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The premise of technical analysis, is that we can study the past and the present, to predict the future. Does this work? Imagine driving along a straight road, with the windshield draped, so that you can only see out of the side-windows and the rear-window. Will you be able to safely proceed forward? Probably. Now imagine a winding road, under the same visibility-conditions. What is likely to happen? A crash.
The premise of technical analysis, is that we can study the past and the present, to predict the future. Does this work? Imagine driving along a straight road, with the windshield draped, so that you can only see out of the side-windows and the rear-window. Will you be able to safely proceed forward? Probably. Now imagine a winding road, under the same visibility-conditions. What is likely to happen? A crash.
True. But the only alternative is to be able to see into the future. Studying history has always been the best way we currently have to predict an outcome.
I think investing is similar. When you see stocks bouncing off moving average more times than not, you have to go with the history. And not just moving averages, there are dozens of various types of models; head and shoulders, death crosses, triangles, diamonds, double bottoms, triple bottoms, megaphone tops, etc. etc.
I use Charles Schwab. They have a nice technical analysis tool which shows stocks that have technical chart patterns that may indicate a reversal in their current trend, or stay on a current trend, according to Recognia. I use this mostly for fun in options trading. The analysis isn't always right, but it is right more than it is wrong.
For example, recently bought a call on a small semiconductor company out of California for $0.49 that this tool showed it was reversing a downtrend and had a 50% upside. So far, after only 12 days, it's up to $0.68. It doesn't expire until May, so I'll let it ride for awhile. But when it hits that 50% I'll probably close it out.
True. But the only alternative is to be able to see into the future. Studying history has always been the best way we currently have to predict an outcome.
.........
Ok, but what history shows is that even the vast majority of full time professionals cannot predict the markets. History shows us that the vast majority of active investors fail to match index fund returns over the long haul. The charts and algorithms, trends and other forms of technical analysis just do not work consistently enough to beat the odds.
Ok, but what history shows is that even the vast majority of full time professionals cannot predict the markets. History shows us that the vast majority of active investors fail to match index fund returns over the long haul. The charts and algorithms, trends and other forms of technical analysis just do not work consistently enough to beat the odds.
The fallacy is putting those unrelated statements together to form a conclusion. Most people don't use anything but gut feel from what they hear in the media or friends.
True. But the only alternative is to be able to see into the future. Studying history has always been the best way we currently have to predict an outcome.
The current model of pricing financial assets boils down to
and
The consequence is that studying the past prices and returns of securities provide no insight into future prices and returns.
The result is that, when examined scientifically—and especially when accounting for the selection bias that only successful traders leave a paper trail—trading rules, technical systems, market newsletters, and so on have essentially no power beyond that of
luck to forecast stock prices. That was true in 1970 and remains true today. This statement is not a theorem, an axiom, a philosophy, a tautology, or a religion: it is an empirical prediction borne out by the data that could easily have come out the other way.
... But the only alternative is to be able to see into the future. Studying history has always been the best way we currently have to predict an outcome.
The other alternative is to give up, meekly accept unpredicability, and settle for average (that is, tracking the indices).
Quote:
Originally Posted by fred44
...The analysis isn't always right, but it is right more than it is wrong.
If this is reliably so, and not a fluke or felicitous burst of happenstance, then you've discovered something truly grand. I don't say this to be sardonic or abrasive. But admittedly, I am skeptical. If your formula works, by all means, who are we to gainsay it? But then, if it does work - is it scalable? And if it is, what prevents you from turning it into a massive enterprise?
Quote:
Originally Posted by jrkliny
... History shows us that the vast majority of active investors fail to match index fund returns over the long haul. The charts and algorithms, trends and other forms of technical analysis just do not work consistently enough to beat the odds.
This is also my view. Charts and jargon are enticing, seductive, beguiling. But do they work? Do we have enough history to convincingly show that they ought to work? And even if they do work if backtested, there's the cautionary tale of Taleb's turkey (he didn't invent it, but he did popularize it).
Quote:
Originally Posted by SportyandMisty
The result is that, when examined scientifically—and especially when accounting for the selection bias that only successful traders leave a paper trail—trading rules, technical systems, market newsletters, and so on have essentially no power beyond that of
luck to forecast stock prices. ...
Difference equations, differential equations, stochastic differential equations, whatever... are only as good as their boundary conditions. If we do not accurately capture the boundary conditions - if we're ever so slightly off - our results, though correctly calculated, will very soon utterly lose their veracity.
Ok, but what history shows is that even the vast majority of full time professionals cannot predict the markets. History shows us that the vast majority of active investors fail to match index fund returns over the long haul. The charts and algorithms, trends and other forms of technical analysis just do not work consistently enough to beat the odds.
Too many unknown factors. Who could predict Chipotle's stocks to plummet because rats were found in the ceiling. Or that Steve Wynn was an abuser causing him to leave his company (although that stock is doing fine now after a big dip). Entropy can not be factored into technical analysis.
No method is perfect. But personally I find technicals to help me with entry and exit points, and the occasional short term options trades for fun. That correction back in February bounced right off the 200 day moving average, a place I had some limit buys and ended up picking up some stocks at their near-term bottom.
There is no debate whether active management is better; it can’t be. That’s a matter of arithmetic, not a hypothesis. A simple way to think about it is: active managers can’t win at the expense of passive managers, because passive managers hold cap-weight portfolios of the entire market or of subsets of the market—which means, they don’t really respond to the actions of active managers.
Because passive index investors receive the market return, one active investor can "beat the market" if and only if there exists another active investor who "loses to the market" because the sum of all passive and active investors must equal the market return.
Except that active managers extract a fee for their research from active investors.
Too many unknown factors. Who could predict Chipotle's stocks to plummet because rats were found in the ceiling. Or that Steve Wynn was an abuser causing him to leave his company (although that stock is doing fine now after a big dip). Entropy can not be factored into technical analysis.
No method is perfect. But personally I find technicals to help me with entry and exit points, and the occasional short term options trades for fun. That correction back in February bounced right off the 200 day moving average, a place I had some limit buys and ended up picking up some stocks at their near-term bottom.
There are two schools on technical analysis. One school is to evaluate the current trends in the market. The other school of thought attempts to bet against the trend by looking for where trends are likely to end.
A lot of people try to sell their views using TA. They already have a predisposed opinion and look for chart patterns and indicators that support the view. Those people tend to make big calls on major trend reversals. They often draw chart patterns that are distorted from the textbook definitions. They are curve fitting in other words.
Also, a lot of people don't have the tools to do anything but use the standard indicators or try to apply them across the board to everything without knowing how they've work historically or what historical events may have played a role.
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