Ending the Technical Analysis Debate

After years of posts on WSO about whether technical analysis is the equivalent to reading tea leaves, a long-time lurker has finally stepped forward to settle the debate.

Spurred by the doubters in @"Jared Dillian"'s recent post ("Technical vs Fundamental Trading") amongst others, I received an email from a trader who wants to end the debate by providing moderators with statistical proof.

His background: Started trading in 2005, self-taught. Took him 3 years to start making money, has been positive every year since and he is currently trading for his own account now. 100% technical analysis based.

Note: I have verified all numbers to be real and have seen the data firsthand.


Ratio of days positive to negative: 2.55
Average positive PNL day: $3374
Average negative PNL day: -$1831
Biggest Gainer: $39,886
Biggest Loser: -$16,250

Misinformation he wants to clear up:

Technical analysis does not predict what will happen. Support doesn't mean a stock will not get below and resistance doesn't mean a stock won't get above. Technical analysis is simply a systematic way to take advantage of price patterns that always have and always will repeat themselves. Stock movement will always be a probability curve, but in certain instances there is edge in the probability curve so a technical trader can make money in the long run without being able to 100% predict any given outcome.

The reason why most people don't think it works and it has been "disproved" academically is because the analysis is much too coarse. Without applying a bunch of nuances and context, you can't expect simple patterns to magically have edge. If it was as easy as buying a moving average break, the edge wouldn't exist anymore.

People who think markets are perfectly efficient argue that fundamental analysis doesn't work and that it is luck and that the data isn't significant and so on and so on. No matter what proof you show them, they won't believe it. For whatever reason, most people on WSO believe in fundamental analysis and mock those who think markets are perfectly efficient, yet they can't be convinced technicals work when given the same level of proof and are then left arguing the same angle as efficient market supporters. It is almost impossible to get someone to see their hypocrisy and change their position even with verified data.

Does this settle the debate or will people raise the same old doubts? For me, I've seen the numbers firsthand and there is no way for me to deny that technical analysis can have edge if applied properly...

 

If i put an infinite number of monkeys in-front of a computer, one will write a Shakespeare sonnet.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

Exactly. The plural of 'anecdote' is not 'data'.

If this guy were a fundamental analysis skeptic and I said "Look at these four trades I made on the basis of fundamental analysis. They did good", he would not be any more convinced than he was before. A single instance is just far too weak to be compelling evidence.

And can it ever be?
 
EvanM:
Oreos:

If i put an infinite number of monkeys in-front of a computer, one will write a Shakespeare sonnet.

Yes but we aren't working with an infinite data set here.

Okay then, give me 10,000 and i'm sure one will spell a word or even write a sentence (probably: "EvanM eats dong")

Jezzzus.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
 

What is being debated? That TA can work? That TA is better than FA? That the market is efficient?

I have no doubt that someone can make money using TA and obviously this guy is at the very least anecdotal evidence that it is possible. But, the data in this post concerning his returns doesn't really do a whole lot to prove anything... especially considering the vast majority of his positive years have been in a bull market.

Most notable Q -- Has he beaten the S&P or other relevant benchmark during this time period?

Other Q's include... What kind of drawdowns has he experienced? What basket of securities does he trade? These are just a few questions that would need to be answered to even have a chance of ending any debate concerning TA and FA...

[quote=patternfinder]Of course, I would just buy in scales. [/quote] See my WSO Blog | my AMA
 

We are debating whether TA in a pure vacuum can work. Meaning just looking at technical indicators is a long term viable trading strategy.

I will try to get more data in the bear markets, but I'm pretty sure he makes more when the markets go down. I believe the majority of these trades are equities, only held for a few seconds to a few hours...but will confirm.

 

to qualify myself without giving too much away, i've worked on the buyside and sellside, mostly USD rates/mortgages with some FX on the side.

guys use TA, TA works as much as anything else and people who say otherwise are generally academics or sell side guys who've never taken risk a day in their lives (sales, research, jr back up guys, etc.)

now, doing a 100% TA system isn't something i could do but i have no doubt that there are guys out there who do quite well. most guys use TA even just basic stuff simply BC there's too much noise and intra-day, you need something to help you pick your spots.

even the biggest, most macro traders on the street (funds and cough family offices) will use at least a little TA to help them find the best entry/exit levels.

 
bearflatten:
most guys use TA even just basic stuff simply BC there's too much noise and intra-day, you need something to help you pick your spots.

