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).
The entire idea behind technical analysis is that it's a self-fulfilling prophecy. The more people believe in a certain rule, the more that rule turns out to be true.
It might work that way with astrology too, but it's not so clear.
Astrology would be a self-fulfilling prophecy if enough people took it seriously.
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.
There is a good example of this in Ancient Rome. By around the time of Augustus Romans were fervent believers in astrology. One of the most notable cases of astrology becoming a self-fulfilling prophecy has to do with the death of the emperor Domitian.
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.
Chinese "sign years" are a good example where it seems not to shake out. There's a 12-year cycle between repeating signs, but it doesn't seem that every 12 years you get whole cohorts of specifically intelligent/kind/diligent/cunning/lazy/science-loving/humanities-oriented/whatever children in a given school year, which will nearly universally be composed of only two star signs (Chinese New Year falling about halfway into the school year). It's even more obvious on the 60-year "element-animal" cycle that the world doesn't go 3 generations between people having "fire dragon" or "earth horse" characteristics.
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.
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.
If the Santa Clause is null and void in your belief system, other Clauses, including the Presents Clause, remain in force to the fullest extent possible.
Instead of intruducing "Presents Clause", I think you can extend the "Santa Claus" concept to have several layers of meaning. Presents is one of those layers, but there is also tradition, coziness, familiarity, excitement and playfulness.
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.
My formulation makers fun of typical commercial license agreements.
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.
> 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.
It's definitely not the entire idea. It plays a part, but that's just human psychology. The same reason that round numbers tend to act as support and resistance. These rules are not mystical; they are provable. There are a lot of metrics in Technical Analysis, and most of them I know nothing about. Technical Analysis doesn't claim to know the future (only the liars and fools), but embraces efficient market theory, which is about the present.
There is a well-worn joke in the economics profession that involves two economists – one young and one old – walking down the street together:
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.”
> “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.
You're proving the point of jjav. Jim Simons was an advanced mathmatician able to employ novel ideas to generate an alpha. Institutions with access to top level mathematicians and massive compute resources are still doing that.
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.
Replace the twenty dollar with the tens of millions at minimum if basic technical analysis (ie. dead cat bounce level stuff) is leveragable and yeah I think you have a pretty close approximation to reality: more likely you are hallucinating than you found $20 million on the street.
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.
It's kind of like "agile", "big data" or "AI" for tech managers.
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.
The article there looks at ONE use of technical analysis which is a moving average crossover. The nicest houses I know are owned by traders who know how to use technical analysis. it is very interesting that such an uniformed opinion is the top rated comment on YC tho.
I’ve always loved technical analysis discourse because it’s the starkest example of how to actually make money in financial markets, and that’s to actively cultivate information asymmetry among other market participants. If technical analysis were a successful strategy, it would, like most other techniques that can actually generate sustainable alpha, be a closely guarded secret. But it’s not. It’s something people shout about from the rooftops trying to get rubes to follow the bait. It’s the same kind of play as wallstreetbets, where you’re tying to increase the amount of stupid, predictable money in your corner of the market.
I think it’s more down to adverse selection… while some really smart people might be making decent returns via technical analysis or whatever, they’ll never disclose their strategies since someone else could frontrun them. Instead, the only strategies we get exposed to are the ones that don’t work, since the best way to make money on a strategy that doesn’t work is to find someone to sell it to. Like - it’s clearly possible to make money trading, because a very small amount of people seem to be able to do so somewhat reliably. But if someone is trying to sell you a trading course, they’re almost certainly more of a scam artist than a genius trading savant.
Not at all. Fundamentally, trading is a positive sum game.
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.
"The market" is just a set of order books. I don't find it weird that technical analysis work some times in some markets.
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.
> Fully systematic traders exist and make money. Efficient Markets Theory says they shouldn't, but they do anyway.
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.
They make money because growth. Any strategy that is not based on information asymmetry or unique clever use of information makes less than the market on average.
There's plenty of trade secrets in TA as well though. A lot of it comes out because eventually it's beneficial to have fundamentals understood by a larger population so that there's a pool of people to develop the internal tools. Only some of the fundamental TA is common knowledge.
This is the correct answer. Selling "advice" and managing portfolios is by far the easiest legal way to make money on the markets.
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.
I always found it strange. You get to charge money win or lose. And then take percentage winnings... No wonder low fee index funds made so much sense...
Back when there were 20 hedge funds, all managed by geniuses, it was rational to pay for uncorrelated outperformance. Now there are 6000 hedge funds, but there aren't 6000 geniuses.
>The nicest houses I know are owned by traders who know how to use technical analysis.
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.
WSB goes to options. So you multiply wins, possibly losses or end up with nothing on your yolo bets as your options expire worthless... Like a casino...
To be fair, the fact that [some traders own nice houses] doesn't imply [technical analysis is a good method]. It's possible that the profit from this sort of trading is essentially random, and there are a few people that get a large profit from that random distribution. I've frequently heard this sort of argument, but I don't have the expertise to determine whether it's true.
The people I know with the nicest houses are doctors and lawyers. I don't think either of us have a large enough samples size. Those who do take a large enough sample will see technical analysis is just a rain dance.
I don’t know about the nice houses, but technical analysis has one thing in common with astrology: one can make a living selling the ideas to other people.
How do we even know how these traders make their money? Maybe they make their money through commissions, i.e. trading other people's money, who maybe believe in technical analysis. Or maybe they make their money through arbitrage or market making. Just because someone "knows" technical analysis doesn't mean they make any money doing it.
> nicest houses I know are owned by traders who know how to use technical analysis
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.
Actually it totally makes sense. Most people here are/will never be rich. It's the software equivalent of the business professor who talks a big game in class but has never made money or built a business.
> The nicest houses I know are owned by traders who know how to use technical analysis.
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.
