It is simply reversion to the mean. The markets are not some nebulous, mindless entity; they are composed of market participants who are seeking some price advantage. The short-term scalpers and the floor traders provide the market liquidity (ie making a market) which results in the tight range (ie congestion) as they play the spread. They can move the markets in a tight range (ie the much ado about running stops) in order to find more market participants. The long term players, the deep pockets, smart money, commercials move the markets in the direction of value (ie they think the market will go higher therefore they buy now, thus forcing the market higher; a self-fullfilling prophecy, if you will). Thus you have these rolling waves of tight congestion where traders are just making a quick buck waiting for the institutional orders to come in, and then the large range extensions caused by those institutional orders. Price snaps back to see if that price value is worth the hassle (ie are all the long-term buyers right? or can you find more sellers to drive the market down?). The market is simply a chaotically controlled mind hive of market paricipants and differing opinions participating in an orchestrated, anarchistic, orgy of price discovery.
I think markets are NOT as efficient as academics would like to think. Yet, on the other hand, it's NOT as inefficient as most traders would like to think. Sure, TA is useful stuff. But don't attach too much predictive power to it than warranted. No method is perfect. TA is just one of the many ways to look at the market. If it was so perfect then everyone here would be rich. But we ain't. It's EASY to recognize an inefficiency AFTER the fact. Not so easy AT THAT MOMENT in time. Someone mentioned the high flying Naz stocks like JDSU, Enron, Worldcom as an example of inefficiency. But how many of you actually saw that inefficiency and SHORTED back in 2000 and HELD? How many? If you did you will be multi-millionaires many times over. So, apparently it ain't so easy to recognize inefficiency is it?? HAHA! For the most part, it's pretty difficult to beat the market over the LONG RUN. Even the best of the Market Wizards succumb to it ie. Richard Dennis and many others. And it's easy to say your particular method of TA works because you've made money. I used to think like that too until you sit back and think about it for a minute. The market offers SO MANY patterns - perhaps MILLIONS of them - that any weird ass concoted pattern or method would seemed to work over certain time period. Because it's so close to random noise, that any interpretation of pattern WILL YIELD somewhat succesful results and even trading profits if trade correctly(risk mgmt, positon sizing, etc.) But it doesn't mean it works forever or that's the market is even nonrandom. A random number generator can create myriads of seemingly nonrandom price patterns. This is what Jack Schwager called the "well chosen example". And that's why trading systems vendors can sucker newbie traders into buying their system because the backtested results were chosen PRECISELY to fit the system and only during those time period. Most commercial fail miserably in practices. But a lot of academics and quants trading methods are actually pretty close to TA, but I'm sure they wouldn't dare admit. They like to called it "statistical arbitrage" , which is nothing but data mining for statistical valid patterns and trading on them. But its' a bit more precise and scientific than TA, but in principles it would be the same. I'm sure my ex quant employers and MIT profs would roll over in their offices if they hear me say this. Haha. But I think in effect it's the same in principle though probably not in practice. But I think the big big picture is NOT all about TA and price pattern. Sure, you can make some decent $ with TA and you will even get rich and hopefully don't go bust one day. But the real real $ is made with fundamental foresight a la Buffett. I'm sure Buffet doesn't even look at a chart. And guess who is the 2nd richest man in the world? And how come NO ONE, NO ONE on Wall St even APPROACHES Buffet's wealth even with all of quants, computers, and tons of supposedly talented staff, well paid researcher, and traders,etc.??? No one approaches Buffett. And all he uses is a simple calculator. That tells me most of what's done on Wall St is bullshit. I came from that environment. I know how it was and is. Sure you can make $ with it. But to truly beat the market over the very very long run(30yr track record) you need a real edge. And there's NOT enough TA, quant math models, or analyst fundamental analysis can get you there unless you really know what you are doing a la Buffett! He rules!
Sure it's hard to beat the market, when it is in strong bullish period. However, TA's main goal is not to beat the S&P (yet many traders can do it) but to produce more stable returns, reduce the negative effects of bearish and flat periods in the stock market. http://www.jwh.com/pdf/NonCorrelation.pdf As trader99 said, quants are using TA. In general, they have higher returns and experience smaller drawdowns than stock market averages, especially non-US stock indices like Nikkei, Dax, CAC. So what is closer to 'FRAUD'?
When talking to people about TA I often find out that they don't know how to use TA. Similar thing happens with people coming to the markets and buy some nice software with all the extensive TA functionality. Beginners often think they are smarter and better traders with all those tools. The point about any TA tools... no matter if it's Gann, Fib or simple MA. Those are all tools... tools that show some sort of relation in the past price action. To just put a Momentum Oscillator on the chart an believe to make money on that is a pure illusion. The Momentum gives just a very basic information about the current price in relation to a past price. The key is to know how to handle those tools and when to use them.. and eventually how. Take i.e. Picasso. Everyone can buy a brush and paint. Those tools are very basic and you can say primitive. But the painter knows how to use those tools, so he can paint masterpiece. Same goes for trading and TA is just the paint and the brush. So it is pointless imo to say TA does not work. A brush does not paint itself... So it is pointless to test some parameters on any TA tool and say based on those statistics some TA tool does not work. IMO the idea comes first then you look for a TA tool that lets you visualize that element of the market. And then I know what the tool tells me and I knwo what I want to use that tool for.
Precisely... gimme a smooth upward sloping trading-based equity curve anyday, over the whims and fancies of an investment in the S&Ps...
The markets are a perfectly well organized system of participants with different goals and timeframes. In order to fullfil the participants respective needs, the markets move as they do. They tend to get more random as the different market participants' information analysis and skills go up. Fact is they will never get completely random, because otherwise many participants' needs won't be fullfilled. TA will continue to work. The irony is, in order to make money, you have no need at all to understand the deeper reasons or workings of the market! good trading
Exactly. Who gives a hoot anyway? Some good traders can make money even if they're right only right 15% of the time - Like options people. Dear folks from the CTFC, TRADING is not about whether you're right or not - It's about bringing as many odds as possible into your favour. TA can help you with that. Who gives a flying fuck whether CTFC thinks TA is right or not. U don't have to use it if U don't want to. It's your fault. Good Luck! Haha
You are missing the point. A moving average is derived from price and therefore follows price, but it also will act as a barrier to price because it is widely followed. Any stock chart will demonstrate this. Of course your eyes are stuck on the NQ so you might not see it. You are a fan of trendlines and "properly drawn support and resistance" db. Are you saying that they are inconsistent? No you are not or you wouldn't rely on them as heavily as you do. How many times have you seen price move to a previously drawn S/R or trendline, touch it and reverse? To deny that is to deny everything your trading style is about.
While I edited the bulk of your post JT, you are right on the money. In the case of a movng average, it is reversion to an ever-changing mean. This is exactly the premise behind using a single moving average as a trigger. Understanding that the average is the mean and that price will deviate from the mean is the whole idea. The beauty is finding stocks that deviate far enough to profit. And there are a ton of them.