You made a good point here, Chris. It is very helpful to understand the "why's" behind the technical action of the market. This is in some respects like what some refer to as the "fundamentals" of the market: the economic scenario, the flow of money and where the institutional money is going to, for example. But this can be "noise" that Richard refers to in the making of decisions. Because, like he says, you cannot know for certain what actually has caused a price movement in a stock. And with TA and tape work, the trader does not have to know. But an awareness of the "why's" I think can lead to more accurrate assessment of the probabilities. And I think this is at the heart of what the trader is attempting to do: determine and manage the probabilities of a trade. Assessing the technicals of a stock also deals with probabilities. IMO there is no "black and white" there.
Now mechanical systems can be developed to work. Richard appears pretty knowledgable in this area. But the system is a tool that a trader uses to help him manage the probabilities (risks) involved with trades. A good system that a trader follows helps keep the "odds" on his side, and manageable. The rest of the risk management process is money management. And a good system will help with the money management part by, for instance, getting the trader out quickly from a non-performing trade before substantial losses are realized from the trade. SInce I have never developed and folowed a mechanical system before, Richard is the one best to comment in this area.
Still, this is a beginner's thread in technical analysis. So some of this material may make this subject of TA unnecisssarily complex for the beginner. It is enough for them just to learn the basics, and how to apply what they have learned well. I am happy you pointed out that disctinction between being aware of what possibly is causing a price movement, and basing your decisions on what you think is behind a specific price movement.
Oh, and I agree with Richard that some of the material I have presented would have a better "fit" for the commodities markets. However, IMO much of what I have covered would apply to the stock market, although perhaps in some cases not in the same specific way. But the effects are the same. Also, even on the stock exchange floor, there are many trading n their own account while they are executing customer orders. Also, there are individuals only trading for themselves, and even firms that only trade for their own account. So perhaps the relationship between the commrcial and the smaller individual trader is differeent on the floor of the stock exchange compared to taht of the commodities market. But IMO much of the same type of thing still happens. Even on the NASDAQ, according to a Forbes article, as much as 70% of the trades are performed by the market maker for their own purposes, including that of their regular market making efforts. It all comes back down to money, fear, and greed. Human beings in specific situations, particularily in groups, can be surprisingly predictable, much more predictable than I think many realize. But it still is a probabilites game.
Bob Graham |