> The nicest houses I know are owned by traders who know how to use technical analysis.
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.
Astrology has more of a culturally evolved or emerged nature. Of course, it's peddled by entrepreneurs who have an incentive to "make it up". Yet it's oddly coherent (with itself), at least from the POV of an uninterested person who encounters it a few times over decades.
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!" is an old meme. I think it might have originated from this video (but maybe it predates it): https://youtu.be/P47OC439x88
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.
Your going to have to define technical analysis for me. I'm questioning very heavily that we're talking about the same thing. You don't believe in trends?
In general the goal of trading is to know more than other traders.
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.
According to the efficient market hypothesis, information can only be valuable until there has been time for information to circulate through the market, and the market price to reflect that information. This seems to happen in under 15 minutes. That's why 20 minute delayed ticker prices are generally available for free.
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.
No, high frequency trading makes money via arbitraging across markets, market making, and some other strategies that make its actors come out ahead on average.
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.)
Not a 100% AFAIK, there's some sentiment analysis on news as well and I suppose every other piece of machine-interpretable piece of information one can get their hands on. Along with human guidance still.
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.
The biggest HFT firms are prop shops. They don't even have clients. There aren't any client orders for them to front run! You know not what of you speak.
This is the cheapest defense of HFT front running. Buying order flow and front running other people's clients is still front running. You see what people want, you get it faster and you sell it back to them after you buy it.
Yes, because it makes it very clear you have no idea of what you speak of, as you don't even know enough to use the correct terms for things.
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.
This is the same argument I've heard before. You give a narrow definition for front running and declare there is no front running by your specific and out dated definition that you set.
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.
What’s the big problem with calling other, problematic practices that are definitionally not front-running by another, less confusing name?
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?
What do you mean by "buying the order of somebody ahead of you"? Can you describe it in a bit more detail so we can see if there's an established name for that?
> people seeing orders and buying based on those orders before the original orders go through
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.
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?
Glad to see this is the top comment. It frustrates me to no end to see people lapping up TA like it is remotely useful when we spent our first semester on finance at university essentially disproving TA signals. It was literally Finance 102.
Does that mean you spent time in university "disproving" e.g. mean regression? Or was it some unrealistically hardcore definition of TA like "any given indicator taken in isolation should lead to profits every time?"
If you expected to learn useful finance at a university, you already failed as soon as you applied. If anyone there knew what they were doing financially, they wouldnt be there, and especially not teaching Finance 102. In case you were not aware, nearly all professors hate teaching lower level classes, so they naturally get forced on the worst performing professors (the ones that are closest to getting fired).
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.
If some version of TA worked, then as soon as enough traders adopt that version of TA, it would stop working.
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.
The fact that you think a finance degree is centered around trading stocks tells me all I need to know about you and your beliefs. And even on the topic of stocks/derivatives, are they teaching the wrong dividend discount model? Or the wrong black-scholes model? Did they get the equation wrong or something? Or are you just mad because they aren’t teaching TA?
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?
>>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).
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.
> Abstractions could be leaky but they work for the most part.
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.
Didn't Renaissance Technologies made all their money from technical analysis? Who cares if it is simplification of something, if your goal is to make money, not understand it.
TA means something very specific, its not a proxy for all quantitative analysis. Actors with privileged access to information and superior execution capabilities may from time to time "beat the market". The rest are noise traders that are just being systematically fleeced.
They’ve made their money through a combination of information asymmetry and gray-area or outright illegal practices (e.g. tax shenanigans). Their returns are literally unbelievable if they are operating within the bounds of regulations.
>Technical analysis is the ultimate dumbification of market structure and dynamics
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
Technical analysis is an insult to technology and should be rebranded to "untechnical analysis".
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.
A serious question now: if we take all the mainstream news articles (or headlines) for 20 years and correspond them to OHLC data with e.g. hour and day granularity timestamps, could some sort of AI make hourly or daily predictions?
If modern AI can generate average-human-like text and images, couldn’t it day trade as well?
Yes, the glut of websites with stock “analysis” or “news” is almost 100% automated based on a number of financial and technical measures of any given stock. They are, as you say, pretty much worthless.
Ah this is silly. Technical analysis hmis grounded in sone level of useful information and technique. But it is ultimately a game of informed guessing, so in that respect, its a bit like astrology
This feels unnaturally harsh and likely incorrect. You seem to be suggesting that statistical tools are useless at predicting trends in time-series data.
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?
> You seem to be suggesting that statistical tools are useless at predicting trends in time-series data.
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.
Textbook TA uses a lot of voodoo which, itself, is helpful for understanding market psychology. The fact that maybe 20% of market participants give significance to a simple moving average calculated from a certain number of days or weeks-- useful explanatory information!
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.
You have phrased your comment very carefully and I agree, sometimes there might be some value in looking at simple trends, if only for the reason that other market participants do the same.
> 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.
You seem to be confused between descriptive, predictive, and explanatory models.
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.
Stock price movements are literally text book examples of unpredictable (or more specifically, random walk) time series in university time series courses. A proper statistics course teaches you that you can predict with great certainty that the mean of the fraction of heads over many coin flips converges to 1/2, while you cannot predict anything about the outcome of the next flip. A good statistics course will also teach you how both can be true. TA is like trying to use statistics to infer something about the outcome of the next coin flip.
The standard model is not a plain random walk, but a random walk with drift. (Actually a geometric random walk with drift, but thats besides the point.) The drift term for the broader US stock market is usually assumed around 8% (long term average gain based on around a century of data). That works out to around 0.022% a day, which is not what TA traders are looking for.
Doesn't "technical analysis" mean pretending that you can ignore that it is Tesla or NVIDIA and just believe that the time-series itself tells you what comes next. I.e. you believe that there is some "nature" of stock ticker data independent of the financials and business environment of the particular company.
