The basic nature of Technical Analysis

Discussion in 'Technical Analysis' started by kut2k2, Jun 10, 2005.

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  1. kut2k2


    You know the old clichés that begin with "There are two types of ..."?

    Well, there are two types of Technical Analysis: the type that attempts to detect a price trend and the type that attempts to predict a price trend. Yes, it's true: not all TA is about prediction.

    Whether you are trying to use TA for prediction or detection depends on whether you see "buy low and sell high" (BLASH) as a plan or a goal. For counter-trenders aka trend faders, BLASH is a plan. Counter-trenders are trying to pick tops and bottoms, i.e., they are trying to predict the next trend, which of necessity opposes the current trend (if there is a current trend). So they are countering (or fading) the current trend. Hence, the name "counter-trenders".

    For trenders aka trend followers, BLASH is just one of several possible goals. Others are "buy high and sell higher" and "sell low and buy lower". Trenders attempt to detect the current price trend so they can climb on board and ride it to a profitable future. The plan for trenders is "buy strength and sell weakness", strength being an uptrend in price and weakness being a downtrend in price.

    As you might suspect even before examining any evidence, it is far easier, as well as far more effective, to detect the current existence (or nonexistence) of something than to predict its future existence. As for evidence, none of the successful technicians interviewed in Jack Schwager's MARKET WIZARDS books claimed to be a counter-trender, i.e., a predictor of future trends.

    So if you have tried diligently to use TA in your trading strategy and failed with it, probably the first thing you should ask yourself is "Was I trying to predict and ride the next trend, or was I trying to detect and ride the current trend?"
  2. kut2k2


    Q: Why is so much of TA unreliable/incomprehensible/lame/convoluted/fraudulent/stupid/haphazard/bogus/mystical/etc.??

    A: TA is an unregulated activity involved with money. As such, it draws an amazing number of crackpots and an even greater number of scammers and other creeps looking to make money off of the greedy and the gullible. This makes it no different from other components of trading systems in general.

    The first thing I do when looking at an unfamiliar technical indicator is to ask myself "Was this thing logically designed, or did some joker just pull it out of his ass, slap a price tag on it, and wait for dupes to start drooling and shelling out the bucks?" You'd be astonished at how often the latter is the case.

    But to condemn all of TA in principle based on the fact that a great deal of it is bogus is like condemning mathematics in principle because numerology exists. The basic tenet of TA (analysis of historical price and volume data can lead to short-term trading advantages) is sound. The devil is in the details, and the details mostly don't get written up in books or sold at trading seminars. You have to be willing to "get your hands dirty." Go back to first principles and ask yourself what a truly useful indicator should be able to do. Believe me, you don't need a degree in mathematics, but you can't be afraid of math either. I have only had a year of calculus and a basic stat course, yet I was able to figure out some stuff most professionals in this arena haven't figured out, probably in most part because I questioned every assumption along the way as to whether it was truly meaningful or was just some crypto-religious dogma that gets drummed into the financial acolytes.
  3. gkadir


    Well said, and I couldn't agree with you more because it works.

    Thats one of the best methods I use, Buy higher and sell higher and sell lower and buy lower.

    I know you guys might find this strange, but I never try and have an opinion on a stock. I just trap the stock, becuase even though it has had good earnings it goes down. This market is strange and never respects an opinion, so the best is ride the trend!
  4. kut2k2


    Hi, gkadir :)
    That's pretty much my approach as well. I confess to wasting a lot of time looking at stochastics when I first got into TA, until I realized that I was trying to do the impossible! The good thing about that experience was that I learned to avoid the same mistake with Fourier analysis and other attempts to predict the future.
  5. I find what you say interesting and thought provoking but as a side note i think Paul Tudor Jones (a Market Wizard) was / is a very successful counter trender - i think he even uses the Elliot Wave method to do so...

    anyway i think your right that 99% of the rest of the wizes use some type of trend following not trend fading method...



    If You Have The Vision We Have The Code
  6. Hello:

    The basic nature of technical analysis is simple to understand. What people fail to understand is the following;

    1. Concepts to not always reduce to "black or white", "on or off", "yes or no".

    2. The effectiveness of technical analysis depends on the skill of the practitioner.

    3. Not all technical analysis tools are useful, some are simple an attempt by the "inventor" to obtain self-agrandizement.

    Recently I posted information of a historical nature on the subject of pivots. In return I saw comments about the "usefulness" of the technique. The point of my comments was to offer historically correct information. Today, I received an invitation to comment on a study of pivots. Again I have to make this clear. The tools themselves are "inert". They do nothing without the skill, judgement and innovation of the user. This is what is missing from most commentary about technical analysis and associated tools (how they can be used). Clearly that is because the preponderance of members here have little or no clue.

    What I suggest is that people who are interested in learning something useful about technical analysis start to do their own homework first. Following are some text references that may help readers to become more knowledgeable;

    "Trading with Oscillators, Pinpointing market Extremes, Theory and Practice" by Mark Etzkorn, Printed by Wiley Press

    "A Complete Guide to Technical Trading Tactics, How to profit using Pivot Points, Candlesticks, and Other Indicators" by John L. Person, Published by Wiley Trading.

    After that an interested reader might go on to books by Graham and Schabaker.

    Good Luck Tomorrow
  7. kut2k2

  8. kut2k2


    You appear to contradict yourself. Either the effectiveness depends on the practitioner, or the tools matter as well.

    It's probably a combination. The best surgeon in the world won't do a first-class appendectomy using a butter knife.
    I'm all for people doing their own homework. In fact, nobody who's become a successful trader is adverse to doing their own research, unless they just got lucky with an outstanding mentor from the beginning.

    My purpose in posting was to give a heads-up to people who (a) may be unfamilair with TA or (b) had a bad experience and wrote all of it off as a waste of time at best.

    Rather than send people off to read books that may just be a further waste of their time and financial and emotional resources, I thought I'd just share some of my own findings in the hope that it might help to guide their own individual quests for knowledge.

    I'm not familiar with the second book you listed but I do know a lot of people don't think much of Etzkorn's book.

    Etzkorn himself says, "The evidence suggests oscillators function better as discretionary or forecasting tools than as the foundation for systematic trading strategies."

    This smacks of a high-confusion factor. If the damn things can't be used in strategies, where exactly is the value as forecasting tools?

    As far as discretionary trading goes, everybody should go here first:
  9. The Growth Stock Report has an intersting take on Technical Analysis in which they see themselvs as translating market action and discerning "what's important" from "what's not" - who knows
  10. "At the Crest of the Tidal Wave is a brilliant and important piece of long wave research with potentially devastating investment implications for the future.", (Paul Tudor Jones II, President, Tudor Investment Corp)


    Paul Tudor Jones - Many times (not all) a counter trend guy


    If You Have The Vision We Have The Code
    #10     Jun 12, 2005
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