I don't disagree but something you use to help "pick your spots" intraday and something that is the basis for your investing paradigm are two vastly different things. And just because there might be some people who can demonstrate a long track record of using technical analysis exclusively and doing well doesn't mean much...standing on the pillars of luck and survivorship bias.

 
  • "picking your spots" using technical levels is a clear expression that some form of TA works. is it so illogical that someone has taken it to a deeper level? like i said, i don't believe in using 100% TA systems but that's the way i was taught to trade. some use 0% TA and some use 100% TA, it's all a spectrum.

  • not to sound like a math snob but it's clear you have no idea the math behind survivorship bias, etc. an intraday trading strategy over 2 years can provide a much clearer signal than 50 years of some mutual fund track record (especially when you get sophisticated on using filters to clear the beta). simply sticking your fingers in your ears and loudly repeating "survivorship bias" smacks of a guy who doesn't actually trade markets.

believe me, a trading floor is the most jaded bunch of people around when it comes to "magical" trading systems etc but there are legit TA guys (read Market Wizards for example).

the specific guy in question for this post, i have no idea. but i can tell you TA isn't complete nonsense (though there are obviously a lot of bogus systems out there).

 

Dont have much time so I'm writing this rushed but, the TA skeptics on this site blow my mind. TA has been around for decades. If it didn't work....it wouldn't continue to be talked about and used. Period. At the 50,000 ft level and at the end of the day TA is the graphical representation of the psychology of the market. That's it. To say it doesn't work because you can't quantify it makes as little sense as saying fundamental analysis doesn't work because forecasted assumptions about sales drivers, margins, DCF, etc could have selection bias or any other assumed metric. You can make arguments against either method as being "guessing".

Personally - all I use is TA but my time horizon is short - 6-7 days on average. It works for me. And works well. Anything beyond the time horizon of 1 quarter is where I draw the line at for using TA. There's too many macro based influences that can negate any TA indicator and it's value and I never hold through an earnings call. For true scalp, day or swing traders - TA is far from the reading of a tea leaf.

 

Here is his response to some of the comments so far:

"In regards to flipping coins: back when I worked for a firm, I taught 8 others who successfully traded with my strategy. Buffet says it would be statistically impossible that his disciples all have edge through the random coin flip problem. And vice versa, you can perform confidence intervals that state the odds of my disciples being successful through randomness is near zero. We did thousands of trades a month each and were positive almost all months.

Regarding performance, the S&P performance is not a benchmark for intraday trading since 90% of the time I am flat (this is why prop traders receive a very high cut vs portfolio managers). But returns are in the 100%+ annually with leverage and well above the irrelevant S&P metric without leverage.

Success in up and down markets equally. No major drawdowns. Trading all types of equities.

@"Going Concern" you wrongfully assume I don't look to understand why my strategy works. I ask why it works and know exactly why it works. Price patterns don't last forever and I don't assume they do. They are always changing and I adapt. Every part of what you wrote is misguided.

My question is why do people believe in Buffet and FA so easily, yet given the same level of proof don't buy into TA?

For the proponents of the infinite-monkeys-at-keyboards-will-type-Shakespeare argument: eventually a monkey will write Shakespeare. But what if month after month that monkey kept on producing new plays and the monkeys he taught started writing Shakespeare too each month!?!? You all would say this is still luck? Given that we are dealing w an extremely difficult and rare achievement, you guys are simply rejecting proof by saying anything is possible by chance (which is true) but are wrongfully rejecting the reality that the monkey evolved and as a result is writing plays rather than by chance. It is impossible to disprove the chance argument.

