Technical Analysis - Help with trading?

Does Technical Analysis help with trading? By technical analysis, I mean moving averages, MACD, Stochastics, RSI, candlesticks, etc.

Academicians say it doesn't work because of the efficient market hypothesis. However, I know some finance professionals who use it.

 

Yes it helps with trading. Not all traders choose to use it, but some do and trade exclusively off it.

In fact, this is how Nassim Taleb picks equities to price his call options. He's all about finding the "black swan" and that's a bit easier to do using technical analysis. Of course, Taleb would also disagree with those academics that teach efficient markets; so just be aware what school of thought he's coming from.

 

Candlesticks, Stochastics, moving averages, w%r, macd, and obv are the main (pretty much only) tools I use when I scalp.

The professors that say technical analysis doesn't work have no idea what they are talking about. If you read the Market Wizards series you will see plenty of brilliant investors that use solely technicals, solely fundamentals, or a blend of both.

edit: can someone tell me how to daytrade without techincals?

 
gundamz:
Interesting. I currently use candlesticks, support/resistance, stochastics, MACD, moving averages, and RSI. Are there any other indicators, etc. that I should add to my arsenal?

Ichimoku could be rather handy at times...

 

I think TA is great, especially if you have a good gut, but I wouldn't rely on it 100%. Also depends on your time horizon for the trade (the chart you're looking at).

Would you ever feel good about buying a chart like this: http://stockcharts.com/h-sc/ui?s=ARST&p=D&b=5&g=0&id=p13856003612

Or this: http://stockcharts.com/h-sc/ui?s=NTY&p=D&b=5&g=0&id=p46597341897

I don't think anyone (top er analyst, stock picker or whatever) could pound the table hard enough to convince me to buy some dog-shit chart like these.

Don't listen to the academic, or any professor who's contra TA... there's a reason why they're teaching and aren't trading. You should of heard the roar of laughter in my cfa class when the instructor, who's also a professor, said, "I used to do this sort of thing when I worked at a hedge fund...." And now your here, buddy?

 

^^ kind of tough to find a reason to buy when falling through those short term moving averages.

Now the question is: what does the broad market do? We very well may have bottomed on friday, and if so, how could you convince yourself to short these battered names based on TA if you think the market could hold them up if we get a little rally? My guess is you begin buying puts or shorting the stocks a little ways out before their next earnings. Maybe get a little skin in the game now, but wait in case this correction is over.

 
Bodhis:
^^ kind of tough to find a reason to buy when falling through those short term moving averages.

Now the question is: what does the broad market do? We very well may have bottomed on friday, and if so, how could you convince yourself to short these battered names based on TA if you think the market could hold them up if we get a little rally? My guess is you begin buying puts or shorting the stocks a little ways out before their next earnings. Maybe get a little skin in the game now, but wait in case this correction is over.

http://www.cnbc.com/id/37301757

 

I have been actively trading derivatives for three years now, and from my own experience trading, I can say that technical analysis definitely helps with trading.

Moving average systems are best applied to markets that have less noise or guided by long-term macroeconomic policies.

MACD is one of the most commonly misused systems. It is typically more effective when applied to swing trading and breakouts; it is primarily used for the timing of entering and exiting positions. MACD typically has two components, two exponential moving averages (fast and slow) and a histogram, which is just the difference between the two EMAs. One of the common misuses of the MACD occurs when someone takes a long position just because the fast moving average is heading up crossing the slow moving average from below. That is not how it is supposed to be used. If that happened when the moving averages were above the zero line, the MACD is employed incorrectly. Where the moving average lines are relative to the zero line help eliminate taking the wrong positions. There is much more to the MACD and how it is best applied. Divergences create the best opportunities in my opinion.

Stochastic are mean-reverting indicators and are best applied to markets with more noise, like the equity markets; however, in periods where there is less noise and a market is transparently trending one direction, stochastics should be avoided. The markets can stay overbought longer than you can stay liquid.

Candlesticks have less credibility. Using a scientific method to back-test candlesticks can be difficult, probably because there are so many variations of them. Pure candlesticks, one bar, have more credibility and would be easier to test though. I personally do not like to use candlesticks in my trading, with maybe an exception to the Marubozu.