If stock prices are so easy predict, why aren't you putting your money where your mouth is? :P Or are you? Then I'd love to hear about that obscene fortune you've made so far. :)
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.
They may have missed it this time, but if you look at a recent stock market history, it was impossible to not make a fortune out of a pretty obvious portfolio. /s
> I can say with relatively strong confidence that Tesla is going to be worth more than $1 trillion in three years.
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.
Technical analysis is based on statistics the same way astrology is: that is to say, it incorporates some of the jargon and features shallow, surface-level incorporation and features. TA is worse because it affects more people.
While we should be sceptical of any and all "models" of reality, we can't lump them all together.
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.
Yes. Although you should never trade on TA alone, it should be a signal that you trade based on your risk analysis of the situation. TA of index etfs today is saying a buy or sell signal is imminent but risk is still weighted to the downside so I’m staying conservative until the market makes a decision.
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)
From the comments here, I think most people just read the headline.
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.
How many people really buy and hold and don't question their strategy when the 30%+ drawdowns come? We know sticking to your plan is key to long term success. Can the masses stick to simple buy and hold long term?
I don't know about how many people keep holding, but we just experienced a 30%+ fall in tech stocks (and 25% fall in sp500) last year. I held all my stocks because, well, what else was I going to invest in? And if I don't have a different preferred allocation, then I'm just trying to time the market.
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 held all my stocks because, well, what else was I going to invest in?
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].
I have your mind set now. But it took me multiple painful lessons over the years until the learning stuck :-) Luckily I was much poorer back then or I would really be bummed right now.
You don’t have to have a strong stomach if you don’t pay attention to the market. Buy and hold or “set and forget” are legitimately good strategies at least in part because of this reason.
Of course you also have to believe the theory of buy and hold is sound and likely to work in the future. I think that's another part of why I struggle with it.
I do think it's important to be aware of our emotions when it comes to money and investing. I've realized that I won't be comfortable enduring drawdowns much more than 20% and so I've found alternative strategies that let me sleep at night.
Your stomach should turn more by actually realizing those losses rather than just letting it ride.
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.
My thinking used to be this way but then I experienced some things in life that made me consider the non-zero possibility that something could happen to me that would require me to tap into retirement savings. If my retirement strategy involves waiting out large drawdowns, then there's a chance I would need to tap into my retirement accounts at the bottom of a large drawdown. I like the comfort of not having to endure large drawdowns for that reason.
Er, you’re acting like you have a choice here, but you don’t. You either endure the drawdown or you just straight up lose your money. You’re trying to say that straight losing money is better than not losing money, but that’s nonsense.
We all choose what investment strategy to follow. I have chosen other strategies that have smaller drawdowns.
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).
Except 50 was never on the table, and 75 is a fraction of what it would be worth if you stopped trying to actively manage your portfolio.
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 think we're agreeing that you need a strategy and you need to stick to it. Where we differ (I think) is you think my strategy is objectively bad and yours is objectively good. I don't think we really know what each others strategies are though.
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?
For the curious thread-reader, here are some websites that offer ideas that might make you question whether all "timing the market" is the same and equally bad long term.
Note, dear thread-reader, how these links are all blogs, none of them are actual academic literature, unlike the dozens of citations in even an introductory book such as A Random Walk Down Wall St.
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.
I don't believe the EMH is settled nor that markets follow a random walk. There is academic literature to back up both sides of both of those beliefs.
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.
EMH being settled isn't of issue here, and I did not claim the markets followed a random walk. It's the name of a book, not a theory pushed by the book itself. The fact that you haven't even heard of the book speaks volumes as to your education in personal finance.
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.
I'll admit I haven't read the book completely or in a long time but is it not about how the EMH is true and so anything other than B&H low-cost index funds is a fruitless pursuit? Doesn't he back that up with the random walk theory of asset prices?
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)
If your plan is "throw my money into a pit" that is not a good strategy, even if you stick to it. So no, we would not agree.
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.
A lot of people would be better off it they just took a $100 a month and put it under their mattress, i.e. throwing money into a pit. There are obviously many better ideas than that.
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.
If you're open-minded, give the paper a read. They suggest a method, that you can verify yourself, for figuring out which months are likely to be worse.
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.
If you can't smell the salesmanship taking place on this link, there is a whole lot more wrong with your filtering abilities than I had initially thought.
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.
I'm not sure why I feel the need to convince you. I think your confidence in the face of contradictory evidence that I've seen triggers something on an emotional level for me. I also feel confident I am correct but you disagree.
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.
It's why having a plan and a strong conviction of that plan (for me this means having to schedule time to purposefully "sit down" with myself quarterly to ensure the plan is still accurate) is so important. When the shit hits the fan you want to be able to realize you are dealing with emotion, and to go look at your pre-flight checklist so to speak before you sell anything. If pre-set conditions aren't met, you have no decisions to make.
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.
If you think about it, actually you should PRAY for drawdowns, unless you are very close to retirement, and assuming you buy-and-hold an accumulating ETF.
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.
> 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.
Me! I’ve only ever bought total market index funds and they’re just gonna sit there for as long as I live, no matter what. If the world’s total stock value crashes permanently, I’m probably worried about something other than my retirement plans.
I am more worried that when I want to start selling them so I can retire coincides with the beginning of a long drawdown. I suppose one way to address this risk would be to save even more and don't retire until you have way more than you calculate you'll need.
One adjustment you could make is to slowly rotate into bonds (also via a highly diversified fund) as you approach retirement to dampen volatility (at the cost of lower returns, but hopefully that’s fine by the time you’re approaching retirement)
>>Can the masses stick to simple buy and hold long term?
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.
I hear people say, in finance and in other domains, that sticking to the plan is the key. I think it's an essential principle to keep in mind to be an effective human.
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".
