The case against technical analysis


(Mehnazfatima) #62


(Mehnazfatima) #63

If there is no BIG SELLOFF in the market by next Friday closing…then I think the market is heading towards a Santa claus / budget rally? maybe some positive announcements from Govt…Next 1 -2 weeks are going to be quite interesting…


(Aksh) #64

The imp Q for which I’m trying to get an answer to for long and still to get is, if what to read out of the chart depends on what happens in a short while as you very rightly mentioned above, which again is very fundamental in nature, how does the technical analysis really help?

Now, I do agree that TA is very imp but IMO that’s only because there are many believers of the same as is the case with very many things in Human System but how does it really prove that TA is really able to indicate market movements successfully?.

I’m looking for some concrete, logical, scientific answers which explains logic/science/fundamental behind various TA concepts. Any pointer? Any good fundamental books?


(Mehnazfatima) #65

There is no scientific explanation for tech analysis…except that human behaviour remains the same and it causes similar patterns in different stocks. Tech analysis recognized these patterns from the past and applies to stocks in present.

But if you really look at it…even fundamental analysis has no scientific basis. The father of value investing Benjamin Graham has said that what causes an undervalued stock to go up in price (eventually) is not known. Here too, we seem to be relying on past patterns of investor behaviour. In the past undervalued stocks have gone up…they may do so in future too.

Both technicals and fundamentals have no answers to questions like…How? Why?

Both rely on the axiom…so it was and so it shall be. :wink:


(Dhruv Saraf) #66

I think Technical Analysis is practiced by different people in different ways, and there are of course theories and strategies that are unique to all. So for instance, something like the Elliot wave is a subjective area and may differ as different people may count the impulse and corrective waves differently and hence the entire predicament of predicting tops and bottoms may be so ambiguous that one may just be against the very concept. But there is a more objective side to TA apart from the cycle analysis which follows plain vanilla analysis like Candle Pattern Analysis, trend analysis and ofcourse playing out mean reversion through oscillators.


(Arnab) #67

I wanted to share a rather interesting answer that I read in Quora which I think will be somewhat relevant to this thread.

The questions asked was ‘Which is more effective: technical analysis or fundamental analysis?’ and someone named Taka Masuda (claims to be a Wall Street trader) wrote this answer and though I think he has gone a bit overboard with the first line, but I do think that the rest of his answer has some merit, especially the last line. So the answer goes like this,

"Neither. These are both bogus methodologies that have no proof of ever generating more alpha than throwing darts.

Before I was a trader at a Wall Street firm, I used to obsess over these concepts. I must have literally read every single book in the personal finance section of the bookstore. Once I entered the industry, I realized that the real traders who make money have an edge that isn’t taught in books. The edge can be technology, or insider info, etc. But one thing is for sure, NOBODY talks about technical or fundamental analysis as they know it’s BS fed to all the amateurs.

As a trader, I made over 500% yearly returns while taking little to no risk. Fellow traders made bonuses in the millions. These guys have proprietary strategies that they’d never share with you. Why would they? Then their strategy would quickly become saturated and stop working as they have to share profits with you.

Here’s a little life trick I learned about how economic cycles work:

Gold rush - an inefficiency has been discovered where it’s possible to make a lot of money in little time. (The internet in 2000, algo trading from 2000-2008, Smart phone apps from 2009-present)

Saturation - the first people in have cleaned up and everyone else is rushing in to grab whatever is left. Often, these things overshoot, leading to a boom bust cycle as the bubble bursts

Sell books - the early winners of the gold rush claim to teach you their “methods” for how to be as successful as them. They keep pointing to their success as evidence of their credibility, and gullible people buy into it without asking "if this is such a sure way to make money, why aren’t you still doing it?

Why are you instead teaching it to us and making a fraction of what you could make just doing this?" The answer is that the gold rush is over, but the gold rush for gullible people is never over.

Don’t be the sucker. Either join a real trading firm or just buy and hold SPY and spend your free time on a hobby that will actually provide returns in life."

Though honestly I am not experienced enough to advocate for any of the two approaches, however over the last year and a half, ever since I started taking serious interest in the stock markets, I have certainly observed one thing, that technical analysis is tiring and time consuming, not to say that fundamental analysis is a quickfire thing, however once you fundamentally analyse a company and things look right, you invest in it and wait, periodically (every 6 months to 1 year) checking the fundamentals and that’s about it.