Additionally, the equity curves of the traders I taught show many similarities to the equity curves of a new poker player. Lose money -> break even -> make money eventually. Poker isn't random and the very skilled have edge over time. This is no different than trading. Just as in poker, most don't have a system with edge or the skill to get there yet nobody says Phil Ivy or Helsmuth or just lucky and it's random."

 
Random Trader Who Can't Even Make An Account Like A Real Man:
@Going Concern you wrongfully assume I don't look to understand why my strategy works. I ask why it works and know exactly why it works. Price patterns don't last forever and I don't assume they do. They are always changing and I adapt. Every part of what you wrote is misguided.

My question is why do people believe in Buffet and FA so easily, yet given the same level of proof don't buy into TA?

I assume you don't look to understand why your strategy works because there is no mention of it.

Prices of financial instruments move because of things like the underlying health of things (companies, sectors, economies, countries, etc), investor behavior, external shocks, etc.

A normal person would either focus on the root causes/structures through fundamental analysis or focus on the effects rigorously through quantitative statistical analysis, or both. If you're also doing one of those then great, two big thumbs up...that makes conceptual logical sense. But if all you're doing is looking at price movements on charts and assuming there's some patterns in those prices and just assuming they'll persist forward, well that's the work of a great charlatan. I certainly wouldn't give you a cent for doing that.

 

Why do we have to argue about what type of trading is better. Both types of traders exist. Both types make money. Both types loose money. We can all agree that this is fact.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

these debates are eternal because a large part of how convincing something is is the STORY behind it, not just the raw data and numbers.

if you stuck a monkey in front of a computer one day and he made a lot of money trading randomly, nobody would believe it was skill. if you put an experienced trader behind it and he made the same money that day, one might be more inclined to believe it was skill because of the story he could tell. whether or not you believe the story is subjective and can't be settled with pure numbers.

when people make money insider trading, nobody will say it was luck. sure it's illegal but there's a very believable narrative that explains the gains. as for other strategies, it becomes more debatable.

as for coin flip arguments, yes sure if you randomly flip 8 coins, about 1 in 256 of them will be all heads. in a tournament of 256 where the winner of each match is decided by a coinflip, obviously it's pure luck.

but in a tournament of 256 tennis players, would anyone think it's pure luck that Nadal happened to win?

 
cauchymonkey:

these debates are eternal because a large part of how convincing something is is the STORY behind it, not just the raw data and numbers.

This is part of what I was getting at...with technical analysis there is no real story, just a bunch of mumbo jumbo about resistance levels and moving averages and this band and that band and this moving average line, all stemming from price movements, lots of bizarre assumptions disconnected from the real world, and the Dunning–Kruger effect.

 

@"WallStreetOasis.com", can you please ask the trader what s/he was doing for 3 yeas to sustain himself while learning the trade?

I would... but the truth is I can't sell my soul to myself... http://www.investopedia.com/terms/b/blackknight.asp
 

Ah, this discussion again...

1) No, a single sample doesn't prove anything. 2) Yes, basic technical analysis "works" (there are multiple studies out there that indicate this). 3) In most cases, the "rules" of TA are actually manifestations of deeper phenomena, such as various behavioral biases, etc. 4) Finally, yes, technical analysis is largely non-rigorous mumbo-jumbo. This lack of mathematical discipline is the biggest problem.

 

There is no point trying to convince people who dont want to be onnvinced...i have seen many people who are very rich who use TA as at least part of their process, many of the best traders of all-time have no problem saying they use it, and yet a bunch of 20 year old college students here insist it is "luck" and can't possibly work. hmm i wonder who i should believe?

 

Isn't this just a case of sample bias, or as Nassim Taleb puts it: the invisibility of the drowned worshippers.

"Bacon mentioned a man who, upon being shown the pictures of those worshipers who paid their vows then subsequently escaped shipwreck, wondered where were the pictures of those who happened to drown after their vows. The lack of effectiveness of their prayers did not seem to be taken into account by the supporters of the handy rewards of religious practice. “And such is the way of all superstition, whether in astrology, dreams, omens, divine judgments, or the like”, he wrote in his Novum Organum."

"This is a potent insight: the drowned worshippers, being dead, do not advertise their experiences."

