Is technical analysis just stock market astrology?
alicegg.tech
alicegg.tech
While the made-up character is similar, Astrology is far richer in concepts, orchestration and story telling.
Technical analysis is the ultimate dumbification of market structure and dynamics, which in itself is a major dumbification of the formal economy, which in itself is a major simplification of the stuff-that-matters(TM).
The objective of technical analysis is to get as many low-information actors as possible to transact with as low-cost as possible technology (I would totally not be surprised if current "technical analysis" verbiage is 100% automated).
Technical analysis is literally made up.
I think there's a gradient where technical analysis is in the far right and psychonalysis in the far left, with astrology in the middle. I can't discern it clearly on an empty stomach right now though.
Checkmate atheists
Sadly the actual zodiac and astrology do not agree on the month boundaries. And that is because astrologers are using an out of date calendar.
https://www.astronomy.com/astronomy-for-beginners/why-your-z...
Also [0].
I've only ever seen it used sarcastically by atheists making fun of the kinds of arguments that religious folks make. It was a bigger thing during the heyday of new atheism, I don't see a lot of discourse on the topic these days.
ngmi
Concluding that the entirety of TA can not be useful (the Null hypothesis is true for all input signals) just from seeing that a few strawman TA in finance 102 not work is beyond absurd.
That is not to say that no versions of TA will work. After all Long Term Capital made a fortune on reversion to the mean...right until they went bankrupt. (And then their portfolio went on to make a fortune again. Too bad they were insolvent.) But it will only continue to work if the trading strategy is not widely known, or comes with trading risks.
And just wondering, using TA, how would you calculate how much to change an M&A offer in order to compensate for including a poison pill?
Just curious about the details, thanks.
If the assertion is true that this is useless for the stock market, that would imply the assertion is equally true for macro-economics, and extending further, climate change.
We are collectively deciding how to spend trillions of dollars based on the outputs of these models. Should we not bother then?
TA doesn't use "statistical tools" in any actually meaningful or predictive way. It's digital phrenology. Data-driven tea leaf reading. Programmatic palmistry. It deserves only scorn.
But the core proposition of TA is that a scientific approach to analyzing past price movements will at least hint at the future, sometimes. Not all the time. That's not controversial, and wouldn't be in any other discipline either. Whether it can be profitably exploited at a particular scale or by a particular person-- another question entirely.
The interesting thing about applying TA to live markets is ... its adversarial. A pattern becomes known, and that leads it to change. If it doesn't change, we can consider it based in fundamentals. For example, markets are more volatile, on average, in the Fall. Why? Well, it's got to be fundamental because everyone knows this pattern and yet it very often repeats. TA is helpful because we would not identify the fundamental mechanism without first observing the historical cycles of prices.
> But the core proposition of TA is that a scientific approach to analyzing past price movements will at least hint at the future, sometimes. Not all the time.
Will those "hints" be correct more than 50% of the time, though? I mean, if TA did beat coin flips, you could exploit this consistently with a profit. That, however, would be news to me.
TA is not predictive. It can't help you anticipate the future. If it was, you could make consistent profits by using it, and no one has. If it's right, it's just as often wrong, in which case it's no better than a coin toss or throwing bones or reading tea leaves.
It's not explanatory. It provides no hypotheses for why the market behaves in certain ways. If it did it might have some hope of being predictive, but alas, as I already mentioned, it's not. And thus it can't teach us anything about market behaviours or their underlying causes.
TA might reasonably be thought of as descriptive, in that it gives a (voodoo) framework for describing observed market behaviours. As you say, we might observe the market is more volatile in the fall. But because it offers no explanatory power, we have no way to know why, and since it has no predictive power, it can't tell us if next year will be the same as this year. You're simply expected to believe that, well, it's always been that way, so I'll assume the future will be the same as the past.
As a result, it's frankly not that useful or interesting.
No, the suggestion is that technical analysis is useless at predicting future trends in stock prices.
I never understand the above argument.
How is that possibly true on long time scales?
I can say with relatively strong confidence that Tesla is going to be worth more than $1 trillion in three years.
In March, it was clear NVIDIA would boom in the scale of one year. Just, nobody knew how soon and how fast.
So the walk is not random in these cases...
So is the walk pseudorandom? Random with a bias?
It clearly can't be purely random.
In all seriousness, though, there is an entire field of research whose results substantiate GP's point. This is not to say that you can't beat the market but the challenge lies in doing so consistently.
How relative is your strong confidence? If you feel this is inevitable, you can become essentially infinitely rich. Why not do it?
Of course so could others. And all your collective trades move the market. At which point it's no longer true. It can't be, not everyone can become infinitely rich.
Macroeconomic models have had spectacular fails but are fundamentally a semi-honest attempt to understand how the economy evolves (Only "semi" because ideology can be quite limiting).
Climate change models have a strong physical component that is neither made-up nor manipulated, but may suffer from not capturing biosphere dynamics all its complexity. Thats why there is uncertainty range around scenarios.
Long term investment decisions are in any case never based on TA. That technique is really a made-up pseudoscience tailored to provide comfort and talking points to the widest possible trading audience.
Technical people would do analysis with state-of-the-art tools, from LLMs applied on github repos to discover lurking security bugs likely to bring stocks crashing, to vision models applied to satellite images to analyze business activity.
But I have to say, I'm not sure if it's a joke at all.
If modern AI can generate average-human-like text and images, couldn’t it day trade as well?
Technical analysis is the macroeconomics (macroeconomics, the discipline taught in school etc) of the stock market! It’s like drawing aggregate demand and supply curves and imagining that they move around monolithically as they drive the economy. Tail wags the dog
I don't win; I'm out the dollar.
I buy a stock for a dollar.
It goes down 50% tomorrow. Then up 25% the next day and so on it fluctuates like a train going through the mountains.
One point in time it is low and another point in time it is high. I prefer to leave the train when it is high on the mountain.
i e. Picking a stock is a gamble but unlike the lottery I get to play the same game with the same money everyday until I win or die.
Only part of it....
Buy low, sell high, use other people's money
That's a good point. Best traders know how to use technical analysis, they just don't use it to invest their own money.
There was a newsworthy situation in the UK a couple of years ago where a star manager crashed and burned. He locked his trading account, with everyone's money still in it, and continued charging fees.
Apparently this is quite legal.
Actual market research directs resources to the most productive companies, helping them grow more quickly and generate positive aggregate value.
Essentially, it's a way to add intelligence and information to the companies that represent the market, to make them more profitable. Specifically, it allows newcomers to grow more quickly if they're more efficent than legacy companies, meaning it's more difficult for the legacy companies to create moats.
Without trading, we might still have IBM at the top of the tech industry, with a massively inefficent organization, low worker salaries and enough market power to keep the competition away, since without a market, startups would need to cover ALL investments using organic profits.
But that's mostly true for medium-long term trading. Short term trading is mostly about speed and finding information or clues faster than anyone else. That part probably generates less net value than it consumes.
Fully systematic traders exist and make money. Efficient Markets Theory says they shouldn't, but they do anyway. EMH is probably written under stricter/ideal conditions though.
If one wants to take a systematic/technical analysis approach though, I would look at the entire universe of stocks, whereas use a fundamental approach in individual stocks.
But yeah. I'm just an amature. What do I know.
The post you are responding to already answered this question.
Here is the answer: "it would, like most other techniques that can actually generate sustainable alpha, be a closely guarded secret"
So, to answer the question, the important stuff in the trading strategies that you mentioned, include information asymmetry. Those systemic traders have hidden information, and hidden strategies that they use, and they don't just given everyone open source access to their code.
On the sell side, sure--you know when they'll under or overpay. Anyone buying retail flow should be running these models.
Technical analysis just looks at the surface of the order book--the transaction layer. If you're integrating the book, you can see when the surface is misleading and profit from it. There are technical heuristics, e.g. dead cat bounces, round-number tendencies, et cetera which are based in reality, part flow of funds and part psychological. But technicians' sole reliance on stock charts necessitates blindness to those underlying conditions.
In summary, a stock's near-term price history can, on its own, provide information that predicts the next tick. It's just a known subset of a broader set of signals. That the delineation is known makes those relying on these strategies possible to arbitrage.
If you have a large group of people who take risks while trading, and they form strategies indistinguishable from flipping a coin (like technical analysis), then at the end of the day you're going to have a lot of ex-traders who failed to make money and a few that look like rock stars - because taking large risks and being lucky is a "good" way to make money fast. It's the very definition of survivorship bias.
One interesting thing about the stock market is that it’s entirely possible to be successful in it, attributing that success to strategy X, yet to be completely wrong about that.
It’s actually not limited to the stock market – there’s tons of professionals out there that are completely unaware of why what they do works. This makes many people nervous, and they try to come up with a rationalization or mental model for it, and sometimes they get it completely wrong.
By itself that doesn't mean anything, surely you realize?
What percentage of technical analysis traders own the million dollar houses?
You definitely can make huge amounts of money on short term trades if you get lucky. So occasionally a TA trader will become very rich and have a mansion.
But, do more than 50% of them strike it that rich? If not, it's just random.
It's like saying that powerball winners have mansions, therefore the best investment strategy is to buy powerball tickets.
Yes
Front running is illegal
HFT is front running
There are very good reasons to believe that. The earliest proponents of HFT may have made money by more efficiently using price information. But now there are so many of them that is no longer possible
It is crime.
The most useful model for understanding international high finance is "organized criminal networks"
Front running is when you take an order from a client and before executing it out your own order in first so you benefit from the bumpe or drop in stock price that the client would cause.
The key here is you have advanced knowledge of the order before it hits the market and you have a legal requirement to execute client orders before your own.
I believe it’s also been ruled to be front running if you get knowledge of the client order in advance of it being sent to the market by a third party.
But having a faster network and computer to allow you to react faster than others is not front running.
Take this is an extreme, if I watch a market ticket and react manually with in 20 minutes to news and you read about the news in the paper the next day, did I front run you by trading before you?
It’s the duty to execute a client order before your own and not tell others abouT the order before it hits the market that is the requirement for front running.