However being a trader reliant on technical analysis would mean constantly scouring the market, analyzing charts, reading parameters etc and all this takes a lot of time, effort, sacrifice and even then there is no guarantee that it would reap profits any better than someone who is a fundamental investor on the long run, is there ?

So the question is, is all that really worth it ? My answer is no. From what I understand that unless you are a professional trader, that is it is not your day job, fundamental analysis approach is the better way and that’s my case against technical analysis.


(Bheeshma Sanghani, PhD) #68

Prices are the heartbeat of the market. Just as a doctor would first listen to the heartbeat before making any diagnosis and prescribing tests one should also listen. Listen. My tryst with ta has been bitter sweet. Like all novices i was attracted to the market after watching news and the market gurus. For the next two yrs i experimented with all kinds of indicators and believe me there are more indicators out there than ants in the world. I consistently lost money because i did not keep it simple. More sophisticated the indicator more money is to be lost.

To cut a long story short i have realised that the behavior of prices cannot be modeled through an indicator approach.

One needs to use simple tools and combine them with business knowledge. Prices follow patterns and i am convinced about that. The trick is how good you are at recognising those patterns visually.

Once i had the privilege of watching sachin practice. After finishing his practice he walked out to where we were sitting and someone asked him how he was so good. He said to us, he doesnt see the ball or the bowler but he recognises the pattern of the delivery and the rest comes automatically. The masters have cracked pattern recognition.


#69

Novice investors are always trying to find the next strategy/formula (based on financial or technical analysis) that will guarantee good returns. Fundamental Analysis, Technical Analysis or flipping a coin don’t guarantee good returns. What guarantees great returns is risk management. Investors, who do not understand the importance of managing risk, lose money.

The right questions to ask are:

  1. What should I do to reduce my chance of permanent loss of capital?
  2. How do I avoid losers?

The only good comment in favour of technical analysis on this thread (made by @sharmaudi) talks about avoiding losses. Here’s his quote: I don’t care about profits as much as I do about losses. This is similar to Oaktree Capital motto: Avoid the losers, the winners will take care of themselves.

Technical trading requires volatility & liquidity and is usually short term. Here your risk management includes choosing a strategy with high risk-reward ratio, managing your trade size and having strict stop losses. Your strategy could be based on momentum, breakout or reversal patterns, but like @sharmaudi mentioned earlier, it really is the least important part of technical trading.

Value investing, on the other hand, has risk management built into it. The core of value investing is buying businesses (typically for the long term) in your area of competency at a price that provides a good margin of safety. First, you reduce your risk by studying the annual reports & financials, researching the sector and competitors to understand the business. Like Buffett said, risk comes from not knowing what you’re doing. You reduce your risk further by buying bargains with a good margin of safety.

Trading is short term, investing is long term. Trading needs volatility & liquidity, investing doesn’t need either. Trading using p/e data or investing looking at head & shoulders price pattern is neither good strategy nor sound risk management.

This comment probably goes off on a tangent to this thread, but traders and investors obsess about chart patterns and financial ratios unnecessarily. Instead, understanding risk, guarantees great returns for the long term. If you want to study risk and make money, you must read “The Most Important Thing – Uncommon Sense for the Thoughtful Investor” by Howard Marks.


(phreak) #70

TA is a self-fulfilling prophecy that works. I feel things like Supports and Resistances work because a whole lot of people use them. The more people use them, the more it feels like it works. I find a combination of RSI, MACD, Trendlines, Supports and Resistances to be more than enough technical analysis knowledge for making consistent profits. Chart patterns like Cup & Handle, Head & Shoulders and the best of them all, the triangle breakout are very, very useful.

I find TA to be a good initial tool for identifying turnaround companies. The ones that are at multi-year lows that start looking up. The charts summarise a story that invariably is backed up by some fundamental sooner or later. So I strongly believe TA is a self-fulfilling prophecy for the most part with some very useful purposes. Long as it helps you be profitable, it probably works!


(Bheeshma Sanghani, PhD) #71

A highly entertaining passage from the book “The New Gatsbys”. It takes place in the Chicago Board of Trade.


(ARB236) #72

Subash,

When someone himself don’t want to “Taste Honey” & insist or tell other people to fully convince him about the “Taste of Honey”… How it is possible under all the three Universes???

There is Tons of material available on the Web, totally free of charge !!! Why don’t you try to learn yourself ??

All Global Markets are “Manipulated ones” then How can you know what will happen NEXT?? It is ONLY Manipulators precisely knows when to Buy or Sell something !!!