Yes, it may work and be advertised by the people who have used this technique successfully, but what about all the individuals who haven't made it using this technique? In all likelihood their stories of failure are buried away and you don't see the large amount of cases where this strategy doesn't work. Just some food for though.

The error of confirmation: we confirm our knowledge and scorn our ignorance.
 
Best Response

This is an extremely disappointing thread. There are some really experienced users on here whom I greatly respect but are showing the ignorance of a toddler and unwilling to accept or even consider an idea that is alien to them.

A few points are being repeated over and over again here as if being spouted from a brainwashed dude. Survivorship bias? You could say the same thing for hundreds and thousands of "investors" who try to use fundamental analysis but fail. But I don't see anyone arguing against FA because it's survivorship bias.

I think it's extremely stupid to argue against TA saying "but this is just one guy, one guy doesn't prove anything". As long as his data is undisputed, one guy is all you need. TA and FA don't work on their own, you need someone who can understand and apply them well.

The trader mentioned in the OP summed up the argument against it being chance succinctly when he mentioned repeating success over a long period of time, repeatedly.

And for the commenter who mentioned TA techniques being a load of mumbo jumbo, there's a shitload I don't understand about quantum physics, that doesn't make quantum physics mumbo jumbo. You, sir, astound me with your stupidity for offering this argument.

Yes, maybe over 90% of the traders who use TA fail, but if 10% succeed, and succeed consistently over a long period, they're not pulling off a John Paulson. They have an edge, which is all what trading is about.

Incredibly disheartening to see the close mindedness of people on here. You all are dismissing an idea that YOU have admitted you don't even understand. Pathetic.

Move along, nothing to see here.
 
DickFuld:

I guess if you were a good fundamental analyst, you might have noticed that.

See the marker next to my name. I'm not a trader. I'm not even arguing for or against TA. I'm simply commenting on the logical fallacies in the arguments made by other users and deriding the tendency to reject an idea before even understanding it.

Apologies for including you among the herd, Mr. Fuld.

Move along, nothing to see here.
 

I agree fully with the fact that this does not only apply to TA, you can easily apply it to FA as well, and I would believe the argument holds just as well. What it boils down to is that when people attribute their success to these methods it's too simple of an answer: there are 100s of other factors that come into play that allow them to be successful.

The error of confirmation: we confirm our knowledge and scorn our ignorance.
 

i couldnt agree more with CAinPE. You clowns are knocking a technique when your alternative, FA, has the same survivor-ship and assumption biases as what you're hating on. For every failed TA trader or investor there are just as many FA ones. You're acting like TA is some new concept or revolution in investing that hasnt been studied and used for decades. Go read a book or actually do some research on the topic before a guy who's clearly doing well in the art.

At the end of the day FA or TA comes down to your time horizon. I'm sorry but I could careless what future earnings or what EPS will be 4 quarters from now if my timeframe is minutes to days. Should I then make the argument that FA is complete crap because it's making assumptions about future events and metrics no one could possibly know now? Of course not. It's a matter of timing and more importantly risk management and position sizing for TA. On top of the actual TA process, screening and pattern/behavior recognition.

 
Beanyeyes5:

At the end of the day FA or TA comes down to your time horizon. I'm sorry but I could careless what future earnings or what EPS will be 4 quarters from now if my timeframe is minutes to days. Should I then make the argument that FA is complete crap because it's making assumptions about future events and metrics no one could possibly know now? Of course not. It's a matter of timing and more importantly risk management and position sizing for TA. On top of the actual TA process, screening and pattern/behavior recognition.

You're presenting a false dichotomy. The distinction I think that needs to be made is between technical and quantitative strategies. They are not one and the same. If I could put my money anywhere in a fund that invests within a time-frame of minutes or days, I would put it at a place like Renaissance, which utilizes gargantuan stockpiles of data and sophisticated quantitative algorithms built by hordes of PhDs. It works because of two reasons: 1) Informational advantage, 2) the rigor of methodology employed (built upon decades of advanced thought in fields like statistics and mathematics). Technical analysis has neither of these attributes.