Anecdotally, all my moderately- to very-well paid tech friends have a robo investor and don't touch anything ever until they need to withdraw. I'd say most people don't play the day trading game, and that includes HODL'ing (man, that term is literally the only thing that came from crypto that I like) during bad downturns.
I find it interesting that most of the popular index funds are market-cap weighted, and that's just how it is. Why is it that way? Why do we think that owning the biggest companies should be the default?
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).
I think the point is there is no such thing as "neutral default". There has to be some weighing to define the market and distribution of your investments. Any act to prune the whole world economy into an actionable list is, in effect, a kind of weighing.
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...?
It doesn't quite matter how long the years of data are, it is still one single timeseries. That's one of the most important things in time series econometrics. You need to test long time series along multiple securities preferably across different geographies. Taking a 50/200 MA crossover over a single ETF literally proves nothing.
Transaction costs are not limited to broker fees, you also pay the spread and eventually slippage. That's why I didn't include them in the article, that's too many variables and I'm lazy.
- 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"
"The patterns themselves become reality rather than just a representation of reality."
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.
So to summarize, the opportunity of pattern trading is self-fulfilling, which also means if any become unfashionable then the signal will cease to exist. From that fact alone we can conclude there is no basis in the economic reality of the business or its public stock. Greater fool theory, essentially.
It’s very easy to tell if it works. If you go to an interview with Goldman Sachs and mention that you are an expert in TA what would be their reaction?
This is not an endorsement of TA but look at what they do, not say. They are highly influneced by chart movements. Price predictions and buy/sell recommendations are constrained by recent trends and observed prices. Even if they want to say they are driven by fundamentals. These “fundamentals” change in reaction to price action.
>This is not an endorsement of TA but look at what they do, not say.
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.
Yes. If you value a stock based on fundamentals, including estimates of the company's future performance, at $10 and the current asking price is $100 you don't want to buy it. Vice versa, you would.
If a meteorite hits earth, aliens are discovered, quantum computing breaks encryption, someone launches a nuclear bomb, etc, any of those will affect the stock market by a lot. Technical analysis can't predict a meteorite or any of those other things, therefore it cannot work.
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.
It's a lot more simple than that. You don't need to discover aliens to move the market in unexpected ways. A crop failure halfway across the world, a border skirmish between two countries, discovery of a new oil reserve, a ship blocking a canal, a tech company not selling as many phones as anticipated in a quarter...all have ripple effects through the economy and can screw all market projections. Stuff like this isn't a "black swan"...it happens every month.
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".
Cicada populations in two different countries emerge the same year, decimating sesame crops while Indonesian crops remain unscathed and the futures shoot through the roof.
Yet, similarly to brownian motion, the thousands of events that cooccur more or less cancel each other out in the grand scheme of things.
>Technical analysis can't predict a meteorite or any of those other things, therefore it cannot work.
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"?
The fundamental problem is that everyone else—particularly people with unfathomably deeper pockets and much better access to information to you—can do the same TA as you. To whatever extent it does work, that opportunity is rapidly exhausted.
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.
In this case profit exhaustion doesn't really work. The assumption of technical analysis is that those with the deeper pockets move the market in certain ways and patterns and it's the job of the short-term speculator to anticipate those ways.
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.
> The assumption of technical analysis is that those with the deeper pockets move the market in certain ways and patterns and it's the job of the short-term speculator to anticipate those ways.
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
Which they do. Many kinds of HFT trading strategies actually look a lot like a more mathematically rigorous version of technical analysis. It is very likely that they take all of the alpha that TA traders used to get.
HFTs generally consider shorter timescales (both in the feature set and the forward horizon) than human TA would lean on, and make tremendous use of microstructure information rather than outright price movements.
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.
> HFTs generally consider shorter timescales than human TA would lean on
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?
sub-minute opportunities are absolutely not all that exist, in many ways it’s the opposite. The hft opportunity space is extremely competitive, and much more zero sum than the mid/low frequency space. A relatively small set of players compete for the lions share of anything one might consider high frequency. The set of trades you compete for and the relevant information to generate forecasts is limited / similar across firms, and table-stakes on engineering side are very high.
> 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.
> 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."
I don’t know why you think I’m saying TA works. The only thing I’ve said is that HFTs are by and large not responsible for trading away those inefficiencies
I’ll add that most hft firms are trying to move to longer time horizons. Some with great success, some mixed, some not at all. There’s not much unclaimed pie left in the hft world
The thing is there's no reason why new patterns can't exist, created by the patterns of the HFTs, who could create new profit opportunities for other HFTs or day-traders.
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.
> The thing is there's no reason why new patterns can't exist, created by the patterns of the HFTs, who could create new profit opportunities for other HFTs
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
> The assumption of technical analysis is that those with the deeper pockets move the market in certain ways and patterns
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.
You're wrong in your conclusion, even though the argument looks good.
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.
Agreed about the statistic of failure rate. For consistent profitablity it's probably at or below 2%, even if it's higher in a given year. The reason is not only lack of a strategy that doesn't depend on specific market conditions, but often (unless you're talking about algos) is psychological. Trading is psychologically very difficult.
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.
Something to be said about playing in pockets of the market those fat cats stay away from due to lack of the liquidity needed, market cap constraints, etc. There it can be a more level playing field for us minnows.
I would be willing to bet significant sums of money that virtually 100% of your trades, in any any of these "pockets of the market", have one of those fat cats as your counterparty.
I think TA is bad because it's priced in but your argument seems like nonsense.
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.
Depends on how "real". A microbe discovered on some rock 60 trillion miles away isn't really going to move the markets. An alien attack fleet entering our solar system...maybe go long Raytheon.
This is where my thoughts went as well. Harry Turtledove is prolific at coming up with scenarios where aliens are capable of interstellar travel but not good at war. His World War series sets up a slightly more plausible scenario. If you haven’t read it, it’s worthwhile and I don’t want to spoil it here. An interesting aspect of it though was the aliens having finite resources with very long delays in resupply. They underestimate humanity who takes advantage of this to slowly turn the tide.
