or technicians) identify non-random price patterns and trends in financial markets and attempt to exploit those patterns. While technicians use various methods and tools, the study of price charts is primary. Technicians especially search for archetypal patterns, such as the well-known head and shoulders reversal pattern, and also study such indicators as price, volume, and moving averages of the price. Many technical analysts also follow indicators of investor psychology (market sentiment).

    Technicians seek to forecast price movements such that large gains from successful trades exceed more numerous but smaller losing trades, producing positive returns in the long run through proper risk control and money management.

    There are several schools of technical analysis. Adherents of different schools (for example, candlestick charting, Dow Theory, and Elliott wave theory) may ignore the other approaches, yet many traders combine elements from more than one school. Technical analysts use judgment gained from experience to decide which pattern a particular instrument reflects at a given time, and what the interpretation of that pattern should be. Technical analysts may disagree among themselves over the interpretation of a given chart.</i>
     
  2. I am not going to get into the discussion but it is pretty easy to see that most academic studies on technical analysis PRO OR CON, are flawed in their assumptions and methods of testings. Studies will either focus on one isolated indicator to prove it does or does not work or come up with a basic mechanical rule to backtest that is unrealistic and is not reliable to prove or disprove technical analysis.

    You cannot academic studies as gospel just because a smart person did it. For me, I have had professors point out non-typographical errors in graduate level textbooks and it is not uncommon. Academic papers are not useful to prove or disprove a subject set of tools.

    So the argument becomes pointless in a sense and serves no real value.

    People who see technical analysis as a means of generating mechanical buy and sell signals usually lose money consistenty. Those of us who see it as a tool to analyze price action to form OUR own opinions as to whether to buy or sell have more success since it is still left to the trader to decide.

    Fundamental and technical analysis both suffer from the same weakenesses when used incorrectly.

    Why bother debating it since no one is putting a gun to anyone's head to trade with this tool or that.
     
  3. 9999

    9999


    Alright, then.
    How do we use price action?
    By the way, I should say that I do not consider Fibonacci levels as indicators, but studies of price and time.
     
  4. The real question is why is he (rcanfiel) still trying to debate something that he stated at ET that some aspects of TA has value (s/r analysis and trend line analysis).

    Thus, the flaw with the typical TA debate is that most traders think that TA represents only traditional indicators which is far from the truth.

    Simply, if a trader is viewing any kind of information on a chart (price, volume, indicators et cetera)...

    That trader is using TA.

    I myself use TA as a price action only trader (no indicators).

    Yep, support/resistance is high on my list of TA tools.

    Simply, its silly to run around specifically naming a few things about TA that has value while elsewhere stating TA is useless regardless if he uses it or not.

    Therefore, I refuse to exclude price action only TA methods.

    :cool:

    Mark
    (a.k.a. NihabaAshi) Japanese Candlestick term
     
  5. "To fully discredit something requires equally rigorous evidence, that is accepted by the other knowledgeable individuals in the invest community."

    For this thread the something is:

    "This is a thread dedicated to the principle that Technical Analysis (by and large) has little to no value."

    Could you post a set of rigorous evidence that is accepted by other knowledgeable individuals in the investment community that supports this view.

    Then we can begin this thread with a hypothesis. So far it is only a limited unsubstantiated opinion.
     
  6. Agreed 100%.
    :p
     
  7. If nothing else technical analysis gives a trader their risk levels, whether real or perceived. At least it should provide levels for entry and exit. The actual levels may be useless, but it should force discipline.
     
  8. "The consideration of Price action, free of all indicators or other philosophies mentioned above, is not included in the definition for purposes of this thread. This seems to be one of the few ways that many successful traders use that actually works."

    Then price action becomes the technical indicator....but you knew that...right?
    .
     
  9. Amazin'... how often this point is missed.
     
  10. You're thinking about TA along the proper lines. TA should not be viewed as giving discrete right and wrong entry/exit signals. Rather, TA should be viewed more in probabilistic terms. That is to say that the entry/exit signals are a method to try and put the odds more in your favor over just random 50/50 price movement.

    The probabilistic nature of the markets is why a given indicator should be incorporated into a trading system that also uses a money management and position sizing component.
     
    #10     Jul 16, 2007
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