That statement is a little dogmatic, don't you think? To me, it's all a matter of probabilities and increasing odds in an uncertain world. Your style of fundamental analysis is based on future projections which can't be proven in advance either. The fact that in 4 out of 4 times in the last year WIND has rebounded strongly off of 30 increases the probability that it will do so again. This is not deductive science. But, it does suggest to me that WINd (the stock) is being controlled mostly by technical analysts and traders. In this situation, it pays to look what their crystal balls are showing them.
My statement, “Any attempt to rely on market or stock timing indicators is mathematically naïve” was dogmatic, and purposely so. But it was not done lightly. I did not say it because I just happen to prefer fundamental analysis. I say it as a simple fact.
I have known for decades that mathematicians have never been able to predict short-term stock price movements to any degree that is practical to individual investors. When Box-Jenkins introduced their impressive time-series tools, probably every economist in the business tried to apply the array of techniques to the stock market – with the disappointing result that the best short-term estimate of, say, IBM’s stock price is the current price of the stock. Not very helpful.
Noted deviations from the random walk model of stock prices either are ephemeral or impractical for individual investors.
That’s background. In the foreground are chart patterns, allusions to probabilities of trading outcomes, breakouts, failures, resistance levels, support levels, basing and consolidation patterns and on and on. In addition, there are any number of exotic oscillators that obviate the need to even have to think about patterns and patterns within patterns. Frankly, it all seems logical, and the evidence usually presented of tons of charts that broke up or down given a type of situation seems irresistible and incontrovertible.
Unfortunately, all the oscillators I have ever seen are either co-incident with or lag the stock price. They may be useful for telling you how you got to where you are, but they say nothing about where you are going.
But that still leaves stock charts. I am the first to concede that charts ostensibly present compelling evidence that market psychology can be captured and, it would appear, used to trade profitable. I am sufficiently pragmatic that I would never rule out the possibility of charts being useful just because all the time-series equations in the world keep coming up with naught. As a mathematician, I could argue that the information contained in a chart has never been adequately reduced to the kind of metric (oscillator) that could be subjected to rigorous analysis. Indeed, one could argue that, consequently, the efficacy of charts cannot be tested, any more than can fundamental analysis.
That’s hogwash. TA (charts) easily can be tested scientifically. The fact that it hasn’t been broadly tested with published results is an embarrassment for the financial community. Further, the lack of published tests is no excuse for individuals not to test it for themselves. I did, and I found TA has absolutely no value at all. Not any.
When I say I tested TA and it failed, you should be dubious. I suspect most investors back-test patterns to see if a particular buy-point would have proved profitable. And I would bet almost anything that, when applied to a number of stocks and situations, the investor concludes it works admirably. Another approach is to paper trade a number of positions and track results. Neither of these are scientific tests, since they are subject to extreme biases. If medical drugs were tested with either of these techniques, modern medicine would be identical to the amorphous state of alternative medicine.
Here’s what I did, which still wasn’t sufficiently precise to crown TA if it seemed to work, but it would make the proposition interesting enough to justify a more thorough test.
1. I became knowledgeable of charting patterns. This was not a minor step!
2. I randomly generated ticker symbols from the S&P Stock Guide publication (by randomly picking page and line number)
3. I randomly selected starting days over the last decade.
4. If I had recollection of the historical trading behavior the stock symbol, I skipped it.
5. If the stock didn’t exist at the starting time, I skipped it.
6. I cranked up a charting program for the symbol AS OF THE STARTING DATE, and began interpreting the pattern, aided by any oscillator I thought might be relevant.
7. I allowed myself to make a paper bet, either long or short, of a fixed dollar amount, or I could choose to wait.
8. I advanced the chart program to the next day and repeated step 7 until I felt confident about making a profitable decision. (Remember, like any TA investor, I believed I would win on average by trading – despite my many expensive lessons in the real world of investing.)
9. Once a position was taken (long or short), I advanced the chart program one day at a time until I closed out the position, recording a profit or loss. No transaction costs were applied, nor were there any accounting for tax consequences.
10. I kept this up until I had accumulated a statistically valid sample.
As indicated above, the result was NO SIGNIFICANT GAIN OR LOSS. Frankly, that shocked me, because, like all TA investors, it was hard to accept that, in the heat of simulated real-world decision making, chart patterns do not lead to clear, profitable trades – despite all the evidence to the contrary.
Without doubt, this test proved to me that I CANNOT interpret charts or oscillators for profit. It does not prove that you can’t. However, if you haven’t tested your ability at least at the level described above, then I advise you not to assume anything. Further, because I think I can read charts well, if not expertly, and because the math is undeniable, I doubt anyone can apply TA profitably on a consistent basis.
My statement denigrating TA was dogmatic, but it wasn’t done lightly. I could still be wrong, but a mountain of evidence backs up what admittedly has become my dogmatic view. It is just as important to be dogmatic about what doesn’t work in the stock market as it is about what doesn’t in work in Las Vegas. I know, dogmatically, TA cannot guide me in stock investing any more than a string of 7 or 11’s give any indication for the next roll at a crap table – even when your gut says otherwise.
Having said all of this, I would turn on a dime if proved wrong.
Happy holidays.
Allen |