Are there other “bad” (for the general investing public) strategies out there? Sure! Should some of them be illegal, or be made unprofitable by coming up with fairer (for long-term investors) markets and market structures? Definitely!
But that doesn’t make them the same thing as front running. Why call “bad strategy/phenomenon X” “Y” and confuse everybody?
Front running is to act on confidential information in the market to the detriment of the initiator of the information. Once something is no longer confidential, ie the customer order has been processed, and all the information is open, then there can no longer be any front running.
What's missing is you actually confronting the problem of people seeing orders and buying based on those orders before the original orders go through. What is your term for that? Playing a game of definitions is a diversion from actually talking about the problem.
Imagine a public official caught taking bribes and calling that embezzlement, blackmail, or driving under the influence of alcohol. Makes about as much sense to me.
> the problem of people seeing orders and buying based on those orders before the original orders go through.
That would be frontrunning, and illegal, as far as I understand. I don’t think it matters if there’s two parties colliding to commit the same crime.
Are you maybe referring to payment for order flow, which also has its problems (but ironically on average yields price improvements over NBBO for retail traders!), but is not that?
This literally cannot happen unless someone is breaking a law. An order is not visible until after it has executed. What can happen is some actor want to get a better price for their order and thus split up the order into multiple orders that it tries to execute simultaneously. Then someone can act on one of those that process quicker before a second of those split up orders end up executed. And that is fine - propagating changes of price quickly between multiple separate market places is a good thing as it lowers the transaction overhead in general.
HFT lives on happening so fast that the market price has not had time to catch up to the information that a trade is available. But it is a race against others in the same market. And an incredible amount of effort has gone into winning that race and making profits off of the increasingly narrow slice of time that markets are profitably inefficient for.
High frequency trading is knowing about recent trades sooner than others. That's where the profit comes in.
I see a difference here to technical analysis. HFT clearly has a data edge over those who just look at historical trend lines.
I think it's reasonable to say this isn't technical analysis. It's not the historical analysis that gives the edge. It's the extra knowledge they have that gives the edge.
Technical analysis is very much rooted in purely the historical price. If you have a way to predict prices with more knowledge than just the historical price you're getting outside the realm of technical analysis and into the realm of plain regular analysis where you take as much knowledge as you possibly can about the stock and figure out the price based on that huge volume of knowledge.
This is why technical analysis is dumb. It assumes all the knowledge is in the price already and there's no way for some investors to know more than others outside the scope of that. HFT is in fact a great counter to that. Some people know incoming trades before the rest of the market. That extra knowledge allows for vast profits.
btilly's comment has a good practical explanation of HFT that expands on this
You having a faster computer and network is just your alpha.
Front running is where I take your order to buy a large amount of a stock and buy some for my self first before executing your order.
Being faster is perfectly legal.
Trading Based on a clients order is not.
Technical analysis is largely astrology for stock markets for reasons many others here have already given, as far as I understand. (Note that it’s still possible to make money using a trading scheme based on astrology, namely if the market structure itself makes any participant come out ahead on average, and the scheme isn’t bad enough to outweigh that inherent advantage.)
It might work that way with astrology too, but it's not so clear.
For example if everyone agreed on that Gemini means good at science and Leo is good at art, the whole education system would be designed around this belief and it would hugely impact how children think of their own potential.
Humans would totally do this. If anything, I'm pleased by the fact that we don't do it quite as much as we could...
https://blog.rongarret.info/2020/09/can-facts-be-racist.html
An astrologer named Asclation had earlier predicted that Domitian would die on September 18, 96 AD, and Domitian's enemies used this as a sort of nucleation point to organize his assassination. So although the date was made up, it had the effect of focusing the efforts of the assassins on a particular date, and they were successful in assassinating him on September 18.
The full story that survives probably has some embellishments, but is entertaining. As the day approached Domitian became increasingly nervous. On September 17, he called Asclation before him and asked him if he stood by his prediction. Asclation said he did. Domitian then asked Asclation how Ascaltion himself was to die. Asclation responded that the stars said that he would die by being torn apart by dogs. Domitian then had an idea, and condemned him to death by burning.
Asclation was immediately led to a public square, tied to a stake, and a bonfire was built underneath him. Not long after being lit, however, it suddenly began raining and the downpour quenched the flames. In the wet mess, Asclation's stake tipped over and a pack of dogs found him and devoured him.
This development naturally did not put Domitian's mind at ease. The next day he became a nervous wreck. Around noon, he asked an attendant what time it was. The attendant, who was part of the conspiracy, lied and said that it was an hour later. Seeing that the danger had passed, Domitian relaxed and decided to take a bath. As he was about to go out, an official rushed in and asked for his signature on some documents. The official appeared to have an injury to his arm, but this official was also in on the conspiracy, and his sling concealed a dagger. When he got close to the emperor he stabbed him to death.
It'd be hard to hide such statistical effects on an yearly interval, whereas the Western zodiac hides its predictive failures by not having signs that are commonly stratified into different groups.
> you ask some parents about santa clause. they say we are athiests, but we pretend to believe in santa clause to make our child happy. then you ask the child about santa clause, and they say i pretend to believe to make my parents happy.
While some kids may become very vocal about it when they suddenly stop believing in Santa Claus as a literal being, they children (and adults) can continue enjoying him for as long as they're not embarrased by it.
Having a small child in the family believing (or pretending to believe) can be a way for everyone else to enjoy him. And some families continue to have him even when nobody believes.
The same is sometimes true about religions. People can continue to value them even if they stop believing in the literal Sky-Father.
I can see how Santa Claus can live as a fairy tale, with small kids playing with the idea of the entire thing being somehow real, the same way as Goldilocks or Bambi. This is indeed cute, unless taken too seriously.
It's quite a bit harder with religions: they are not a once-a-year pleasantry, but are things that shape your entire view of the world and the way of life. A faintest idea that they are but a cute tale is literally a destruction of a worldview, a catastrophe instead of a mild disappointment. Knowing, say, Christianity or Islam as a cute tale only works for people who never were believers.
Belief comes at many levels of intensity. People with low intensity beliefs can drift away without experiencing a world view collapse.
There are certainly people of most religious backgrounds that continue to practice and enjoy many of the religious traditions and practices even generations after they stop believing in the supernatural parts.
I think it descends from a line about labor in the USSR: "We pretend to work, and they pretend to pay us." Tony Judt in "Thinking the Twentieth Century" had a line about Moscow needing its satellite states to avoid loudly or conspicuously disagreeing with party ideology even if in practice they were able to diverge. "You pretend to believe and we'll pretend to believe you."
At higher levels of simulacra, the statements people make are less about reality, and more about what they want people to believe they believe about reality.
-- Upton Sinclair (?)
This is how it works for the child and Santa.
The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”
Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now.”
I don't remember too much from my finance courses in business school but one comment from the professor always stayed with me. He said that if there was any succesful pattern to trading, there are firms on wall street which can afford many orders of magnitude more brain power and compute power than you, so they will zero in on it pretty quick if it works. As soon as they do, it doesn't work anymore. Proof: Otherwise they would all be making infinite profit.
Makes sense. This means any trading algorithm that can be programmed is pretty much obsolete (if it ever was any good) by the time it's working.
But such algorithms only work as long as they're kept secret. As soon as the algorithm is made public, every large institution will incorporate them into their trading robots, meaning the information will become priced in to the market value instantly.
There are really only five ways to beat the market:
1) Insider information. (Illegal) 2) Extensive market research, where you understand the companies better than the market does. (Requires A LOT of work) 3) Direct contribution to the company's success (you need to have the talent of a Elon Musk, Mark Zuckerberg or Bill Gates). 4) Mathematical/computational superiority (you need to be at the level of Jim Simons or have the capital to hire such people) 5) Luck.
Mainstream technical analysis is not on the list.
That being said, I'm sure the current AI revolution is leaving some doors open to massive profits to some clever person able to create a model that predicts patterns better than most other algo trading robots.
1.) You don’t get it.
2.) Let me explain.
3.) Science and maths.
4.) I’m no expert I believe in 3 though.
5.) Nothing is 100% accurate.
6.) Full Deepak Chopra.
But it’s hard to do that when something disproves its own validity so utterly.
If someone has a strategy to predict any amount of value from the market, it would be automated immediately (we’re mostly programmers here so that part’s kind of our bag), and so doing abstract that value away to a machine housed at JP Morgan or Citigroup.
tldr; It’s astrology for finance bros.
At least the crypto hype has died down again for another while. They perfected the above during Covid.
While actual finance people use algo trading all the time (meaning technical analysis using secret algorithms), naîve technical analysis is mostly a sales or influencing tool. (Unless the "finance bro" is truely deluded)
The same goes for tech managers. While some actually create agile teams using big data to create useful AI, plenty more just use the terms to inflate their own careers.
It's kind of like a group of lions hunting a giraffe. Globally it's adverserial, but within the lion pride, it's cooperative.
That said back in 2018 there were no less than 3 cup and handle indicators on SPY at almost every timeframe. I yolo’d the biggest gain ever because the TA was saying heavy buy and the risk was very low (bought long dated ITM calls with a strict exit date)
There are lots of giant trend following and quant funds that will likely fall into "technical analysis" category.
So basically Python is ultimate dumbification of C, which in itself is a major dumbification of Assembly, which in itself is a major simplification of Gates/Transistors?
At some point we have to deal with abstractions in one way or the other or just continue to indulge in mental verbosity of the most extreme kind.
Abstractions could be leaky but they work for the most part. Which is good enough for most situations.
Your abstraction of abstractions is leaky and is not working.
Technical analysis is not an abstraction of market behavior. It the fetichization of linear 2d representations of historical price timeseries.
In your analogy it would be to look at pictures of chips, identify faces and other objects in the clusters of transistors and argue that is the interaction of these patterns that determines chip function.