In my opinion, technical analysis developed a bad reputation in the academic world from classical charting techniques, like head-and-shoulders patterns, island-reversal patterns, and other esoteric price patterns.

Efficient market hypothesis is transparently wrong. It is possible to beat the market consistently. Market timing and risk management are crucial in order to do that.

Technical analysis is extremely helpful in deciding when to enter and exit positions. One of the best applications of technical analysis comes from its ability to help manage risk. I am a practitioner of technical analysis, and I can say that it has greatly improved my trading.

Bryan J Turner
 

Product knowledge + technical analysis + coherently being able to back trade ideas (may be incorrect but it's the logic that matters)

"The markets are always changing , and they are always the same."
 

Technical analysis can be helpful at times, but sell side traders aren’t going to be taking positions based on pure technical analysis. Seasonsed traders will have a well rounded style of trading, where they use tech, fundamental, macro, etc. and then they have their own style of trading. For example, one of the traders in my group uses technical analysis frequently when determining yield curve movements, but he trades primarily based on order flow of bonds in our market and based on how the market feels to him (he’s very successful by the way). Just understand your product starting out, test some trading tactics, and see what pays off in the end for you. Also keep in mind, junior guys don’t get PnL resposibilities for some time, because someone is going to have to give you a piece of their order book, or you’d have no capital to trade on.

 

Primary duties on the sell side is to make a market for our clients and manage risk. At the end of it all, you have to be profitable for the bank. Guys on our desk do take outright positions, as in directional and yes, I'm talking prop trades and he does use technical analysis. Yes people, prop trading is still alive but bank traders never admit to it... Technical analysis is such a misused terminology and people tend to associate it with trend lines, triangle formations and other nonsense. Read my posting on here...

https://www.wallstreetoasis.com/forums/hi-i-need-direction

 
Best Response

Well, I'm on the equities desk. But we have a variety of desk covering commodities, rates, fx and, etc... I trade for an investment bank in their NYC office... Not a bulge bracket but it's a top 3 Canadian bank (RBC, CIBC, BMO Capital Market, etc...). We had our holiday party recently, and I spoke to couple MDs and they trade directionally outright. People have their own strategies, for me, I trade both RV and directional, but this particular trader who was a director level on commodoties desk, traded outright directional.

 

Yes....mega fund managers use technical analysis. Even if you skip studying technical analysis anyone who gets a mark-to-market and risks management is doing some form of technical analysis (even if its a bit do-it yourself).

Classic technical analysis may be a little less prevalent too. At the end of the day its using charts to figure out meaning. I think someone could right a book on incorporating new risks-management techniques into technical analysis. Lots of quant frunds or milleniums trade different styles including draw down stop losses. Long-only guys feel a need to buy the more the market goes up. You could right a book on adding those concepts to TA. Seems like any market that is 10% off its highs sells a bit more now because of the risks management in place in quant world/big 5 trading shops.

 

Being that you're a freshman looking for an internship. Most banks dont care much if you know Technical Analysis. They focus a lot on Fundamental Analysis especially throughout the interview process.

I knew a lot of Technical Analysis but was fairly weak when it came to Fundamentals and they straight up told me that Fundamentals is what they're looking to see out of you.

Luckily, I learned enough Fundamental Analysis in time. My advice is to focus on Fundamental Analysis and have an overall Marco level view of the markets. Knowing Technical Analysis is a cool bonus but definetly not a game changer, for the interview process that is.

Wicked Smaht
 

sure there are fundamentals.......id argue there are not fundamentals in the market, but none the less....after qe buy calls on e mini's....buy calls on gold etc.... also with individual stocks, have a position, sell a covered call for extra income/exit stock at price you like.....sell puts if you like levels, and if said security doesnt reach levels, then you keep premium..

this is of course all basic concepts

 

an option is a derivative of the stock price. So the analysis (technical or fundamental) would be on the stock. Unless you are trading vol

Because when you're in a room full of smart people, smart suddenly doesn't matter—interesting is what matters.
 

Generally short term trading. Traders will form strategies to bet on short term price oscillations If you are making a call on the fundamentals you generally take a position on the security its self

I sold some shares, but on a net basis, significantly increased my ownership. Jeffrey Skilling
 

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