The case against technical analysis

(Hitesh Patel) #124

I think for those arguing against technical analysis, it makes sense only if the guy arguing for or against it has a good grasp on the subject. Without knowing much about the subject, or having a very limited knowledge about the subject, the arguments dont bear any weight because in my view those arguments are done without full knowledge about the subject and more likely to be based on hearsay or half baked knowledge.

People here seem to argue that technical analysis is purely momentum based trading which it is not. Those who know how to use it and apply multiple techniques available in technical analysis can very easily detect bottom formations useful for long term investing as well.

Some arguments sound like the story of blind men touching different parts of an elephant and then trying to describe the shape and characteristics of the elephant.

For those interested in finding out long term wealth creation using technical analysis besides other modalities of investing, there was a list circulated by @basumallick which ennumerated long term wealth creators globally and in that you would find a lot of guys compounding wealth at astounding rates of returns who used TA. I think one can google it and find it or try to find abhishek’s presentation at VP Goa meet if he has shared it.

(Bheeshma Sanghani, PhD) #125

TA is a very difficult topic in my view to learn and implement. My own brush with it was when Prakash Gaba gave a lecture on it during my college days and it seemed pretty easy the way he described it. However, when he invited a bunch of us to observe him and his colleagues trade I quickly sobered up. What I noticed that good TAs have a set of tools but they know which tool to use under which circumstances. For e.g cotton futures has a different set of indicators and sugar has some other set.

Also, good TAs are more about informed about the going ons in the sector compared to a typical value investor.

Another thing I noticed was that all good TAs are seasoned I.e at some point in their career they would have had a massive hit to their portfolio and sometimes multiple times. They have all learnt the hard way what works for them and doesn’t. Ofc this is also true for other more pure forms of investing but I think TAs have a different attitude towards losses and for them it’s business as usual if something doesn’t work out.

Value investors are a little more protective about their thesis and more resistant to discarding it but TAs don’t have such hangups.

I have a deep admiration for seasoned technical analysts because of their attitude towards gains and losses.

That said, my sense is that its more of an art form and not everyone can be a good TA but a good TA can come from anywhere.


(Abhishek Basumallick) #126

I have a simple view. Fundamental analysis, technical analysis and statistical analysis (quant systems) are all available as tools to investors/traders to optimize/maximize returns. How one uses a tool is dependent on their i) knowledge on using tool, ii) skill level, iii) discipline and iv) temperament. Of all factors, in my opinion, temperament makes the biggest difference over a long period of time.

Also, learning each tool (FA/TA/SA) takes time (usually years) and then using them effectively takes more time. As @hitesh2710 says, making judgements on very little knowledge about a tool and saying it does not work is juvenile. If one simply goes through the Market Masters series, it is amazing to see that people using all these tools have been successful over the years and over very long periods. So, again, the differentiator is not the tool, but the practitioner using the tool.

So, bottomline is, don’t waste your time and energy on this thread. Hone your skills on one or multiple tools!!

(Krishnaraj) #127

You are buying or selling a stock to make a profit. Your counter party who is selling or buying a stock is also doing the same to make a profit. It is obvious that the two of you have arrived at opposite conclusions whatever maybe the methods (fundamental or technical or any combination or anything else).

Now if I am really sure of my methods/conclusions (say rooted in fundamental analysis), it is profitable for me for the counter party to think exactly the opposite of what I am thinking, in terms of the price. It may be more profitable if the counter party is using what you think is a completely wrong method (say rooted technical analysis just as an example)

In other words, like it or not, it is better to have someone thinking the opposite of what you are thinking, for a profitable trade. Which means it is profitable not to correct him :slight_smile: but encourage him to trade! And unprofitable to tell him he is wrong because if he thinks like you, he will bid up the price if you are buying, and bid down if you are selling. Why add competition?

Net net, the moral side of it aside, trying to right someone is a lousy trade!! Sometimes moral compulsions :smile: come in the way, so one may just share a view point, and if the counter party does not listen, then just trade with him wherever possible. On balance, you should either win, or change your methods.

(Praveen Shekhar) #128

TA is only as probabilistic in nature as FA is. Viewing intrinsic value and buying at “cheap” levels is also a kind of "Hope’ based on study of various tools that price will go up. An example of how i “trade” fundamentally using TA is given on various stocks in thread Contrarian investing using TA.
1.Giving price targets using TA would also largely depend on what frame of chart you use. Using a 4 hour chart may be used to buy options and make quick profit(loss) in short durations and that is what they are best for… Thousands of tools in TA have been devised by nothing but backtesting to see success rate. You have answered most of your own questions.
2. TA is a psychology of prices. To understand that we have to understand our own psyche first. I traded in FNO for ages using TA and eventually saw i made only net to net loss or breakeven. On backtesting all my trades i saw that had i not panicked and exited any(most) of those trades, i would have succeeded over 75% of the time. Which just leads me to say a trade is as good as the persons fear/greed and loss appetite. TA is not used only for “idle cash” (God bless the person who leaves money idle…!!) I use monthly and quarterly charts to help analyse bottoms ONLY on fundamentally good companies which have been around for quite some time and have sufficient TA data. Buying any old garbage company at 4 bucks just cos charts look great may lead to a lot of pain later.
3. By buying a company which i have studied fundamentally as cheap and good to go up in years to come i use TA as a tool to see when the correct time may be for a good entry with LEAST possible further slide. As you say, if it falls more, then fundamentally i bought the stock having convinced myself it’s good, so further price slide only makes it cheaper. On the TA front one support has gone so i look for the next best one to average out my price. In any case my trade would last from 10 months to maybe 2 years also.
There are ample people who have become millionaires using just TA and FNO. All you have to do is first day of new contract write Nifty CE or PE 500 points away from current level. Reap profits every month barring some black swan event or major happening like election. Creating wealth and being rich may have different ideas for different people. For basic example on how i buy you can view mentioned thread and some on Bull Therapy 101. phreakv6 is very right in what he says. It’s all about the experience using different time frames of charts and required indicators. I too used to use over 10 indicators before which has become only 3 now. I dont even use candle patterns anymore though i needed to learn all of that to understand TA better.
As for DHFl and Yes bank throwing sell signals, see following chart for the most basic sell signals.
assume an investor using TA on monthly chart bought DHFl above (breakout) of 2015 peak, in 2016 end sometime above blue line marked 287 price. MACD is giving a crossover and stochrsi has also crossed earlier signalling a buy. Forward to Sept 2018 where you can see centre of M top at threat (red line) at 509. MACD has also given a cross down. Fall from first peak of M itself had Stochrsi giving huge negative divergences when price went up again suggesting an impending fall soon. Or simply use break of orange trendline to exit while still in profits.

as for Yes, a simple monthly trendline break or fall below trading rectangle at approx 305 signalled a sell which obviously matched with the bad news around stock. As i said. There is a lot more psychology in a monthly candle as it contains bigger chunks of news, factors, results, Oil price,etc factored in. Very seldom does a monthly pattern fail on charts owing to this fact.