The article looked at 50/200 day simple moving average crossovers on the S&P 500 index (using SPY etf). Which are really just indicators of momentum. Buy when going up, sell when going down. This underperformed just buying and holding the SPY 480% return versus 520% over the last 25 years. However, it avoided big draw downs, so the risk adjusted return was better. In other words, it works in a world with no trading commissions and no bid ask spread. Is it worth it in real life? Probably not.
Lots of people saving for retirement do though.
If you go into a "situation" thinking you are already overleveraged or whatever, you are much more likely to do something silly vs. if you went into the same situation comfortable in the logic of how you have your finances configured.
Market downturns mean nothing! You lose literally nothing; you still own the same things you did in the morning, and will own those things again in 5 years (or more based on splits/dividends).
Honestly yeah, this is kind of a critical part of profitable investing; if you can’t hold through downturns, you ought to find someone who can and then forget about that money entirely.
In the case where I have to tap into my retirement account because of unlucky life circumstances, I'm happier that I'm selling something I bought for 100 at 75 vs having to sell it at 50 (hypothetically).
I cannot overstate how bad of an idea this is. Investing is not the same as decorating, there are objectively bad ways of managing your investments and this is one of them.
You will end up poorer as a result of this behavior. I hope that happiness is worth it, because you are paying through the nose.
I'll assume you're a proponent of B&H SPY and continuing to buy $X/month of SPY until you retire. I'm just saying there are other ideas than that that you can use that have smaller drawdowns and comfortable returns to risk. You could B&H 60/40 SPY/treasuries for example.
Is it active management if you rebalance 60/40 once a year? What if you rebalance quarterly? At what point is it active management and therefore bad?
- https://portfoliocharts.com/portfolios/ (one step up in activity from B&H one ETF forever)
- https://allocatesmartly.com/blog/ (another step up in activity from sticking to one asset allocation that you simply rebalance periodically)
- https://qoppac.blogspot.com/p/systematic-trading-start-here.... (several steps up in complexity and activity)
If pablum on the Internet is your preferred method of investing advice, by all means care about a blog. If understanding finance as it operates is your preference, I recommend staying far, far away from the Internet blogosphere.
Things aren't as settled as you make them out to be, and that's OK. What's important is that you have enough confidence in your methods, whatever they are, to stick with them. In the end, the stickwithitness may be more important than what you stick to.
The basics of investing are settled for individuals, and you are not operating at a level of sophistication to rise into the areas of finance that are debated.
These aren't "my" methods, they're the methods. You either do these basic things as a retail/individual, or you lose money. Period.
Instead of me assuming I know what you mean by the methods, would you mind stating what they are?
I think we could agree that some of them are:
* Have a sound plan (I'm sure we could debate what makes a plan sound)
* Stick to the plan
You ignore Nejat Seyhun's 1994 paper "Stock Market Extremes and Portfolio Performance" [0] which says:
> For the 1963-1993 time frame, the findings were similar. The index gained at an average annual rate of 11.83%, for a cumulative return on $1.00 of $23.30 over 31 years. If the best 90 trading days, or 1.2% of the 7,802 trading days, are set aside, the annual return tumbles to 3.28% and the cumulative gain falls to $1.10.
And from ARWDWS [1]:
> The past history of stock prices cannot be used to predict the future in any meaningful way. Technical strategies are usually amusing, often comforting, but of no real value.
Further:
> Using technical analysis for market timing is especially dangerous. Because there is a long-term uptrend in the stock market, it can be very risky to be in cash. An investor who frequently caries a large cash position to avoid periods of market decline is very likely to be out of the market during some periods where it rallies smartly.
[0] https://www.stayingrich.net/wp-content/uploads/2016/05/Towne...
[1] https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/03933...
Thank for for that paper, I'll give it a read.
The next line in Seyhun's paper is more interesting to me and the focus of my research and strategy:
> If the 10 worst days are eliminated, the annual return jumps to 14.06%, and the cumulative return increases to $44.80. With the 90 worst days out, the annual return rises to 21.72% and the cumulative gain to $325.40.
I believe this paper describes a strategy that accomplishes that goal relatively well: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4346906
Also uncited and unpublished papers aren’t worth the ink they’re printed on.
The paper you shared defines "in the market" as long equities and "out of the market" as long T-bills. The paper I linked looks at other assets you could rotate into besides T-bills. How could that one change (they offer several other ideas) impact the results of your paper?
If that's not interesting to you, skip the paper I linked.
Personally, I believe that type of research is still valuable. I don't structure my life just based on things in published and cited articles.
This isn't about interest, it's about value. What you're proposing is flat out wrong, and has been shown to be so in hundreds of different ways.
https://allocatesmartly.com/diving-deeper-does-the-day-of-th...
So based on this, I think you have a filter problem; you seem to be unable to accurately evaluate sources for their credibility, and take in any/all arguments without understanding how easy it is to be manipulated by un-credible sources into believing hard-to-disprove ideas that are nonetheless actively harmful to you and your ability to grow your investments.
This leaves you susceptible to charlatans and snake-oil salespeople, which fully explains your desire to believe proven-wrong ideas on investing. When you lose out on these market timing attempts, you apparently do so in a way that allows others to profit directly off of you, and you further advocate for others to follow suit.
You're a great mark, I'll give you that.
Your model/filter may be better because you don't have to think about as many things. There's certainly more information out there than one has the ability to ingest. In my experience many things I thought were settled turned out not to be upon further inspection. A simple filter might be good enough for your purposes!
I think your ideas about investing can be correct (in that they produce favorable outcomes) and other ideas can be correct too.
Not a perfect analogy, but Newton's ideas about gravity are correct to explain a lot of things. Einstein's ideas expand and explain more. They are both correct, depending on the level of detail you need. Sometimes "correct" roughly equals "useful".
Do you really not understand the issues there? Incredible.
And it is not a logical fallacy to disregard their argument entirely. I didn’t say they were wrong, I said they weren’t credible.
Thanks for the lively discussion, Zetice!
Knowing your limits and knowing how bias creeps in are two skills you clearly lack. I hope nobody depends on you to make these kinds of decisions for them or in a way that impacts them.
I'm pretty sure Zetice hasn't changed their mind on anything. I haven't really changed my mind on anything.
I still think the things we linked to are valuable. For those of you who have filters that let the information through, I hope you find something useful. Read the paper Zetice linked to and see what questions you come up with. Or don't.
You will be worse off if you think like they do.
My sarcasm didn't go through. I mean no one has written a published and cited paper about our conversation. Therefore no one should make any decisions based on our discussion.
I am stunned sometimes when I discover how completely unaware people are of how to apply critical thinking in the modern world. It's second nature to me, but conversations like these make it abundantly clear it's not a universal skill.
I think it speaks to the medium of communication we're using (you've misinterpreted things I've said as one problem with the medium), mixed with the topic being a very emotionally charged one.
For example, you believe "whole life experience" is something worth noting, as if you have no clue whatsoever about how bad humans are at self evaluation.
Why wouldn't you know about that? What kind of "critical thinker" goes through life fully unaware of the impact that bias has on their ability to think critically?
A bad critical thinker wouldn't understand this concept.
A bad critical thinker would also not understand the value of avoiding sources from organizations misaligned to their incentives, because they'd know how powerful bad arguments can be, and their inherent limitations at recognizing them as a result of said bias.
I don't know you. But I do know how you've behaved in this conversation, and if you think this conversation is representative of your method of evaluating ideas and arguments, then yeah I would consider your critical thinking skills to be limited, regardless of how much you engage them.
I think you have a rigid idea of what the right idea is with investing and there's some resistance to anything that might challenge that. I understand why you'd feel that way. There's comfort in believing your filter and your method for gaining understanding of this complex world is totally correct. I find myself thinking that way sometimes too!
I have categorized you as someone who has a substantially inflated sense of their capabilities, but when faced with any kind of challenge to that belief they wilt magnificently, usually in the form of, "That's just your opinion."
You discount the concept of bias as inapplicable to you for some reason, which more or less renders you incapable of meaningful critical analysis, yet you falsely think whatever remaining machinations you're capable of are useful.
You're trying to fly without any wings, declaring that you falling on your ass counts, and then refusing to even acknowledge the existence of gravity when its pointed out to you.
I may be entirely wrong about how personal finance works, this is possible and fine with me. What I'm not wrong about however, is your behavior. It's fundamentally and profoundly broken, if its purpose is to accurately predict future outcomes such as you claim it is.
Because we disagree you think there's something wrong with my critical thinking and that I'm unaware of biases. But are you aware of your own?
Typically what we criticize in others is what we fear about ourselves.
Who I am, what I stand for, does not matter. These are facts, and you'll either accept this reality or you won't.
Hopefully you, someone reading this thread, or I get something beneficial out of this, though! I hope you are successful with your investments and they give you peace of mind.
The fact that I'm capable of seeing that and you aren't is what folks ought to glean from this conversation.
Here’s why: An accumulating ETF constantly uses the dividends from its underlying stocks to buy more of itself (instead of paying those dividends out to you).
And it can buy twice as many pieces of itself when it is at 50 versus when it is at 100.
It is thus to your advantage if the ETF is really low for a really long time.
As long as you don't start retirement at the beginning of one of those decade-long periods where the market is flat. It would hurt to have to start selling shares at 50 when you bought them for 100.
This is, by the way, the intended strategy behind most index-based retirement funds.
1. You need some way of normalizing shares to produce a statistical sampling of the market, and capitalization is the obvious, existing market mechanism to do this.
2. You need to resist brute attacks on the index investment strategy. I.e. if a giant fund is known to just consider all shares equal, you could soak them by doing wild stock splits to put more of your shares on the market. Or if they consider all companies equal, you could soak them by bringing lots of empty shell companies to the market.
What is the market? The market is something like the returns of the S&P 500 index. How do we get the returns of the market? Make a fund that tracks the S&P 500 index. Why do we have funds that use market-cap weightings? Because we want to track the market.
I guess it's not about having an equal representation of companies or industries or sectors, it's about having an equal representation of where dollars are allocated. The goal isn't to take a dollar and buy a share of each company, the goal is to take a dollar and buy more of the companies that other people own more of and less of the ones they don't?