Paxys thanks for the short story, I truly enjoyed that and it was also rather funny.
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.
You're conflating micro and macro price movements. Sure, you can't predict black swan events with technical analysis, but it wouldn't be out of the question to predict short term fluctuations based on a mixture of market psychology and herd thinking.
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.
To add, it provides a general measure of sentiment. It's a measure of actions taken rather than words. It's not a crystal ball, but does give a slight edge if you figure out which indicators to use.
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.
While I agree that TA is an invalid method for investing, I disagree with your take on it. What you describe are, charitably, outlier events. Statistical models generally aren't useful for predicting singular events, even if they aren't outliers. So you aren't really invalidating the use of TA with that argument.
You may think so, until it’s revealed that one of the bidders makes all bidding decisions by roll of a die / flip of a coin (you can invent some scheme for doing so).
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.
It depend on whether they are also trying to use each other's bids to determine each other's psychology. At that point you may be observing a recursive system (I know that he knows that I know that he knows...) and can't be sure how many layers of reasoning each actor is employing.
Not with the prices alone. You need a context to use the prices for insight. They could literally be using the bids as a channel to communicate with each other because they are colluding, or as a performance for observers.
Behavior is different at different scales but I see your point. I typically walk to my car after an event, but if I see a group take off running with urgency I will probably do the same thing. Know what I mean?
Does non-technical analysis work for those events? Nope. TA can incorporate all currently known information about the likelihood of those events though. As they say on WSB, it's priced in.
Doing that is not technical analysis. Technical analysis is predicting stock prices strictly from the previous price history.
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.
> Technical analysis is predicting stock prices strictly from the previous price history.
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.
Not really. When you add that much information that gets into 'analysis' rather than 'technical analysis'. A bit like medicine vs traditional medicine.
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
Burgers' equation models traffic flow. Traffic comes from humans and humans behave in patterns. What difference does it make if it's a PDE or a teacup?
Because you are not drawing a teacup, you are looking at price patterns. IF you believe in efficient markets, price should be an indicator of "all currently known information"
If you believe in efficient market and things being priced in then there is no past price information that can affect future price as future price is entirely martingale. You can’t both believe in technical analysis and in market efficiency.
You can predict situations like crop failure - if you're an expert in agriculture and have access to data that impacts crop yields.
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.
It can be an input, but is it a significant input?
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.
>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.
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.
By the time you have this information and are reasonably act on it, it has already been priced in by participants with deeper pockets, better access, and rapid processing of relevant information sources.
The prediction of a crop failure isn't a binary event and money isn't deployed in a binary strategy. It becomes more or less likely over time.
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.
Nobody is saying these things are binary events. But betting that you're going to more accurately guess the odds of these events than dedicated players with enormous sums of money behind them and who are supported by professional research teams is… maybe not a strategy with positive expected value.
Mostly. I've been known to get my hands a little dirty using historical pricing combined with deep due diligence efforts. Think of my use of TA like the cherry on top, not the actual cake. I already know I want cake or I wouldn't be sitting at the table. But, I might consume the cake a little bit differently depending on the nature of the cherry.
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.
I imagine, even if equity prices are imagined to have an ideal or true value based on fundamentals, nearly all of the work of making a profit comes from maneuvering appropriately relative to competition, and the data on that is nothing but "technical".
The problem is that if you could actually time the best execution moment, you could make that profit trading options or futures as well. If you don't think you can, you might as well just buy now.
Well that was pretty shallow. Only a single pattern was included and even that performed worse than the index. If you were to include the transaction costs and the cost of time spent analysing that, the perf would be even worse.
So a shallow article with a wrong conclusion.
Since past returns are not a reliable indicator for future returns any back testing will only show if a thing would have worked in the past not in the future.
Yes, well the headline "Is this particular 50/200 day simple moving average crossover strategy just S&P500 astrology?" isn't a sweeping enough generalization
Yes. And what's more, not too long ago this was common knowledge. Every professional trader knows that TA is crystal-ball-tier nonsense. But the influx of morons in cryptocurrency and WSB memetrading have to learn this lesson all over again (and in an adversarial environment, since there are tons of '''gurus''' poisoning the well with bad info, insisting that their TA is totally legit and anyone saying otherwise probably has "political motivation")
Mandelbrot (of the set) studied the effectiveness of technical analysis and wrote about it in The Misbehavior of Markets: A Fractal View of Financial Turbulence. This PDF [1] has a summary of the findings.
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.
Keep in mind that the vast majority of the market is driven by institutional investors and the prices are largely set by those big players. Let's say that TA works, but it doesn't scale to that level (i.e. it only provides returns on marginal volume).
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
Sometimes the secret is in the open, but seeing it takes a series of long slog steps which most people just can't get themselves to do(for many reasons).
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.
Depends. I have made substantial profits on a sub-million portfolio on a pure TA algorithm over a span of a couple of years. I have never made the strategy a secret because I knew very well people are too lazy to actually implement it (and the cake is bigger than I could take). And yeah, nobody did.
Another thing that one can also be reasonably sure, is when when things stop working ( for the ones where it was working for a time, and they were talking about it), is that they are going to be very quite about it.
Not really. Sharing specific useful investing information renders it largely useless. That’s an oversimplification, but the incentives are just very different.
So, it’s hard to go beyond shallow advice without everyone screaming about the latest bubble.
The funny thing is, HN is one of the few forums where the average user has close to enough mathematical maturity to discuss this sort of finance. Quantitative finance folks rarely come from a pure finance background, it is very different from investment banking or typical bread and butter bulge bracket work.
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.
It does seem like HN has a lot of this surface-level stock market discussion. I wonder how much crossover there is here with r/wallstreetbets.