The basis of technical analysis is ultimately the behavior of financial market participants, which are influenced not only by cognitive and emotional biases, but also portfolio constraints, liquidity needs, etc etc. How exactly would a technical trader have any idea of what is going on in the heads of millions of individual investors by just looking at one price chart, which is the aggregated sum of all of those behaviors? It is like trying to solve one equation that has one output variable and millions of input variables. Because ultimately that is the conceptual basis of his strategy (theoretically anyway), even if he does not acknowledge it as such.

 
Going Concern:
Beanyeyes5:

At the end of the day FA or TA comes down to your time horizon. I'm sorry but I could careless what future earnings or what EPS will be 4 quarters from now if my timeframe is minutes to days. Should I then make the argument that FA is complete crap because it's making assumptions about future events and metrics no one could possibly know now? Of course not. It's a matter of timing and more importantly risk management and position sizing for TA. On top of the actual TA process, screening and pattern/behavior recognition.

You're presenting a false dichotomy. The distinction I think that needs to be made is between technical and quantitative strategies. They are not one and the same. If I could put my money anywhere in a fund that invests within a time-frame of minutes or days, I would put it at a place like Renaissance, which utilizes gargantuan stockpiles of data and sophisticated quantitative algorithms built by hordes of PhDs. It works because of two reasons: 1) Informational advantage, 2) the rigor of methodology employed (built upon decades of advanced thought in fields like statistics and mathematics). Technical analysis has neither of these attributes.

The basis of technical analysis is ultimately the behavior of financial market participants, which are influenced not only by cognitive and emotional biases, but also portfolio constraints, liquidity needs, etc etc. How exactly would a technical trader have any idea of what is going on in the heads of millions of individual investors by just looking at one price chart, which is the aggregated sum of all of those behaviors? It is like trying to solve one equation that has one output variable and millions of input variables. Because ultimately that is the conceptual basis of his strategy (theoretically anyway), even if he does not acknowledge it as such.

Best post ever on WSO. Congratulations, you win this thread.
 

One simple question...if TA really works, wouldn't the influx of money into the strategy compress your expected profits, or at least, make it more difficult to find good trades? That's something you see in the fundamental space, where it becomes harder to find good bargains in areas which are widely-known and dissected by armies of investors (equity L/S for example). Sure there are areas like distressed where good opportunities can still be found, but there are structural barriers to entry in distressed (namely that it takes a hell of a lot of work), and even so, the expected returns in that space have come down from the era when Howard Marks first started his fund. No such structural barriers to entry in TA as far as I can see.

I won't get into the whole argument of how reliable the sample is or how much it proves. But if TA is a successful strategy, shouldn't we at least see it suffer the fate of successful strategies (that is, become less profitable over time)? Will you eventually need automated/systematic execution in order to capture a profit in TA before everyone else (not sure if this is already the case?) and if so, doesn't this mean there are diminishing returns for your effort and you should go do something else more productive?

 
arrhythmiatic:

Will you eventually need automated execution in order to capture a profit in TA before everyone else (not sure if this is already the case?) and if so, doesn't this mean there are diminishing returns for your effort and you should go do something else more productive?

Yes, this automation is already happening. Heard of high frequency trading? A large portion of that is devoted to TA based algorithms. Yes, the edge and therefore the profits are slowly beginning to erode. I've personally seen this happen to someone I know who built an HFT algorithm for a TA strategy, made a shitload of money, saw the profit margins decline and eventually went into losses.

In case someone is ready to pounce upon the above example to scream, "See? You're admitting it doesn't work!", calm yourself. The strategy did work, for multiple years, but the fault lies with the trader in not evolving and adapting to the changing times.

Move along, nothing to see here.
 

But if the argument is that TA reflects some kind of predictable human psychological pattern, why should one have to adapt/change it over time? Human psychology doesn't change that radically.

 

Thanks for your thoughts so far guys...I find this an interesting debate. No need to call other people names since I think smart people can disagree here... :-)

@"arrhythmiatic", you said "But if the argument is that TA reflects some kind of predictable human psychological pattern, why should one have to adapt/change it over time? Human psychology doesn't change that radically."