My point is market-cap weighted index funds are an investment strategy and not some neutral default thing that people seem to think they are (or maybe I'm projecting).
Existing indexes represent tried-and-true weighing methods that have are considered to summarize a market in some useful way. Index funds leverage that on purpose to not do a bunch of bespoke analysis. Not using one of these indexes puts you back in the realm of a managed fund with its own active research and forecasting...?
My experience (thankfully not paid for with real money, but fake trading) has shown me I am not good at market timing, particularly knowing when to get back in, so I don't bother trying.
It doesn't really take restraint so much as an acceptance that I will likely not do better than buy & hold. I don't enjoy seeing my balance go down, but I am not close to retirement, so I accept that I need to wait it out to catch market rallies because I am not paying super close attention to markets.
I recently learned about a class of investment strategies called tactical asset allocation. One aspect of TAA is to switch to some other asset when your main one isn't performing well.
It's a form of market timing but it's systematic and backtestable. Reallocating once a month, a lot like a rebalancing that even B&Hers probably do.
This site [0] has some interesting articles on their blog. HAA has really piqued my interest [1].
[0] https://allocatesmartly.com/what-we-do/#whatistaa [1] https://indexswingtrader.blogspot.com/2023/02/introducing-hy...
This statement here is the key. This is why many times real estate investments work. You more likely to pay monthly payments on a loan with discipline, than have discipline to DCA into a index.
People think and work very differently under 'compulsions' and 'freedom'. There is always a phone to buy, car to change, vacation to take, and eating out to do with the money if you were not forced to put it away, like a compulsory monthly payment.
Even in cases where I have seen disciplined folks, one emergency/pleasure life situation is enough to ensure they fall of the wagon(spend thrift'ism).
This is why most calculations that don't take into account emotional aspects of investments are doomed to fail. And they almost always do. One thing nearly everyone is bad at is waiting, with patience.
Many diets will work if you'll just stick to them. Find an investment strategy you that lets you sleep at night and stick to it for decades. To steal a phrase from a diet book, "compliance is the science".
- The patterns are real in that they can be used to roughly identify groups of buyers and sellers who have price floors and ceilings. E.g. it's a way of gauging the momentum of a trend. However the signal:noise ratio is very high especially when traders try to act on these patterns so that their activity drowns out the original signal
- The patterns then become a schelling point and those who can read the patterns faster can front-run those who read it more slowly. The patterns themselves become reality rather than just a representation of reality.
The value is most likely fully drained from it in that there is no longer any alpha but remains sorta-kinda truish occasionally like "if they don't look you in the eyes it means they're lying" or "changing the lighting improves productivity"
So do they hire you, or do they not?
What they do is make-market, rather than conduct proprietary trades, and spend huge amounts of time, money and effort on risk management that's based on hedging the risk in the book rather than forming an idea about which way the market is going to move.
Brokers don't particularly care whether their customers make money. But they do like customers who trade early, and trade often.
Source: I'm a quant
or do you want to make 1% of $100,000,000 win or lose, you still get paid every year?
The key point is that if you were a consistent expert in TA you don't need to interview anywhere. You can be a billionaire trading from home.
This is known as a "hyperstition". It's a cool concept that I believe is more and more relevant as the world becomes more and more connected. Things like "meme magic", etc.
It "might work if nothing significant happens" but that is just a weasel way of saying it doesn't work.
Now if you're saying you decided to invest in something and you're trying to get an entrypoint and you spot a moment of large deviation from the mean and you use that to influence your operational buying mechanics like how you space out your buys or time them, that I can definitely see. But online you always see these two very different things mixed together.
More importantly, it's backed by genuine human intent to buy whatever the coin says. There is information in that too.
This is very far from the zero information situation that you were trying to set up, lol.
The goal of technical analysis is to find pools of supply and demand at different price points, much like a clustering algorithm. It is reductive by its very nature but it's still a useful approximation because big interpretable clusters can absolutely drive price action and it's helpful to have a model for that. On a good day, you might get the biggest 2 or 3 clusters correct to within 10% and miss several others totaling 1000000x the size and importance of a hypothetical bozo trading based on a coin flip, and this highly imperfect outcome would still be enormously valuable and worth pursuing.
It's like politicians assembling a platform by considering the sizes and interests of voting blocs. This strategy was always going to be a reductive, imperfect, noisy mess but that doesn't make it irrational or useless.
There is a UAP disclosure hearing in the US House tomorrow:
https://www.theguardian.com/world/2023/jul/21/ufos-congress-...
Are you shorting Tech on the idea that w/e we have now is inferior to theirs?
Do you go long on War on the idea that we'll start fighting them?
--
Perhaps more difficult, what do you trade if Aliens aren't real?
If they aren’t, I dunno? Business as usual cause its already priced in.
Not very realistic, but interesting nonetheless.
Regarding the case for lowtech interstellar travellers: I can accept the idea that there is some symple physics trick to make a jump drive that we haven't discovered, fair enough. Just as in the story, there would also had to be a similar undiscovered trick for antigravity, since otherwise they have no way of getting to orbit.
Can you however build a ship that can resist vacuum and provide life support with 16th century tech? I guess perhaps your species might be able to live in vacuum, needs only a bit of heat and doesn't need to breathe gasses?
- - -
Anyway, I’d like to recommend another book. High Crusade by Poul Anderson[0]. In the first chapter pacifist aliens land in 13th century England and get immediately massacred by the locals. Now the king has a starship.
If you want to use math and statistics to get an edge in the market then become a quant trader. People who aren't smart enough for that but want to feel smart get into "technical analysis".
Yet, similarly to brownian motion, the thousands of events that cooccur more or less cancel each other out in the grand scheme of things.
Some things, like weather and major political issues are easily obtained bits of information and are high-impact events. Data like satellite imaging of fields are available at a price and will tell an awful lot about what best-case production figures will be like. Lastly, insider information is around too - asking companies what they planted, sales data on seeds/fertilizer, etc. If a disease is hitting one company, it's probably hitting a lot of them, especially true with live stock.
People do pay for this information, and they use it to trade futures. Which is how it eventually gets "priced in."
Forecasting is a huge factor in a successful agriculture business. Which is part of why a lot of niche industries tend towards vertical integration - it's much easier to forecast demand when you produce a lot of derivative products. Buy your own stuff; if you planted a surplus then create new products / markets, if there's a shortage, cut production on lower profit items.
Experts predict crop failures, big money acts on those predictions and moves securities price and volume, which technical analysts examine.
Therefore, the experts prediction is input for technical analysis.
If I know for a fact that a company is about to collapse and I establish a short position, will anybody notice? It depends on a lot of factors, but I could make an assload of money on puts without nudging the market.
Technical analysis is all about answering the question: are you able to filter who know something vs those that don't merely by looking at a buy signal? The answer: no, not really. Insiders acted well in advance of the SVB issues being made public, and there are lot of other examples of people making guaranteed bets that weren't obvious in the technicals. The noise is just too much.
By the time the signal is clear, the market has "priced" it in, and now you're just trying to predict the random actions of the know-nothing crowd.
Technicals are always after-the-fact. Since enough people with deep knowledge have to have already moved on that information in order for the market to have reacted to it.
It's much like trying to predict a fire by watching a crowd running away and hit the fire alarm. You didn't predict the fire and you can't have predicted the fire. Maybe you could have noticed one person booking it for the exit and follow along, but you still didn't know what was happening and were going on blind faith.
Assuming you are the only person who knows for sure that this company will collapse, technical analysis is the wrong tool to use and all other strategies, experts, big money players will also fail.
Assuming you aren't the only person who knows for sure that this company will collapse the price will reflect this knowledge.
>It's much like trying to predict a fire by watching a crowd running away and hit the fire alarm. You didn't predict the fire and you can't have predicted the fire. Maybe you could have noticed one person booking it for the exit and follow along, but you still didn't know what was happening and were going on blind faith.
It's nothing like that at all, and reasoning with analogy is pointless because the discussion becomes about the analogy not the issue at hand. But I will try. If people running away is people selling stock, it doesn't matter if there is a fire or not. Selling stock impacts price regardless of if the event is real or not. And as you know, having been in a building where the fire alarm was activated, people don't rush to the exists. Some small number leave right away. The vast majority won't enter the building. The remaining people look to others and as more leave the momentum builds until the mass moves out.
And once the fire department arrives and gives the ok they will go back in. But since we are talking about stocks, not all buyers won't be waiting for that. They'll have put their money elsewhere, money may go back into the stock slowly. Obviously this won't work on the top 3 most popular stocks in a raging bull market that everyone is paying attention to. In that case, people will be waiting to jump back in.
Also, the situation is very dynamic with an unknown and very large number of variables, even with something as seemingly simple as a crop failure. Such as such as a countries deciding to ban exports to secure food security, lack of access to fertilizer due to sanctions against major fertilizer producers in wheat producing countries, the politics of national and local water rights.
All these factors have parties with inside information acting on them (see members of congress trading stocks) which no player with big pockets will have access to but is all reflected in the price.
The steel-man position for technical analysis is that humans are herd animals, who tend to do things in similar, predictable ways. Such as, people who pick stocks like to sell and take profits after the stock reaches some nice, round number. When enough people do this, it can result in repeatable, predictable patterns in prices.
The massive caveat there is of course that while that might be true in the absence of outside stimuli, any news always trumps that. It doesn't matter how nice your patterns are, if it comes out that the company somehow did worse than expected, it's price is going to fall, and if it did better than expected, it's going to rise. Trading on technicals might be something that works if you are really fucking careful, but it seems to me like you are picking quarters in front of a steamroller, in a way. The actual reliable profits from technical analysis are always going to be small, and the risks of investing with no understanding of the fundamentals seems fraught.
Is this true? For example, is using AI models that take into price history, current and historical events, insider and/or institutional trading, analyst opinions -- would that not be considered technical analysis? I know this is just a matter of semantics, but curious as to what is considered TA nowadays.