> 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.
I had not seen the blog when writing the article. I think it's basically the same strategy as what I have backtested. I run the backtest on QQQ since this blog seems to be focused on the nasdaq and it's about the same: 0.20% CAGR and 0.07 sharpe.
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.
As someone who has dabbled in this sort of thing for a few years, dived pretty deep, and begun my journey into quantitative analysis I can tell you that all TA is pretty much useless. There are fundamental mathematical reasons as to why, but in a nutshell there is no TA indicator (that I'm aware of) that is a leading indicator. You simply cannot use technical analysis to glean any useful information about the future.
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.
Reddit stock gurus do the opposite of what a legit person would do. Unlike "world's smartest billionaire" Jim Simons, who's operations are super secret, finance influencers share their picks as a way to grow followers and sound smart. If the modern equivalent of haruspicy (technical analysis) worked as well as claimed, these con artists would realize they could make more money keeping quiet.
Except for the "stock gurus" like these guys who were running pump and dumps (https://www.sec.gov/news/press-release/2022-221). They buy early, hype up a stock, and then bail after they've convinced enough other fools to buy in
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".
This question can essentially be simplified to: "Is the stock market truly random?", as randomness is defined as the absence of patterns and TA is all about patterns.
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.
Well...random with a positive trendline can still be random. The fact that there's a positive trend globally doesn't change the fact that the local behavior is indistinguishable from random noise. The way I tend to think about it is that the deltas day to day are completely random, but shifted up from neutral by just a touch, so that the overall trend is upward but the micro behavior is unpredictable.
If I understand you correctly, you believe that "micro behavior is unpredictable", thereby suggesting that technical analysis (TA) is not possible on shorter timeframes. However, you seem to allow for some applicability of TA on larger timeframes, such as the concept of a "positive trendline", a term that occurs quiet frequently in TA. That's an interesting perspective.
I mean insofar as "market goes up over time", that's been pretty much a guarantee, at least on a large enough timeframe, since what, the 1930s? I wouldn't call that TA though, that's basic observation of a trend over time. TA purports to read the market's "mood" and predict its behavior via a bunch of mathematical indicators, which are about as useful and scientific as pickup artistry.
I think this is where the question of “what is TA really” comes in. I think most people would grant there are underlying patterns but there are just so many factors and they are dynamic. Whether the patterns are discernible or not is another matter but in theory if they exist they are be chartable in some form.
The existence of players that generate high-sharpe consistent returns is a sort of empirical proof that the market is not actually random (although these tend to be relatively short term trades, I.e. < 1hour holding periods, turnover portfolio multiple times a day, etc).
In quantitative finance a stock price is modeled by two elements, a “drift” (the long term expected returns) plus a random walk (the randomness). The drift not being zero does not mean that the process is not random.
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.
Just a side note: you can be highly successful with less than 50% win rate. Many trend following strategies are 30/70 but are still profitable due to how much they win when they are right and how little they lose when they are wrong. The expected value is what matters not a high win rate.
I think a more compelling argument against technical analysis can be found by considering the outcome of a semi-efficient market, and how unlikely it is that simple, purely momentum-based signals haven't already been arbitraged away by the other participants in the market (who have significantly more sophistication and speed-of-execution than anyone publishing technical analysis strategies online)
The Market Wizard series has several good interviews with traders with verified records that significantly outperformed for decades. The ones who used TA invariably say that it used to work but became less and less effective as computers became more prevelant.
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.
It still overperforms after 2005 (0.63 sharpe vs 0.55 for buy&hold). It gets kinda awful after 2015 (0.47 sharpe), with the V-shaped 2020 crash and recovery.
I always assumed any momentum effectiveness was arbitrage on trader volume scales differing by order of magnitude.
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
> I always assumed any momentum effectiveness was arbitrage on trader volume scales differing by order of magnitude.
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]
TA is a very broad umbrella, and forms of TA work. Day traders exploit it day after day. It doesn't require sophisticated technology or deep pockets. I see many people that necessarily aren't familiarized enough with the trading world argue otherwise, which is unfortunate since they're making categorical statements while being not very well informed.
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.
That astrology managed to result in a significant loss compared to "buy and hold" shows that astrology is very effective, unlike the suggested "SMA crossovers" technique.
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
So, the article got it wrong, done right, astrology is clearly the best.
If anyone is interested in doing stock picking, at least seriously, I would recommend that they first read A Random Walk Down Wall Street, which just celebrated its fiftieth anniversary and released its thirteenth edition in January:
And then read Security Analysis (Seventh Edition just released, 1934 original publication) and understand why "A Random Walk Down Wall street" is mostly BS...
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.
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:
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.
TA is extremely useful for learning Python, Pandas and Matplotlib. The simple algos like MACD, RSI and SMA are easy to code and allow you to have a lot of fun learning how to build a simple trading system.
Other than that, its pretty much as useful as tarot cards.
It can be and some people treat it like that. But it can also be a tool used to identify trends and trend changes. The chart takes into account everything: financials, narrative, public opinion, future earning potential, etc. All of these inputs are probabilistically weighed against each other in real time. Keep the TA simple and it's an extremely useful tool. Anyone who dismisses TA entirely is leaving money on the table.
There is no reliable evidence that TA generates alpha. In reality you're just fooling yourself with confirmation bias. If TA actually worked then sophisticated institutional traders would quickly arbitrage any advantage away before retail traders could even put in an order.
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?"
I don't understand your point. If TA can't generate alpha then why bother? Whether stocks exhibit momentum or not is irrelevant if you can't profitably trade off of it.
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).
"There is no reliable evidence that TA generates alpha."
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...
Public markets are fairly efficient, although not perfectly so. The hedge funds that consistently outperform aren't using anything so simplistic as TA on a single ticker. Instead they employ an army of experts armed with enormous computing resources to identify correlations with data outside those markets that no one else has noticed (arbitrage opportunities). They also do proprietary research by commissioning researchers to go out and gather real world data that no one else has, so they are working with an information asymmetry.