Maybe human psychology doesn't change that radically, but as HFT and algos get better at identifying this edge / strategies, the edge and potential profit based off of one particular strategy will undoubtedly decline...I don't see how this makes TA not a viable long term strategy. Nobody says you have to "set it and forget it" or only trade on one pattern...

@"Going Concern" - the statement referring to Reneassance: "It works because of two reasons: 1) Informational advantage, 2) the rigor of methodology employed (built upon decades of advanced thought in fields like statistics and mathematics). Technical analysis has neither of these attributes." I think is a very interesting point. So based on this, for something to be legitimate strategy, it has to be based on a arbitrary level / certain amount of data? What about emotion and the millions of synapses in our brain?

Isn't it possible that this data is uncovering similar patterns that talented TA traders are (and taking advantage of that)? Isn't it possible that the market is still not perfectly efficient on a second by second, minute by minute, hour by hour time frame, or that it can display consistent patterns over decades without that edge being eroded away?

When a large group of people make thousands of trades over 10+ years in bull and bear markets and are positive 11+/12 months year-in and year out, isn't that statistically significant even if that edge may be eroded over time forcing them to adapt? Isn't this what the most sophisticated algos do with statistics and adaptive learning / AI?

@"Martinghoul", also welcome your thoughts on these questions. I am not trying to be difficult, I am just trying to understand why statisticians finding patterns is any different than "less sophisticated" / less quant heavy traders?

If the argument that TA will not work in the future as more and more of these HFT algos take over, I can see the argument as more logical on that front...

Thanks for educating me :-) Patrick

 
WallStreetOasis.com:
\@Martinghoul, also welcome your thoughts on these questions. I am not trying to be difficult, I am just trying to understand why statisticians finding patterns is any different than "less sophisticated" / less quant heavy traders?

If the argument that TA will not work in the future as more and more of these HFT algos take over, I can see the argument as more logical on that front...

My view is that there's nothing fundamentally different between TA and a lot of statistical/quant heavy analysis (finding patterns or stuff like this). Both involve using past behavior of mkt prices in order to "predict" future behavior of mkt prices.

The only difference between the two is in the amounts of mathematical rigor and discipline used. Specifically, to anyone who is somewhat familiar with basic statistical techniques (even just the basics, like myself), TA is, without a doubt, a bunch of hand-waving mumbo-jumbo.

However, in spite of the above, I would never make a silly statement along the lines of "TA doesn't work". Firstly, because TA has been empirically demonstrated to "work" (i.e. investing according to some traditional basic TA rules generates excess returns). Secondly, it would be foolish to claim that the only things that work in the mkt are based on hardcore sophisticated math. In fact, the really interesting aspects of TA have more to do with all the behavioral stuff, which, in turn, is more psychology than hard maths.

That just about summarizes my view on this issue...

 

You say TA is a bunch of hand waving mumbojumbo? I could argue stat analysis is the same. It's trying to shoehorn your past world view into the future.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

Thanks for explaining your view. But unless I'm misreading something, it seems a bit contradictory. You consider TA to be without a doubt, a bunch of hand-waving mumbo jumbo, but also say that empirical studies have shown that it works. So, uh... Mumbo jumbo works?

Not trying to be a dick, genuinely interested in why you consider it to be so even though it's been demonstrated that it works.

Move along, nothing to see here.
 
WallStreetOasis.com:
So based on this, for something to be legitimate strategy, it has to be based on a arbitrary level / certain amount of data? What about emotion and the millions of synapses in our brain?

What about it? A technical trader is partially basing his decisions on the future emotions of millions of individual investors (based on their past emotions), none of which he has direct access to. I say partially because emotion is only one component of a person's decision-making framework.

Investing has to be based on something defensible, at least if you want to convince others to give you capital to manage. The point that a larger quantity and quality of data and superior techniques used to analyze that data being investment advantages is self-evident. What is not defensible is claiming that you are investing by finding patterns just by looking at the same price charts that everyone else is looking at and running some basic arithmetic. What is this "talent" based on? Your gut? Your intuition? Your market instinct? How you think the market is "feeling"?