Technical analysis is specifically the stupid line drawings you see on stock charts that try to predict trend lines from the motion of the previous lines
This feels like you're attacking a strawman version of technical analysis. The claim isn't that you can predict future price movements with perfect accuracy, it's that you can predict it well enough that you can make some money from it. None of our economic models can predict a meteor hitting the earth either. Does that mean we should conclude that all of them "cannot work"?
So all that’s left is the unpredictable bits, and those are what you’re at the mercy of. And the unpredictable bits are happening constantly.
But if you assume enough rich people do technical analysis and pattern day trading you can earn money by doing what's essentially technical analysis, but with different patterns - ones designed to capitalize on the old patterns used by the rich.
Keep in mind, I'm not saying technical analysis works. I don't think it does, but that's without seriously examining the evidence. I'm just saying that the diminishing profit argument doesn't work. At least not as presented.
if this were the case, it seems likely that others with deeper pockets than you, perhaps other high frequency traders, would rapidly exhaust those profit opportunities
Having said that, “let’s take difference to EMA” is pretty the one-size-fits-all solution, and there are no shortage of firms looking at minute to hour long trades to gobble up anything human TA practitioners would ever try to trade.
This just further emphasizes the point that retail investors relying on TA are having their lunch eaten. HFTs are picking the minute opportunities because that's all that exists. If there were longer-term strategies that were reliably profitable, do you think they simply ignore them?
> If there were long term strategies that were reliably profitable, do you think they would simply ignore them?
Yes? Mid frequency trading (say holding period of 5 minutes to ~1 hour) is a totally different class of quantitative trading, from the features you use to how you build portfolios (if at all) to how you execute on forecasts. At least one top-of-the-game hft firm (that already relied on forecasts instead of speed) got burned on their first attempt to enter mid frequency.
Put differently: "A bunch of smart people who have proven to be able to reliably extract profits from microsecond trades tried their hand at exploiting patterns on longer timescales and were unable to. Even though I have less money, information, access to markets, and am just one person, I believe I can succeed where they failed."
Now, perhaps each new generation of patterns would have diminishing returns over the previous generation. My intuition is that this almost certainly true. But either an argument or evidence has to exist for it and I'm not aware of any.
correct, exactly what I'm saying, any opportunities, including those derived from other opportunities being seized, would themselves be seized by such deep pockets and HFT firms
> ...or day-traders.
unfortunately I doubt it, due to the above
If those with deeper pockets had reliably exploitable trading strategies, other teams with equally deep pockets would be exploiting them. You need to simultaneously believe that widely known and understood patterns exist which are profitable to exploit but also that nobody with large sums of money and a financial incentive to profit is interested in taking that easy money.
The opportunity is there for the average person to take, but it needs sufficient skill / training, like any other skill. I can't "prove it" to you, but I already proved it to myself and many people in the trading community did.
You don't need any sophisticated tools or huge amounts of money. It's bloody difficult though, not just for the technical reasons (there are many strategies but most go beyond a MA crossover, even though I'm not denying even that can produce alpha -- I don't know or care), but mostly for psychological reasons. And psychology is what's behind many of the patterns you see in the markets.
Every year there are people who beat the indexes and there are people who perform worse than the indexes. Every successive year some proportion of the winners stay winners and some become losers. The interesting thing to note is that—if you look at the statistics—winning one year has almost no bearing on whether or not you win the next year.
Still, there are participants who flipped that weighted coin year after year and caught heads five years in a row. It doesn't mean they have a successful strategy. It just means that if you flip a 45/55 coin five years in a row, two out of one hundred people will get a string of heads.
I've personally witnessed all of my day-trading friends go through this (I almost said "learn this lesson" but I'm not sure they have). For a while they beat the index and they're convinced their strategy is sound. One day something unexpected happens and they're suddenly in the hole. Often this is compounded by having an enormous tax bill on "gains" that no longer exist, necessitating selling off holdings that are deep in the red, making it even harder to get back to positive.
Do some individuals exist who can reliably beat the markets? Sure. They just are exceedingly likely to not be you, and none of them are offering their services to you.
You're right in that most of the time, the directional probability of the market is close to 50% for a 1:1 trade.
There are instances where the directional probability is significantly above 50% to make a trade have a positive EV (if it's not 1:1, the baseline is not 50%, and there are similarly moments where the directional probability for a different risk-reward is above its baseline for some direction). Different strategies tailor to different RRs, but you can absolutely find those entries.
However, as you said it's easy to get caught up in the illusion of profitability for a given market condition. For example, in a strong bull market like the post COVID stimulus, you could trade to the long side in a large timeframe and just win money because of the anomaly of such a protracted spike in the daily charts.
That's not a sustainable strategy though which explains what happened to your friends. A price action system that takes into account markets structure works in every environment, be it ranging, surging or a bear market.
Learning price action TA takes time to learn though, it's a skill like when we learned to code till the time we got paid for it. And trading, in general, goes against how our brain works. Psychology is the great barrier to profitability once you have a strategy. It explains the high failure rate. it being a hard skill is why there's so few people doing it, But it's not because it needs a very high IQ or Rafa Nadal's strength of mind. Most people could get there, but it takes a lot of effort, and theres so much deception and scamming around it, it's easier to pretend it's impossible based on the amount of people that fail.
It boils down to "the market is probabilistic and you can't know for sure it won't get impacted by things" but if TA gives you even a couple % edge (with black swans averaging out in both directions) it would have been worth it.
I don't employ any technical analysis in trading, nor am I a strong advocate, but technical analysis is more about reactionary psychology than about predicting the future. In the most micro sense, the market is dictated by single individuals buying and selling stock, and in the broadest sense, it's a statistical result of millions, or billions of unknowns. Those are two totally different games.
I've used it for years and had very good success when I was actively trading (traded longer timeframes. Usually made weekly/monthly trades) to the point I was able to live off of it. The last couple of years I've taken off from trading to focus on developing my business, but will likely jump back once that launches and is in a good enough place, as it's both a time and emotional drain.
... when you draw the figures use in technical analysis, the predictions will depend on the relative scales you choose for the x- and y-axis.
Case closed.
For example, I'll listen to an earnings call or other investor presentation to determine if I even want to do business with some corporation. After I have committed to my decision to purchase based upon DD, I might look at how the market has historically treated their business up until today to develop an actual strategy for acquiring a position (or more of a position).
The most recent instance of this for me was AT&T and Verizon getting bad news raked over the coals last week. I already know I want to be in business with these organizations (already am), so I looked at how the market was reacting in near-real-time to the news and adjusted my cake-eating strategy accordingly.
Ultimately, the outlook you are working with is what will drive all of this. I don't ever sell stock. If I decide to buy something, I know I want to hold it for at least 3 years. Never selling and strategically buying seem to be a simple rule for not getting fucked over with how investors typically try to use these tools.
The least tortured analogy I can come up with is to compare pure TA investing strategies to poker. Is it gambling? Kinda yes. Is it also strategic? Maybe also yes. Really depends on the context and mindset of the participants going into it.
Spoilers: The math shows TA's bullshit.
[1] https://users.math.yale.edu/users/mandelbrot/web_pdfs/getabs...
That is, since everyone knows that everyone knows about technical analysis, the value it may have had is long since sucked out of it. And in any submarket where a participant has the market power to paint the tape, all following technical analysis will do is allow then to make traps for you and drive your trading activity in response to the technical analysis.
It is possible that super-long-term technical analysis has some meaning, and there's some generalized principles about how to read things like depth of the market off of the tape, but I'm not convinced deeply about the utility of technical analysis in general.
TA would never grow large enough to compete with the institutional investors who are actually driving the market, it would never gain pricing authority, and the gains would continue to be available to anybody playing in the margins.
As an analogy- you could say that you're scavenging for scraps behind a big fish. Sure, it doesn't scale. And sure, not everybody can do it or it would fail. But, if there are enough big fish, and you don't mind waiting for scraps, there's food to be had
Note that this is no argument for or against TA, it may still be bogus. I just don't think you can assume it's bogus because it would get priced in
In general, investment discussions on HN are very shallow.
Is there some investing discussion forum on the web with substance?
So, it’s hard to go beyond shallow advice without everyone screaming about the latest bubble.
> Is there some investing discussion forum on the web with substance?
I've personally searched for something like this quite a bit in the past and I think ultimately it's the wrong question. It seems to me that a forum of people discussing stock market dynamics is always going to be doomed from the start. I think that's because the ideas actually worth discussing are too complex for even people with above average intelligence/capability.
TLDR: In my opinion, there's basically no where on the internet that you will find an "edge". All of the discussion is too shallow.
Assume that there are ultimately just two approaches you can take to financial trading: fundamental analysis & technical analysis.
Fundamental analysis is almost a solved problem. This is why stock picking is so hard and Warren Buffet types are so rare. I think this is because FA is infinitely more understandable than TA. Companies are evaluated based on their balance sheets/cash flows and compared to peers. It's not simple per se, but it's the sort of thing most people can grasp. It's well established that beating an index fund is difficult and that most stock pickers will not beat an index fund. Investing forums are full of people thinking they will be the exception but we know that most of them will underperform the benchmark.
Then there's technical analysis. Technical analysis of any substance requires a very strong mathematical background. The original post only mentions moving averages. That's essentially a pre-school level understanding of TA and I have strong doubts that a moving average strategy has ever been profitable. Basically any strategy that involves buying/selling based on a moving average or one of it's cousins is more shallow than astrology.
A more advanced practitioner of TA might get into pairs trading/statistical arbitrage. In developed markets (stocks/forex), an individual cannot succeed at this even if they understand how it works. It's just too competitive. Just a few years ago you could be profitable doing this in under-developed markets (.e.g crypto) but I'm not confident an individual could compete in crypto markets anymore.
Then there's even more advanced strategies that are employed at places like Renaissance Technologies. The people that work there tend to have advanced degrees in math/physics.
If you see the most fitness and nutrition advice, and you go through it, most of it sounds like pseudo science that would never work. Yet if you go running in the morning, most parks around your home will have these people who are very fit, eating the right things and doing the right stuff.
