Interesting TA post - Raging Bull
ragingbull.lycos.com
By: VllgIdiot 08-11-01 at 9:25 am
Reply To: yugojohn Post # 53286
OT: T/A discussion
Here are some excerpts from a discussion I've had with someone who trades for a living using only technical analysis. His explanation of the uses and limitations of TA have been very helpful to me. As much as I respect many of the opinions on this subject on this board, I've yet to correspond with anyone who has a better understanding of this particular art than he. I hope others find this enlightening as well:
All of TA, believed by many to stand for technical analysis, can be boiled down to one word - Trend. TA is more useful if it is understood to be trend analysis. All oscillators, all channels, bands, trend lines resistance points, support lines, smas, emas, bollingers and the entire encyclopedia of the TA alphabet soup are merely examinations of Trend.
Trend understood in the context of the market is mob behavior, the movement of a volatile mass. Not just any volatile mass like that of a weather front, or a pot of boiling water, but rather a volatile mass whose individual molecules are capable of expending their own energy source moving against the greater flow of the crowd or stepping out of the flow at any moment in time. Unpredictable.
While it may be thought by many that TA is capable of prediction, I do not believe this to be the case. I do not believe that TAists and Meteorologists are making use of pattern analysis in the same manner, nor for the same goals. Enough similarities exist to cause confusion. It is quite possible to find good examples for both sides of this argument. I could personally make a case either way. However, in the long run something has to be given up to allow for focus on the task at hand.
I quite agree with your implications that meteorology has a tighter set of variables. I also agree that their predictions are best when short term in nature. I would also note that they are getting quite good at predicting a weeks worth of weather. They are also acquiring a tolerable good understanding of some of the long-term variables and the resulting impacts. I live out in West Texas. I have often watched a meteorologist show weather formations lining up in the Pacific Ocean, then overlaying the Jet Stream and from that predicting moisture flows for the upcoming week. They are often correct in the big picture outcomes. However when that moisture makes it’s way out here and it begins to rain out here in West Texas I might get 2 inches of rain and my neighbor, down the road a mile, gets none. Our local Meteorologist is in fact trying to predict whether or not we will get rain in the next few days. Thus the Meteorologist can say it’s raining because it should be raining (given the formations and jet stream) and we consider that a competent job of predicting the weather.
TA, as I view it, Trend Analysis, does not cause us to conclude that we are, where we are, because we should be. Trend analysis is not impetus, stimulus, nor predictive of price movements. The goal of Meteorology is to be predictive. The goal of TA is to be determinate. TA answers the question, “are we within defined limits?” (more on this later).
The comment stated TA could not “explain” the past few days of movement. As a stand-alone sentence, that would be quite correct; simply because TA never seeks to explain anything. I should add that to my list of things TA is not. TA is not impetus, stimulus, predictive not explanative. TA is only determinate.
Expecting any result other than a determinate result is folly. TA cannot explain, but it quite easily analyses the past movements and the current position of the price with the goal of determining the status of the current trend.
Understanding TA in this light helps explain why you can’t escape certain feelings about Ta and TAists. TAists come off seeming so smug or self-assured because the results of even mediocre TA are clear. The results are entirely unambiguous. It’s easy to assume, and adopt an attitude, because you have become moderately adept at analyzing a trend, you have how somehow arrived. You’ve arrived all right. They got you right where they want you.
The main reason the results are unambiguous derives from another of your observations. TA is mechanical, almost entirely. However, as we shall see shortly, it does not require an all things being equal starting point. It doesn’t matter where you start or what is going on with the company. Segueing into another thought, surprises. TA doesn’t give a hoot about surprises.
Every time I post a bit of TA someone always informs me that I did not take into consideration some enormous upcoming news release, merger, sales, new product, whatever. Those things are not a part of TA. A company’s “future” whatever - is what attracts me to the company in the first place. In the old staid world of regulated utilities I never bothered to do the TA on a utility company. Why would I? They had no foreseeable potential growth explosion regardless of what were to happen. I obviously cannot follow, nor TA, 10,000 listed companies. A company has to have some undeveloped potential before I even look at it. Once a concept has caught my attention I can pretty well tell what trading value exists simply by TA. Beyond the power of price movement I cannot make money in the market simply because a great idea has been espoused.
Coming back to the surprise moment or movement, I have this observation. Surprises, almost invariably, impact a stock in the direction of the primary trend. The one exception to this rule - the moment of trend change. And that, historians will tell you, is why Trend Analysis was first developed.
Best I can tell; TA is worthless. UNLESS you believe the axiom, “the trend is your friend”. If I had to trade, or invest, or speculate, with one rule and one rule only and my life hung in the balance, I would choose to trade with Newton’s first law of motion
“An object will move at a constant speed in a straight line if no force is acting on it.”
In laymen’s terms, “An object in motion tends to stay in motion, and an object at rest tends to stay at rest, until that object is acted upon by an outside force.”
Which brings us quite naturally to the questions: What is a trend? How do we know when it has changed? Most any book on TA (technical of course) can answer these questions.
Most beginners error in the use of TA when they try to use it to do anything other than answer the question: Has the trend changed? Those who have no knowledge of TA are whipped back and forth by every little movement or they are hung out to dry as the price moves endlessly against their position until they are emotionally exhausted and then throw in the towel.
TA is used after every new move to determine whether or not the prevailing trend has changed. Hence it is a determinate. It has to be applied based on what time frame you are trading in. A stock can only be in one of 3 trends. Up, down, or sideways. TA does not predict. It shows us which trend is active and in the event of rebound movement whether or not the trend has broken. That would be an entry/exit signal.
Do you really think you can have a long trading career – betting against the trend?
“Only a sucker bucks the odds." |