Of course, there are also persistent rumors of insider trading. Maybe just sour grapes from inferior traders, but who knows?
The primary metric I believe is important in evaluating the viability is TA is the number of people that "believe TA works." To the extent that other investors trade based on mystical figures on a chart, the price behavior may start to match investor movement and become somewhat of a self-fulfilling prophecy, at least until more meaningful fundamentals start to stabilize the behavior.
The key to make money in the market is not about prediction. It all about managing your risk. If you manage your risk well, that when Mr Market pays you your due.
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.
So, the author picks the most basic indicator applied in a way that most would not use it in modern times, questions its usefulness and compares it to astrology.
Why do people bother writing blog posts void of insight? This isn't even useful for SEO...
The answer is of course - yes. But the funny thing about markets is that if enough people believe a thesis it is effectively true. Go figure. People will trade a "vomiting camel" so best to be abreast.
If there are youtube/twitter/etc guys "teaching" you a "strategy" then it's one to avoid like the plague. True edge generating strats are held onto like state secrets.
The proper way to study charts is to look at price action only. Moving averages, RSI and the like are all lagging indicators. The trade is already over by the time the signal hits.
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.
Dorsey Wright was acquired by the NASDAQ for over $200m in 2015. [1] They made a business of selling asset allocation and sector rotation model portfolios, mainly using RSI (Relative Strength Index). They are probably a bigger business now than when they were bought.
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.
I can't believe how many haters there are of Technical Analysis here. Perhaps the connotation and possibly the meaning of the term has changed in recent years. I've been using Technical Analysis since I read Stan Weinstein's book here (https://www.amazon.com/Stan-Weinsteins-Secrets-Profiting-Mar...) and as you can probably tell from the cover, this is not a new concept. I can't remember whether Stan actually refers to it as TA, but that's what it is. Here is what it comes down to:
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.
There are only two legal approaches to investing - available to average people and professionals alike - that have been shown to work over very long periods of time.
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.
Looking for patterns in charts is stock market astrology, but technical analysis is a broad term that goes beyond just that. An analysis of 10,000 institutional portfolios found technical analysis provided a small but statistically significant return advantage [1].
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
If you stretch out the definition of technical analysis enough to include any predicting of the future from past patterns of pricing across multiple stocks, then sure market makers both use and profit from TA.
But what people usually mean using TA, IMO does not work at all.
This section tells me that the data is insufficient to draw conclusions:
> 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.
95% of the professional asset managers, for example those in wealthion, blockworks, paid macro people like 42macro and themacrocompass, nearly all of them, said stocks would most likely touch 4300 on the S&P and probably cycle down again to prior lows, as manufacturing PMIs, housing, etc weaken, as the long and variable lags from Fed tightening, credit environment, start to hit.
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).
Nope, the fact is a private individual has a very low probably of building wealth on the stock market due to numerous factors. Much like a casino the assumptions the naive make are leveraged against the ambitious and irrational.
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.
If enough people believe it then it works and hence it’s not randomness and can be exploited to make money.
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
Sigh. A lot of the arguments here amount to "there is no heuristic that's 100% correct, so heuristics are useless". That's not how that works.
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.
Well, the thing is that it once had value. But before computers and the internet and real time data made creating all sorts of charts really easy. Jesse Livermore is regarded as an early technician in that he would spot price patterns that he interpreted to signify behavior. For example if he saw a lot of buying while people were bearish he would reason that there were insiders who knew something driving the buying. And yes, he did hand chart stock prices meticulously according to a particular system. But again, in those days it took a tremendous amount of work.
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.
It’s demonstrably true. Do you really think you have an advantage in the market because you spotted the same breadth thrust everyone else is talking about? Same reason why people can’t understand how market is rallying with a yield curve that’s been inverted for almost a year.
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.
Market sentiment is driven by a lot of factors including human emotion. So none of these tools are going to be accurate predictors of price movement. However, there are certain things in the market that are pretty solid indicators in my opinion. For example, RSI (relative strength index) shows when something is overbought or oversold and is a great tool to use. Typically an RSI of 70-80 is indicative of a coming sell-off or people taking profits after participating in the price appreciation rally (if RSI remains elevated for a period of time). Similarly, an RSI of 30, 40, 50 indicates that a company is over-sold and could present a good opportunity for starting a new position. Other things like head and shoulders and double top patterns are generally a crapshoot in my opinion. With that said, I do think that algorithmic trading uses these patterns, so maybe there is some merit to them.
Like everything in the stock market technical analysis works when a lot of people are doing technical analysis, which is why people doing it tend to talk about it and sell books, rather than keep their “winning” strategies to themselves.
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:
Quantitative trading != technical analysis. They couldn't be more different.
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.
>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.
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.
Do we know for sure he doesn't mean technical analysis? When discussing his strategy (6m 30s) he says:
> 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.
Every trading strategy involves looking at the past price of a stock. Technical analysis involves looking at the past price and nothing else. That's quite literally the definition. Everyone is going "oh you can do that but also do XYZ other things". Well sure, but at that point it isn't technical analysis.
Technically (no pun) technical trading is looking at historical prices and volumes. But that's not really important.
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.
It doesn't have to be. As long as you can specify what your system actually does, you can test it, and you can falsify it as a hypothesis about how the market works.
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.
I wouldn't say all technical analysis techniques are "astrology". It depends on what method. Support and resistance for example is an economic optimization behavior where people would buy when the price is at the local minima and sell at local maxima. Other "non-astrology" technique is "riding the wave" which is following what large number of people / big volume traders are doing (selling or buying) in a way it's like how AI being the magic buzzword where VC would invest in at the moment, and hence it's easier to get invested in the area
I have a pet hypothesis that Fibonacci Retracements accidentally lines up with some reasonable noise quantiles (or something, I'm not a finance type) and thus is a sound strategy, but for the wrong reasons.