Its just doing all of this is hard, painful and demands some serious discipline on the very long run. This process in essence now acts as a filter to 99% people out there. Among the 1% degree of success again varies based on other parameters(timing, luck, overall effort in continuous improvements etc). By the time you arrive at 0.1%, the process basically acts as ruthless filter to eliminate people who just can't measure up.
So many times the what works, can be easily learned and known. Doing it, is just a whole different beast altogether.
(That particular strategy doesn't work anymore)
To do well in quant finance you need the same intuition and talent as a reinforcement/probabilistic learning practitioner — good grasp of statistics and instinct for complex systems with feedback loops like differential equations and dynamics. Market making for example can be formulated as a bellman equation.
I don't know why they are somehow focused on counting green days vs red days, as most of today's market volatility is outside of the trading hours.
That isn't to say that you cannot use mathematics to glean useful information about the future. The medallion fund exists. People are doing it. But you're going to have to get very, very good at very domain specific math involving statistics, signal theory, information theory and the like, it's much more involved than TA, theres a reason quants make 7 figure salaries, you're not making useful predictions drawing triangles on a linear price chart.
Looking at both side to side shows how much the materialists influence places like this.
1. Astrology is seen as a "womanly lowly thing", but this has no people yelling such sexist connections.
2. Astrology has the underlying Hermetic beliefs that "As above, so below" and to know thyself, whereas this goal is "make money machine go brrr"
3. Astrologers/diviners know their art is imprecise and say so, whereas this Technical Analysis shrouds itself in "hard math badly applied" to fool people (including themselves).
4. The Materialists (anti-religion, anti-occult, anti-mystic) are absent, whereas in the Astrologer thread they were HOWLING.
It's a simple reality that you can't just trade shares based on technical analysis alone. You are trading in a company, so you can't ignore what's going on with the company or the regional market.
The only place technical analysis might work is the forex market. Because the volumes are so enormous, and there is no centralised exchange.
But even then, you're still at the mercy of world events. Look what happened when the SNB pulled the peg on CHF overnight[1].
Sure the HFTs and Quants do it, but they do it on minuscule timeframes, and they have an enormous budget and even more enormous risk appetite.
As the old saying goes. Time in the market is better than timing the market. Oh, and "only invest what you can afford to loose".
[1] https://www.reuters.com/article/us-swiss-snb-brokers-idUSKBN...
Currently, the random walk hypothesis remains just that - a hypothesis. There is no definitive evidence to confirm that the stock market operates in a random manner.
On the other hand, many believe that there are some long-term patterns and invest huge chunks of money based on that belief. For example, one such belief is that the S&P 500 will continue to have an annual average return of something between 8% - 10% in the decades to come.
If the movements in stock charts, including ETFs like SPY, were truly random, such a pattern could not exist. Consequently, our expected average annual return from the S&P 500 should be 0%. This is because in a genuinely random environment, the likelihood of a rise and a fall would be precisely equal.
First, no system is perfect. If you're a trader, you want something that will shift your odds from 50/50 to 55/45. Can some forms of TA do that in certain market conditions? I believe so. When the market is driven by certain factors, say, retail traders, TA likely performs better simply because other people are using TA. Doing TA can tell you what the morons are doing.
Also, I believe it was "The Long, Good Buy" book which covers the advantages of mean-reversion strategies and provides backtested analysis. If a stock moves by a large amount in a short period of time, it will likely mean-revert somewhat and you can take advantage of that.
Do I think any of us computer folk should mess around with this? No. The best trade is to improve your skills and get pay raises.
What I was trying to convey is that folks shouldn't be looking for a 100% win rate, and not achieving that does not make a strategy a failure.
https://www.bloomberg.com/news/articles/2020-06-03/bitcoin-b...
I wonder if the crossover strategy would still outperform (on a Sharpe Ratio basis) starting in 2005 instead of 1998.
I also wonder if the crossover strategy would fail to outperform (on a Sharpe Ratio basis) once transaction fees were considered.
E.g. a major player rebalancing a position created distortions that allowed much smaller players to profit, but no distortion on the scale that would allow others trading at major volume to profit
It's an area of active research:
> Students of financial economics have largely attributed the appearance of momentum to cognitive biases, which belong in the realm of behavioral economics. The explanation is that investors are irrational,[4][5] in that they underreact to new information by failing to incorporate news in their transaction prices. However, much as in the case of price bubbles, other research has argued that momentum can be observed even with perfectly rational traders.[6]
* https://en.wikipedia.org/wiki/Momentum_(finance)
* https://en.wikipedia.org/wiki/Carhart_four-factor_model
Though the market, size, and value factors appear to explain >90% of returns (at least using US data):
I'm a bit blunt because of this, but you have to remember that calling "SMA crossover" TA is like calling setting up the washer "programming" it and equating it with programming in a software developer sense. And both are available to a wide population! Guys, there's much more to TA than that (and similar super simple strategies that just rely on no or very simple market structure).
I just had to reply. Someone down there said he spent time and said no indicator will reliably predict price. Forget about magical indicators, agreed. I have proved TA to myself, but it doesn't look at all like what the article or many of the comments describe. It's one TA system of many, though.
I'm happy to answer questions if anyone disagreeing has any. I may not be able to do so for a broad variety of scenarios, since I'm talking specifically about day trading, but the "patterns" (it's not just patterns, it's patterns in a market structure context where you get the alpha from, otherwise I understand the "astrology" analogy presented here) apply to longer timeframes as well.
A strategy that is based on pure chance is going to make, on average, as much as the "buy and hold" strategy, for the time you actually hold the stock. Looking at the "SMA crossover" graph, it looks like the stock is held for about 80% of the time, so, the result is about 25% better than 100% "buy and hold". Good but...
The "moon phases" technique gets zero benefits even though the stock is held for 50% of the time, seems bad right? Now think about it, if it made nothing during the time you held the stock, it means all the valuation must have happened during the time you didn't hold the stock. So all you need to do is to do the opposite of what is suggested: buy on new moon, sell on full moon. In the end, you should get as much as the 100% "buy and hold", but because you only held it for 50%, it is actually twice as good.
So to summarize, here is the ranking. The number corresponds of how much better it is to "buy and hold":
- buy on full moon, sell on new moon => 0
- buy and hold => 1 (reference)
- SMA crossover => 1.25
- buy on new moon, sell on full moon => 2
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
If you just want to have fun (5-10% of your assets/portfolio), then just have fun.
tl;dr: Don't. And if you do, don't tell anyone about it or it will go away.
And then read (original co-author) Graham's last published interview ("A Conversation with Benjamin Graham", Financial Analysts Journal, September/October 1976):
> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
* http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Ben...
There is probably even more "enormous amount of research" going in the decades since he said those words. Hedge funds are using satellite imagery to get an information edge:
* https://newsroom.haas.berkeley.edu/how-hedge-funds-use-satel...
* https://www.theatlantic.com/magazine/archive/2019/05/stock-v...
What are you, as an individual investor, doing to get an edge over other market participants?
With a much smaller portfolio it is a lot easier to be more nimble, but you're going to spend hours researching things. If you find that enjoyable, go nuts; but for most folks the market returns of index funds will probably allow them to meet their financial goals (e.g., retirement nest egg), and so IMHO the time is probably better spent with family and friends.
Other than that, its pretty much as useful as tarot cards.
To be fair, there is no reliable evidence that anything really generates alpha (efficient markets, random walk, etc), but there are hedge funds who consistently outperform (Renaissance, Two Sigma, DE Shaw, etc).
So, maybe there are things that work in practice, but there is no way to produce reliable evidence that they work besides looking at track records...
Of course, there are also persistent rumors of insider trading. Maybe just sour grapes from inferior traders, but who knows?
A lot of technical analysis's value, in the sense that I understand it and believe most retail traders use it, is based around predicting intermediate timespan market changes to time trading. It's less about beating the market and more about taking its pulse.
Looking at TA statistics generated from daily, weekly, and monthly points, effectively aren't those momentum? Which collapses the question down to "Do stocks exhibit momentum or not?"
Look at it this way. TA is fundamentally a matter of pattern recognition. If it actually worked then you could program a computer to recognize the patterns and automatically put in trades. But if everyone does that then any profit opportunity is almost instantly arbitaged away, and thus TA quickly stops working (if it ever worked at all).
Technical analysis is just one tool to pick potential stocks out of the many. The real money is how well you manage your risk on that particular stock you pick.
Shameless plug. I recently did a "Show HN: Weekly Charts of Strong Stocks and ETFs (https://weeklycharts.org)", which do the same thing like technical analysis. Its main purpose is to just show you potential stocks that need attention.
The hard work is risk management.
Why do people bother writing blog posts void of insight? This isn't even useful for SEO...
Also, this is a really pitiful article. Very short, badly written, proves nothing. Why is it getting this many upvotes?
Actual TA is based on human psychology. Imagine a lot of people are buying at $1 and price pumps and then drops. Now imagine the price moving towards the $1 again. There is a high probability (not certainty) that price rejects that price point. There will be people who want to get out at breakeven because they didn't have stop losses.
So the question of whether technical analysis makes money: Yes, for the right people it does.
As a long time trader and markets practitioner, I can also tell you that YMMV with technical indicators. Because many people use them, they are self-fulfilling in a way. The signal exists because people think there is a signal.
Another way to think about it, is technical indicators can be generalized to other well known price-based or volume-based indicators or factors such as momentum, reversion, etc... Understanding how volume interplays with price is also quite important. Big price moves with little volume may not have support. Technical indicators aren't bad. For "visual thinkers" it may be a great way to segway into a more "closed-form" solution or explanation of how a particular market works.
Also, to the folks who are poo-poohing the "simplistic" blog post: yes, the analogy to astrology is a bit contrived. But the point on using SMA for better risk-adjusted returns is excellent. This would be a great foundation for building a higher-Sharpe S&P-like replication strategy.
[1] https://ir.nasdaq.com/news-releases/news-release-details/nas...
