19 Comments
 

Yes, what he said is 99% true. However, if you define technical analysis factors as feature variables, they are definitely used in statistical models. (Not the dinky drawings and lines on a chart, but properly crafted, no bullshit, organic input variables). I'm honestly not very familiar with traditional technical analysis, but technical analysis have some faintly similarities.

I'm not going to explain it, but if you want to read about it: "Algorithmic Trading: Winning Strategies and Their Rationale" by Ernest Chan is a great book. Fuck MATLAB tho.

 

First of all it is important to clarify what a person means by TA in order to say its "working" or not. I got a lot of the old "TA doesn't work, random walk, no statistical evidence,..." blabla, especially from people with a long academic career (and mostly no track record in markets and no own definition of TA) over the years.

There for sure are investing approaches, esp longer term oriented or factor neutral catalyst driven ones,... where you may use it less.

I believe that since we are dealing in public markets it would be fatal to not look at the historical price data that accompanied fundamental developments of a stock.

Also don't forget that the PV of your asset in comprised of FCF and a discount rate. Both are included in the price. The latter is usually less easy to analyze. E.g. FAANG bubble,... but price always shows you the full picture.

I use TA for 2 key purposes - Screening: Up/down trends in price which lead me to evaluate fundamentals to understand the potential for a trend following or contrarian position; support and resistance zones (esp larger ones): these have been the market's most pessimistic/ optimistic assessment of the asset's value in the past and need to be put into context. Also don't forget: in the short term valuation change= price move. For screening (in my case a large stock universe across all geographies) I use primary price action, MAs and RSI. That's basically it. You literally SEE trends in certain areas of the market before sell side etc pushes them.

Second use case: position timing. Do I buy right below significant resistance? Do I chase?...

Having a view of what drives markets and how you expect it to be manifested in prices VS actual price action is powerful if included in your process properly. Again: only if such considerations make sense for your mandate. Warren Buffet style guys won't put too much emphasis on it

 

Probably for identifying entry points into a position. You'd want an attractive price to ensure your "margin of safety". If you're looking at an excellent company that's trading 3 standard deviations above its long term mean, in a technical sense you're buying at a relatively expensive level. I believe a lot of funds use some sort of moving average analysis tool to identify price reversals or something of that nature to milk their discounted value thesis. Obviously most mainstream TA you hear of is just astrology but I think there are a decent chunk of metrics that could qualify as technical analysis.

 

Yes, in genral on the buyside TA is still used, but different to the way retails use it. TA the professionals use are more of a orderflow based system, whereby it evolved from the days of pit trading. The basic technical structure is still used, for reference levels, and helps traders monitor & react. With guys on L/S space, they will tend to have a view on a stock before looking at the technical chart, TA helps them find the good entry point, that's all.

TA retails used are more like 'make-believe' horseshit with a bunch of indicators and try to predict the market. When I was a market maker, I used to love it for the sole reason my sub-dealers can sell bullshit TA-based signals to their clients and facilitate trading volume, so I can aggregate liquidity and make markets. Sometimes I can take balance sheet risk by trading against that stupid retail flow as well since most of them are overtrading inept apes who are not only incompetent but also impatient and easily let emotions take the better of themselves. We all know in the market making space that farming yield on 'TA obsessed apes' is literally free money. 

 

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