WallStreetOasis.com:
When a large group of people make thousands of trades over 10+ years in bull and bear markets and are positive 11+/12 months year-in and year out, isn't that statistically significant even if that edge may be eroded over time forcing them to adapt?

As I said, a track record alone won't get a fund LPs. Just because an investment strategy has shown to "work" in the past doesn't mean anything on its own. What I'm more interested in is why it works, and how an investor is interfacing with that why when making investment decisions. If technical analysis works because the behavior of millions of investors is predictable, what is the technical trader doing in terms of understanding each individual investor so he may predict their behavior? The net result of their behaviors is reflected in a given price chart, but there are almost an infinite number of combinations of each investor's behavior that might lead to that particular time series of prices, so in order to predict what prices will be in the future, he would have to consider each investor separately if he wants to be investing in a way that is conceptually defensible. But if he just wants to analyze the numbers from a top-down perspective, then we have statistics and mathematics that he can use...but that's not technical trading then.

 
<span class=keyword_link><a href=/resources/skills/finance/going-concern>Going Concern</a></span>:
WallStreetOasis.com:

So based on this, for something to be legitimate strategy, it has to be based on a arbitrary level / certain amount of data? What about emotion and the millions of synapses in our brain?

What about it? A technical trader is partially basing his decisions on the future emotions of millions of individual investors (based on their past emotions), none of which he has direct access to. I say partially because emotion is only one component of a person's decision-making framework.

Investing has to be based on something defensible, at least if you want to convince others to give you capital to manage. The point that a larger quantity and quality of data and superior techniques used to analyze that data being investment advantages is self-evident. What is not defensible is claiming that you are investing by finding patterns just by looking at the same price charts that everyone else is looking at and running some basic arithmetic. What is this "talent" based on? Your gut? Your intuition? Your market instinct? How you think the market is "feeling"?

WallStreetOasis.com:

When a large group of people make thousands of trades over 10+ years in bull and bear markets and are positive 11+/12 months year-in and year out, isn't that statistically significant even if that edge may be eroded over time forcing them to adapt?

As I said, a track record alone won't get a fund LPs. Just because an investment strategy has shown to "work" in the past doesn't mean anything on its own. What I'm more interested in is why it works, and how an investor is interfacing with that why when making investment decisions. If technical analysis works because the behavior of millions of investors is predictable, what is the technical trader doing in terms of understanding each individual investor so he may predict their behavior? The net result of their behaviors is reflected in a given price chart, but there are almost an infinite number of combinations of each investor's behavior that might lead to that particular time series of prices, so in order to predict what prices will be in the future, he would have to consider each investor separately if he wants to be investing in a way that is conceptually defensible. But if he just wants to analyze the numbers from a top-down perspective, then we have statistics and mathematics that he can use...but that's not technical trading then.

you can make the exact same arguments against FA as what you just outlined against TA. The same detailed statistical quantity and quality of evidence and data sets you claim help support FA are available to anyone and everyone. So why do some FA investors clearly out perform others? You're argument is that the person with the largest back up of support and data automatically has an edge?

And a track record alone that is consistently outperforming certain benchmarks will absolutely get LPs. To say anything to the contrary is comical. Alpha is alpha. It happens all the time in many forms of investing. Specifically for TA, you don't need to understand each individual investor to see market patterns or market behavior. The collective summary of those behaviors are already reflected in the price changes and patterns. There are just as many combinations of future outcomes from any FA analysis as there is with any TA.

 

On a completely different side note, it doesn't matter what school of though you follow. All investing type follow the self fulfilling model. Lets take a support level for example, is there some rational reason why 17/share is a support when 17.05 isn't? No, however the fact that millions of people believe that for some reason this stock is worth at least 17 dollars a share the support level becomes a self fulfilling idea. Regardless of technical or fundamental valuations that cause this, the support level is established based on nothing more than psychology and emotion. The numbers are nothing more than an excuse to execute ones inner desire and emotion about a trade.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

It would make sense that certain aspects of TA could work. For example, if you find that a huge amount of people bought into a stock at say $30, and the price then fell to $20, that if the price were to reverse- $30 would be hard to break through as the huge amount of people that bought in there would just be happy to have finally made their money back and leave. While not a definite, it's something I'd rather trade on than some FA that calls 80% of tech stocks overvalued, yet you'd be killed for shorting.