Using TA, we can better determine when a stock is in the process of becoming more valuable aka trending up. We also can observe when it's likely that a stock will not become more valuable (the top) and even when a stock is likely to become less valuable (trending down).
Things like moving average crossovers might work for some people. I'm sure there are people out there that swear by the MESA Sine Wave or some obscure study like that. Personally I've had more success just keeping it as simple as possible, and that's what you might find in Stan's book (which is not a referral link, and I'm sure you can find the information elsewhere).
This works because of Efficient Market Theory, which I do subscribe to. It doesn't invalidate other means of choosing investments, but for certain minds, it provides a good framework for making decisions. That's really why I'm confused about all the hate for TA in here: I was under the impression that hackers like to make decisions based on data. Maybe WallStreetBets has given it a bad name or something.
1) Buy the S&P500 via a very low cost index fund. Buy consistently, effectively cost averaging, over the long-term. Don't worry about valuations, timing, bulls or bears, recessions or euphoria, as that will all smooth out. Just keep buying over time. This is what works best for ~95%+ of all people and is one of the few ways to predictably build wealth (assuming enough income above expenses over decades of time).
2) The Ben Graham school of value investing. [1] This some takes time to learn and integrate. You have to build up a skill at understanding what represents a good value and you have to be able to have considerable discipline, understanding that you only need a few hits every so many years to fairly rapidly compound capital (ie that you don't need to constantly hit homeruns, so you properly grasp that you can safely afford to be patient and do not need to FOMO participate in market stupidity; with the first rule being do not destroy capital).
This is why so few professional money managers on Wall Street can beat the market over time (despite all they have access to) and skilled independent value investors can. There is a system that works and most of the Wall Street players do not have the time (they want/need results asap) or discipline to put it into action.
[1] The Superinvestors of Graham and Doddsville [PDF] https://www8.gsb.columbia.edu/sites/valueinvesting/files/fil...
Perhaps the way most retail investors or get-rich-quick schemes use technical analysis (looking for patterns in charts) is astrology. But the big boys and institutional investors seem to profit from certain types of technical analysis. Highly reccomended watching this video by Benjamin: https://www.youtube.com/watch?v=ZN6P9ErUcOg
Essentially:
- Chart patterns are uselesss
- TA by itself is useless
- Using TA in tandem with a bigger strategy can (and is statiscally shown to) provide an edge
[1] https://scholar.google.com/scholar?hl=en&as_sdt=0%2C22&q=Hea...
But what people usually mean using TA, IMO does not work at all.
> The strategy goes as follows: we purchase SPY on a new moon, and re-sell it on the next full moon. And repeat that every lunar month.
> Clearly, it fails at beating SMA crossovers. Or at doing basically anything, an investor using the moon phase strategy starting with 10.000$ would end up with only 11.110$ and a Sharpe ratio of only 0.09.
Under EMH, technical analysis doesn't work, and under technical theories there's no reason to expect a wax on / wane off strategy to do anything. Our strong assumption should be that a strategy that has you in the market 50% of the time should produce 50% of the return with 50% of the variation.
However, this arbitrary control strategy instead provided a strong return difference, somehow avoiding most periods of growth. If this backtesting period gives a false positive signal that this strategy differs from no strategy (appropriately weighted in-market investment), then the period is also likely insufficient to confirm the strength of the crossover technical strategy.
Instead, right after the debt ceiling, there was a massive short squeeze, parabolic AI tech pump, and we're at 4567 on the S&P.
As it turns out the people just trading off momentum, technical analysis, and liquidity expectations, did way better than those betting on certain industries to go down. Sure, it can still go down, but there are plenty of money managers, macro experts, that looked at the big picture based and made data driven decisions based on historical data, and still got completely burned because they were trading against the technicals (massive upward momentum since after October).
Traditionally, the homes and farms people earned would ultimately have better returns for individuals, but the primary mechanism was controlling for inflation and excluding debt bleeders on equity. These systems were slowly converted into commodities through investment hedge-funds, and are now the primary driver in speculative-markets (2008 crash mechanism was never mitigated). See Japan real estate if you would like to predict the logical conclusion of the naive commodity theory.
When one has the epiphany debt has real consequences despite the political rhetoric, Your investment risk profile will improve, and seeing currency in a global trade context becomes clear.
Rule #13: "Never reach out to a drowning man", as in their desperation they can push you under as well.
Good luck =)
Much like it’s important to always say to your crush that you are the most compatible sign.
All sorts of BS narratives dominate the stock market, TA can be thought of as a meta-narrative.
Some quant hedge fund understood that sunny days in Manhattan are correlated with the market going up, TA could be the same, if some particular chart figure emerges then it prompts people to buy or sell thus creating the same effect of a sunny day in Manhattan.
logically speaking both the sunny day and the peculiar TA chart appearing should not prompt people to buy or sell a security who are we to question their psychology? And most importantly why question it when we can exploit it?
Other people would turn around and exploit our psychology when being in a good mood due to having made money on the stock market exploiting the TA meta-narrative , people in a good mood are notoriously more likely to spend on stuff and even overpay for it
TA ultimately is supposed to give you insight into how the overall market is currently thinking about a specific stock. Of course it doesn't work by itself, because yes, new info changes attitudes.
And yes, some heuristics are worse than others. Some are more sophisticated than others. But they help paint a picture.
Sometimes, the picture is "hey, the market seems currently full of people making irrational decisions, they all disagree with me". That's a signal you look at your fundamental assumption to figure out if you're the fool, or they are. That's where TA makes sense. It's a way to highlight where to look, not a way to make decisions.
In the complete absence of any other analysis? Probably not so much. Though I'd certainly love to see more thorough backtesting than one stock, one metric.
Hell, stock indices which we all take for granted today were largely created because it was so difficult to know at a given moment what the overall market was doing and tabulating those was a ton of work by today’s standards.
But now technical analysis has been democratized and everyone has access to the same indicators. So the value has been destroyed.
This brings me to a larger point. Markets are constantly evolving to take what used to be hardly noticed and difficult to understand and make it the focal point of everyone after it works. But people fail to realize that because so much attention is now placed on it that it changes the market in the process so that that thing no longer has significance.
One recent example- the fed used to not even tell you that they had changed the fed funds rate! So some clever market observers would follow the prime rate and figured out that there was a relationship between that and the stock market. Eventually everyone caught on and so the fed itself became politicized and so now they telegraph to the market what they’re going to weeks and sometimes months in advance. So what the market might only begin to price in after like a rate hike now gets priced in months before they start hiking. This has caused market cycles to be thrown out of whack and very few can make sense of it because they believe market should continue to behave with similar timing as before.
Oh no, the Efficient Market Hypothesis strikes again!
It all stems from this delusion that everyone else is dumb when in reality most people are following the path of least resistance, they just don’t realize it.
People seem a little smarter than they used to be (or they just bought crypto), so it doesnt work well now…
> My only concern about empowering individual investors is that when you invest as an individual, you are entering the fieriest, gladiatorial arena ever invented and you’re competing with highly incentivized participants around the world who are out for your lunch and going to eat it if you don’t have an edge.
It seems profits are possible with technical trading; it's just that they're zero sum, and there are extremely few (although big) winners.
This numberphile video gives an interview with someone who was successful at it:
https://www.youtube.com/watch?v=gjVDqfUhXOY
[1] https://tim.blog/2018/06/22/the-tim-ferriss-show-transcripts...
* https://www.penguinrandomhouse.com/books/557104/the-man-who-...
* https://www.goodreads.com/book/show/43889703-the-man-who-sol...
A quant trader analyzes real world events, both inside and outside the market, to predict stock prices. This is a proven and successful strategy, and in some ways it is essentially automating what people already do with fundamental analysis, just getting an edge by being faster.
Technical analysis involves looking at a single data point – the past price and volume of a stock – and making a future projection.
When a company releases an earnings report a quant algorithm will analyze it and make trades before you can even click on the link. A technical analyst deems the earnings report useless. Where the stock will go depends on how it has traded for the last N periods, nothing else.
You're being very loose with language here, to the extent that your entire point is suffering.
Systematic Market Trading (the sole strategy of the RenTech and Two Sigma's of the world) is almost exclusively trading on systematic market data that is largely neutral to the underlying tickers. Sure, they'll do some Alpha Factor modeling in some trades, but look at the CV's of the people that work at those shops and you'll see people talking about modeling momentum, crowding, pairs, etc.
Speed matters in the sense that you're operating in an adversarial market, but plenty of quants just have better ideas (I think you're confusing market-making HFT with quant - they're related but separate things)
Fundamental analysis is a completely different ballgame where the ticker does matter. These are the Citadel Equities, Tiger, Coautes, etc. of the world that emphasize the value of a human stock picker over all else (they have small quant trade execution teams, but it's a rounding error in terms of headcount).
>Technical analysis involves looking at a single data point – the past price and volume of a stock – and making a future projection.
If this is how you define TA, then sure, that's not what Systematic Trading is, but that's not how most people define TA (The most common example of TA is a form of momentum trading).
>When a company releases an earnings report a quant algorithm will analyze it and make trades before you can even click on the link. A technical analyst deems the earnings report useless information. Where the stock will go depends on how it has traded for the last 3 years.
This is a gross mischaracterization. Some quants do NLP and sentiment analysis, but that is a small part of the landscape.
> Looking at the patterns of prices, I could see that there was something to study, maybe some ways to predict prices mathematically and statistically.
And shortly after he speaks of doing way with 'the fundamental stuff'. And also:
> Gradually we found more and more anomalies, and you put together those anomalies and you get something that predicts pretty well.
I guess you're right and I misinterpreted the comments made in the video to mean he finds mathematical patterns in the price/volume data. But now I revisit that evaluation I think it's almost certainly wrong; he almost certainly would use other data too (I mean, why not use everything available to you). It makes sense that he's probably using many, many other data sets and not relying on price/volume alone, and hence it's probably (almost certainly) not technical analysis.
Thanks for the correction.
^ 2007 Cramer spilled the beans
However it has to be done in a statistically sound way. Just showing a backtest that makes money or beats the market is not enough evidence.