TA is really a great tool for Timing your “Tentative Entry or Exit” from a Stock but you need to spend at least FIVE+++ YEARS to learn it by using a Great Software like METASTOCK published by Reuters

I have spent 10+++ years on MS for learning… You should also do the same & learn & get fully convinced yourself !!!

ARB


(Bheeshma Sanghani, PhD) #73

Hi @ARB236

You may want to dial it down a bit. He may not be on the forum. But he has contributed tremendously to the overall VP community. He is a market veteran. If you have a view please present facts. Spending x amount of yrs on metastock counts for nothing. Please substantiate with data.

Sincerely
Bheeshma


(Subash Nayak) #74

Hehehe, I am not a market veteran. I am novice stock Investor with around 5.5yrs of experience !!!

The beauty of old VP used to be in its openness and quality participation, where one can share his views without a tinge of fear of being ridiculed. Thoughts used to free flowing, and some of the thoughts of super investors here were no less nourishing than nectar. It was a nice ecosystem, where one can openly ask questions and expect the questions to be properly discussed, and some smart thought/outcome to come out. It never was like being correct 100% of the time.

The new age VP is of a different breed all together !!!

Off late have seen some of super brilliant TAs, and Techno-Funda guys. So not so doubtful about their effectiveness. But TA as an approach could never ring a bell inside my brain, and hence I prefer staying within Fundamental+macro-themed investment, with a little tinge of micro-cap investing (who will bet big in such crazily rising micro/small cap markets these days !!!)


(ARB236) #75

Bheeshma,

Visit the following Link, Read the Silver & Natural Gas Market Manipulations with authentic links about MARKET MANIPULATION by World’s TOP BROKERAGE & INVESTMENT BANKING FIRM: J.P.MORGAN…

SEBI ORDER AGAINST RELIANCE INDUSTRIES LTD.

http://sat.gov.in/scripts/search.asp

Judgements and Orders: 2014 (available from the year 2002 to 2014)

(For all previous years, a month wise search should be done to get the list of judgment pdf)

I hope above may NOW be considered as SUBSTANTIATED WITH DATA !!!

ARB


(ARB236) #76

Dear ALL,

Here is the Brief Profile of Real Life TA Masters - who made millions & billions in dollar terms:

Top 7 Technical Analysts of All Time Share Their Secrets

http://etfhq.com/blog/2013/03/02/top-technical-analysts/

The World’s 10 Most Famous Traders Of All Time - Investopedia

Above is posted for general reading of all fellow VPs

ARB


(Hitesh Patel) #77

There is no universal truth applicable to investing. It all depends upon what suits one’s temperament and what one is good at.

Personally speaking I have found technical analysis to be quite useful especially in combination with fundamental analysis. Many a times technical analysis provides a list of companies to work upon and is helpful in uncovering good companies which later on turn out to be great fundamental picks.

One book which impressed me was How to Make Money in Stocks by William O Neill. It propagates the CANSLIM method of investment and provides pointers to some very successful technical analysis setups. These patterns are meant to be combined with fundamental analysis. Many a times the technical setups give an advanced inkling of things to come and if that is so sometimes an investor who has some technical analysis in his armory benefits immensely. And mind you, these are not very complex technical analysis with a lot of indicators and all. Its more to do with breaching all time highs, or double bottoms, or cup and handle or inverted head and shoulders pattern which to the trained eye are immediately visible.


(satish23) #78

Any good book you suggest for technical analysis. This will be my first book on TA though I have read few books on fundamental analysis


#79

Let’s not forget that TA poster boy Jesse Livermore (mentioned many times in this thread) died broke (committed suicide). On the other hand, Warren Buffett says he won’t trade sleep for the chance of extra profits. Its not just about making money, its also about living a good life. Choose well.


(ARB236) #80

Hitesh2710,

I absolutely endorse you views, yes, making money from the markets should ALWAYS be based on “combination of strategies & flexibility to suit ever-changing market conditions” for a Trader or Investor…
There can NEVER be One-Fit-For-ALL type of solutions…

BTW, considering Global level Debt problems - EU, JAPAN, CHINA & USA & DANGEROUS Geo-Political Conditions… We will have several Black-Swan events over next five years or so… We are likely to enter in a NEVER SEEN LA LA LAND… in very near future… Protecting our “wealth” should be given HIGHEST PRIORITY…

best regards,

ARB


(Devdutt Rathod) #81

Hi Rohit that link is no longer accessible, could you please replace it with this instead:

http://theemotionallyintelligentinvestor.com/?p=24