 

1) I have seen people make money doing certain things including some forms of TA that would likely be considered mumbo jumbo 2) When i see people make money in a way that doesnt appear absurdly non-repeatable I copy their stuff 3) The stuff that works for me I continue using until it stops working 4) I have made money consistently

my bank account and my career have no biases against stuff that others would consider "mumbo jumbo", "film-flam", or even "tom-foolery". The line between TA and FA is also highly blurred and I dont waste time considering the difference...the two categories are stuff that works and stuff that doesn't and you only find out by watching others and trying yourself.

 

Isn't the distinction very blurred in some markets, e.g. rates trading? Part of solid fundamental analysis here seems to be superior judgement of economic conditions. But the Fed's assessments of the economy are some of the largest market movers. And obviously the Fed is a market participant itself. So it seems even if you have a fundamental reason to believe that a specific part of the yield curve is relatively rich/cheap over a specific horizon, you can easily get stopped out on various trades in the intermediate term if you don't bother to analyze the likely flows in various sectors from various participants in reaction to econ data releases. This latter aspect I thought is part of what constitutes 'technicals' from a fixed-income investor's perspective. It seems to encapsulate not only experience based on previous price action in varied economic environments but also a nuanced understanding of the underlying fundamentals.

 

It's just too titillating not to jump into an interesting discussion like this. With all due respect, I think this debate nowadays probably only means something to retail investors, i.e. people who trade their p/a. For survivors that trade in an institution (a bank, a fund, or whatsoever) in the modern period, this topic together with the EMH are more often a waste of time. You need a combination of both plus a lot of other critical elements just to survive. Survival is the key. The best loser in the long run will be the winner.

The thing is some markets are sometimes efficient. You can be consistently making money whether you believe or disbelieve in this hypothesis. You can be making money purely based on charts or fundamentals for years without having even the slightest fucking clue why you've made money. I've also seen people like this. They had simply been on the right side of the variance. Again, with all due respect, most retail investors don't know what real markets look like - how the information flows, how the orders are being placed and executed, how the real money guys come in and out having an impact (or distort) on certain markets, how clients are sold with a shit load of axe trades thinking they bought something good, and so on. This refers to the linear and liquid products readily for retail investors either directly or through CFDs. Not to mention the OTC derivatives: how the sexy non-linear things are priced, traded, and managed. It is just a different world.

Today my quant developer on the equity team was just shouting at me, trying to "make me understand" the logics behind his algorithm by explaining to me how to look at the R/R (reward/risk) ratio and win/loss ratio "together" to justify the losses so that I will fathom and give in not to suspend his algos. Our algos are all proprietary and they're not simply based on fundamental data or technical indicators. I then said to him "Kiddo, I know you got a PhD in nuclear physics, but in trading, the only thing you can probably have a little bit control over is your downside (risk). You can't control how much money you're going to make and when. If the market just doesn't give you your optimal return, you need to take your profit and reduce your risk proportionately. Evolve with the market."

Maybe I should fire him. Or maybe I should fire the equity PM? I don't know. Kid's great. My point is, is it really about technical or fundamental? Anything else?

Invest first, investigate later.
 
WallStreetOasis.com:

Note: I have verified all numbers to be real and have seen the data firsthand.


Ratio of days positive to negative: 2.55
Average positive PNL day: $3374
Average negative PNL day: -$1831
Biggest Gainer: $39,886
Biggest Loser: -$16,250

Am i getting it wrong or is this guy supposedly making > 1m$ per year ? 2.553374-18311 = 6772 $ average per day, if we assume 252 trading days and that he only trades 2/3 of the time. 67722522/3 = ~ 1,1 m

 

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