The whole point of TA is to create a distributed pump and dump. You tell everyone to take some action when something behaves a certain way and you will have made some percentage of volume predictable.
Technical analysis is basically just taking advantage of people. All for the benefit of creating short-term liquidity. I feel the cons outweigh the pros. But it is difficult to draw the line.
I would think so, because if it was indeed that straightforward (pattern X reveals future movement Y), it would inherently mean that the stock market is easy to predict and that markets are rational.
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.
In my experience technical analysis works ok at resolutions of 1 to 5 minutes. i.e. if you want to grind at day trading watching the live candlesticks and have a reasonably fast trading platform you might make enough to get by. This assumes you are familiar with the asset and are up to date on latest news relating to it and use that as a lens to read the TA indicators. As the timeframe grows it's just alchemy. Applying to to asset activity over days is meaningless.
I have been in trading software for over a decade now.
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.
We’re pattern matching animals suited to staying alive by making snap decisions without perfect information. This works perfectly when we think there’s a tiger behind a bush. Suboptimal when we’re faced with the random movements of the market economy.
“tendency to perceive meaningful connections between unrelated things”
> 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.
Obviously the double camel hump pattern predicting a breakout at the 47 day moving average is bullshit.
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'm surprised that this made the front page. This is the investing equivalent of someone new to programming writing a single benchmark of some if statements versus a switch and blogging about which one was faster. The results are far more likely to be random noise than anything meaningful.
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!
I can only talk about it from a crypto perspective. I've never cared for looking deeper into TA. All I saw was people drawing lines and looking at patterns, so I spent time figuring out how that works practically.
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.
Most probably the answer to this question is yes. Quant hedge funds like Renaissance technology claim they are making their money by exploiting the mistakes of these technical analysis people.
Technical analysis trivially cannot work for commonly known and widely used signals, because the market will correct eventually. For little known signals, it can work, but so can any trading strategy within a narrow window or with low probability. I think the union between seemingly successful TA anecdotes and random noise approaches 1.
Yes. In fact we'd be surprised how much of our modern world is just attempts to guess the future, like the ancients, but instead of reading goat entrails or judging the alignment of Venus and Ursa Minor we instead worship the god of "statistics" and "the science". I don't want it to seem as if I am anti-science, not at all, but "the science" is the cargo cult that Feyman warned us of.
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.
There are always posts on r/algotrading that debate this sort of thing. As in, can it work or not? There are always those that have found some success, even if it doesn't always last.
Everything is wrong about this article. TA is just an indicator of market psychology, automating trades based on setups (sma) is a nonsense for a trader as it doesn't include execution which is the most important part. No trading bot have performed better than human traders, ever. Bot doesn't have glut feelings.
Tech analysis esp on penny stocks is actually a type of self-fulfilling prophecy where almost every gambler there uses the similar analysis and see who can front run or get out the fastest when such pattern is forming. Other than that it’s news that make it pop.
Isn’t technical analysis ultimately just reading patterns into trading exchange data - and don’t quantitative hedge funds have strategies that make money from doing precisely this? (albeit automatically and at massive scale through the use of computer systems)
TA is unlikely to produce alpha when used on its own, but it's certainly possible. However, combining TA with other indicators such as macroeconomic data, VIX futures curve, and tracking interest rates and Fed actions can lead to a consistently profitable model, as long as overfitting is kept in check and slippage is properly accounted for. It's much easier said than done.
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.
Interesting how an entire discussion can be hostage of an association to a single analogy. Instead of astrology, alchemy is a better analogy for what is commonly called technical analysis.
I have a very little experience in trading crypto and the only helpful/working for me kind of technical analysis is a moving average. I am excited about learning similar moving-something things.
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.
The comments for this article are surprisingly shallow. A much more interesting article about Technical analysis can be found here : https://elite.finviz.com/help/technical-analysis/backtests_r...
They also found the SMA indicator to be useless.
Hardly worthwhile to say all TA is useless since SMA is useless, when people that are in favor of TA say SMA is useless.
Given that HFT exists, I can't imagine technical analysis can be useful. Many of the rules it proposes would be easy to feed into a trading bot and you would expect firms to be making profits using these strategies already while being able to execute trades far faster than you can.
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.
Oversimplified: HFT is essentially front running in disguise. It has a technical component but it's better to think of it as someone running ahead of you to be first in line at the counter of the bakery to buy the thing you want to be buying so there is a bigger chance you'll be buying it from them or so that the increase in price when you are buying it will allow them to sell it to someone else at a profit.
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.
wondering if anyone can definitely pass judgement on technical analysis, as it encompasses so many metrics.
anecdotal evidence is just that, and it has no value.
metrics that accurately describe market dynamics are definitely useful.
an indicator i use often before placing an order is On Balance Volume, i find it relevant.
Not really, being the royal court astrologer was a pretty lucrative business back in the day. Hell being the Persian Kings court astrologer could eventually be leveraged into being the chief advisor.
All of the technical analysis in the world won't predict something like Musk tweeting "use signal", causing a 438% increase in some random company's stock price.
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.
So... a lot of smug comments on both sides claiming what technical analysis is and isn't. Let's get something straight, there are only two ways of analysing markets: fundamentally or technically.
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.
I think there's something to technical analysis, but am skeptical it is the be-all / end-all. Consider this:
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.
And none of this seems to apply to startup valuation because startup "notional stock price" is based on the valuation of what the next round of investors think the company is worth, not the market. Does technical analysis only work if the stock value is based on the greater fool theory?
Not really, since all stock market analysis is about as woo-ful as astrology. No need to consider any sub-genre for the title.
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.
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).