Disclaimer: I would not advise you try it as a way to get rich quick, but it's fun to read about!
> Stock price movements are literally text book examples of unpredictable (or more specifically, random walk)
I never understand the above.
How is this possibly true on long time scales?
I can say with relatively strong confidence that Tesla is going to be worth more than $1 trillion in three years.
In March, it was clear NVIDIA would boom in the scale of one year. Just, nobody knew how soon and how fast.
So the walk is not random in these cases...
So in what way are stock prices a random walk?
Is the walk pseudorandom?
Random with a bias?
Markets aren't easy to predict (that's why people who DO predict them correctly make bank) nor are they rational.
TA can provide historical reference points, sure, and in some cases can indicate that something is likely to happen (to a degree, anyway), but cannot accurately predict anything consistently.
This article is a bit misleading. Nobody trades on a TA alone ignoring the reality around. That just doesn't happen. TA is an indicator, a raw information. It's up to you what you make of it.
Also: the cross SMA strategy the author mentions is indicative of one of the basic forces of market and works very well on certain markets.
Also: nothing actually works on SPY, it's the most efficient market there is.
It seems short term efficient but over the longer term there are periods where putting all your money into it are in fashion and periods when the public are wary of stocks.
“tendency to perceive meaningful connections between unrelated things”
Jokes aside, I'm only betting on stocks that im familiar with (e.g my hobby industry)
This is potentially the most valuable advice in this thread. If you invest in what you know, it will be a lot easier to stomach downturns and other unexpected events. This is the only reason I held AMD through a few painful phases. I was 200% convinced their architecture would make all the other news irrelevant.
But I think its more interesting to find the least bullshit aspects of TA. Its not clear what constitutes technical analysis. Momentum is a real signal that can be seen on a chart. If you trade based off momentum is that TA? Momentum trading can be effective.
I almost feel like the simpler the TA concept, the more beneficial it is. But then it’s arguably less of a TA concept.
I think this type of calculation is valuable exploration for anyone to try out if they are interested in investing, and is a great way to get some hands-on learning with real data. I'm glad for the author and for anyone who reads this and decides to replicate it or extend it for their own practice and leaning. It's just that the results are not notable in the slightest.
Though it's a rare counterexample to Betteridge's Law of Headlines!
When I can draw lines, which are called channels iirc, and the price follows that channel over time, it's already more accurate than astrology.
When time passes and I can copypaste the lines to a newer structure (that came later) and the lines fit the new structure just as much, it's already more accurate than astrology.
When I can see that a repeating pattern exists, which repeats itself on a bigger time-frame, then it's already more accurate than astrology.
When I can watch good analysts (not the assholes on youtube who just bait the dopamine-addicts/greedy into watching) continuously doing TA properly up to the point where most of the things they predict are likely to happen, then that's already more accurate than astrology.
Of course it's not exact. Outside influence can throw it all off. That doesn't mean that it's wrong, things simply change.
Anyone talking about TA without understanding that it has value, either never did TA, or was too dumb to draw a few lines and compare patterns.
All of this works, to the degree it does, because most of the trading is done by bots, which all more or less orient themselves around the same data. As long as everything goes smooth, TA is extremely usefull. When something happens that throws everything off, it's back to the drawing board.
Back when LUNA crashed, Binance pulled it from the exchange. I thought that wasn't right ... simply too soon ... and got ready for when they'll bring it back. They did. With TA I made 1200+ in two days of trading LUNA, because price movement was entirely predictable.
I have no idea what's wrong with the people who shit on TA. It works to a certain degree and that's all that matters. All this yammering about it reminds me of children who don't know what they're doing, which causes them to shit on it.
It would help a lot if people were capable of recognizing when they're listening to someone who they shouldn't listen to. There's too many assholes out there abusing the simple minded, who happily listen to them, because the assholes them what they want to hear.
https://youtu.be/Q2u0dKRA1cA?t=1216
"Never send a human to do a machines job!" (Agent Smith)
And lest you think I am off some examples:
The diet and nutrition studies constantly getting pushed are the new fertility rituals, and the last one didn't work because it didn't please the diet gods, but atkins, or paleo, or weight watchers, or whatever will really work this time.
Econimics is worshiping the god of the harvest to ensure a bountiful crop, and when their predictions fail to come to pass, it's because the goat entrails were read wrong, or the math was off, never because the whole thing is useless.
Psychology is self evident if one examines the replication crises.
The point is we aren't really that much superior to the ancients in many ways. Sure we've figured out some of the fundamental laws of nature and are able to use them better, but that's mostly been the work of a few geniuses over the past 400 years and much less because we as humanity are far superior.
Full link: https://reddit.com/r/algotrading
Intermediate: "technical analysis is total BS!"
Pro: "technical analysis is legit."
It took us years of 80 hour weeks to become consistently profitable at Grizzly Bulls, but the result is quite satisfying. Our top model, https://grizzlybulls.com/models/vix-ta-macro-mp-extreme, has produced +17.92% returns since launch in January 2022, vs. -4.15% for the S&P 500 over that same time period. TA plays a role in timing swing trades / hedges once other indicators align.
By allowing the money to be in the market only 1/2 the time, it will not do as well. This is common sense to anyone who understands even the most basic thing about markets.
I’m having trouble figuring out what specifically people are talking about; but everyone has apparently strong opinions on the subject.
So either:
a. HFT firms are already doing this and what the retail trader sees is the left-overs with little profit left to capture.
b. HFT firms are not doing this because it doesn't work.
Neither option bodes well for doing retail trades based on TA.
The main focus is on being able to outrun not just you, but also everybody else, hence the focus on latency. The next problem: which bakery to target first is where there is some analysis involved.
Very odd overall
A thinly traded device maker called Signal Advance soared for the third consecutive trading session after Elon Musk said to “use Signal,” even though he was referring to a messaging app that has nothing to do with the company.
https://www.cnbc.com/2021/01/11/signal-advance-jumps-another...
(The answer is Yes)
https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headline...
I've been actively trading nearly every day for the past 6 months and can tell you there are people who extract profits from the market every single day (I'm not one of them yet, but I'm at least modestly profitable the past few months). Being profitable every day can ONLY be done using technical analysis. You're not going to profit every single day doing intraday trades on fundamentals. People think 'technical analysis' is as simple as what this blog post mentions - using something as rudimentary as SMAs. Unfortunately, this is case for most people. Come back when:
- you know what auction market theory is (AMT)
- you know what one time framing is (OTF)
- you know what delta divergence is
- you know what poor market structure / single prints / excess all are
- you know what low / high volume reversals are
All these are NOT fancy indicators or contrived signals but are quite literally real structures and residuals of actual BUYERS and SELLERS in a market (i.e. exactly what a market is, NOT astrology!) that can help show where the markets MAY go (of course the future is never certain)
Further more, you have to synthesize the context of all of these things in real time as the session unfolds and block out any of the emotions or psychology of putting money on the table entails! To get to this top tier (being profitable nearly every day) is as hard and takes as much time as any other performance profession (athletes, sales, etc.)
Of course you're going to have an extremely bad time if you try and implement something like a SMA crossover!
Think of it this way: any automated technical strategy you can think up within even a few days of effort have been done over 1000 times by every financial firm on the planet - and you can guess they don't work - if they did there would be a lot more billionaires on the planet! Most of the automated strategies that are actually profitable are designed by engineers with the help of decades+ traders who have been consistently profitable. Even then, you'll be lucky if in a raw win/loss ratio is over 50% (but this gets into expected value of the trade, etc. too long to post about here, you can be profitable with just a 30% win rate, for example if you're reward to risk is 2:1)
Anyway, thats my 2 cents from someone who trades with real money on the line. It's probably pretty easy to say that TA is made up and use it as a scapegoat when you YOLOed a bunch of money on GME and lost it a few years back.
1. The dollar is a mildly inflationary currency, by design. (though recent events show us that sometimes it is more mildly inflationary than others.) The fed engineers the dollar to be inflationary so people don't park their value in dollars in bank accounts. The modern concept of a currency is that it circulates. Liquidity is generally believed to be good for an economy. So... over the long run you'll always have inflation that, all other things being equal, will cause security prices to go up. I think that part of econometrics is not astrology.
2. Many of the metrics people commonly use, notably the previous 30, 90 or 180 day averages and when they cross each other are tied to real events. Publicly traded companies publish quarterly results, so it always seemed to me that these averages have something to do with the aggregate sentiment regarding a security's performance (i.e. - the wisdom of the crowd will lift or lower a security's stock price based on the crowd's aggregate interpretation of the quantitative and qualitative aspects of that company's behaviour.) Does this mean it's a science and not astrology? I say "Largely, but not completely," as there are still numerous fools out there. And maybe there are whales out there trying to tilt the market for later financial gain? And sometimes people are just wrong when they interpret a financial statement.
3. But there are higher order effects. Everyone seems to know about basic quantitative measurements and it's not hard to find people to analyze a security quantitatively. So... if everyone is using the same metrics, then shouldn't everyone come up with the same buy/hold/sell signals? Of course not. Not everyone has the same risk profile or understanding of the context of the markets (i.e. - you don't have to be an insider to know what the macro-economic situation is, and there are a lot of insiders.) That part of technical analysis may seem like astrology because people are telling you what they think will happen based on their own view of the market, the economy or a particular security, but they're not telling you how they came up with their analysis criteria. I don't think it is astrology, because somewhere, someone is making a decision based on what they think are rational reasons. But you don't know what they are, so like an astrologer of old, you're left trying to decipher the relationship between causes and effects and people often see relationships between the two that really aren't there (especially if they have small data sets.)
4. And there are probably some people out there who are buying/holding/selling at random. Maybe there are enough of them to affect the popular technical indicators.
So... is technical analysis just stock market astrology? No. Not at it's core. But without sufficient information about what market participants are thinking, it may be indistinguishable from astrology in many cases.
I really don't understand how, decades after "A Random Walk Down Wall St." was published, there is anyone who can take any sort of "stock market analysis" seriously.