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starbucks4ever (97.39)

The TA trap

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July 08, 2010 – Comments (12)

Is there such a thing as TA trap, by analogy with a value trap? As I said when the Europe crisis started, we did see a technical drop because of all those TA specialists who imagined they saw some "pattern" in the tea leaves. However, chasing imaginary patterns could be dangerous for your health. Just when we were supposed to have "broken" some imaginary support line, new money came stealthily out of nowhere, bought the dip, and left TA affectionados holding the proverbial bag. Same old story that was played out many time before and will be played out many times in the future...

12 Comments – Post Your Own

#1) On July 08, 2010 at 6:54 PM, blesto (32.05) wrote:

It's fun though. One should still make a value judgement on any equity. Pick the one you value the best and use some TA tea leaves to maybe pick an entry point. Which is kinda how I do it in my real life portifolio. As some may know already I trade on a quarterly basis. I keep track of a few stocks I would like to own along with what I own. When my trading window opens I like to use the charts to determin if I'll buy something new or reinvest in what I have.

Cheers

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#2) On July 08, 2010 at 7:19 PM, NOTvuffett (< 20) wrote:

Hey Zloj,

I guess it boils down to the 'efficient market' fallacy.  The assumption is that lots of smart people with lots of data are driving the price moves so you only have to follow the trends.  Some here on MF have proposed using simple differential calculus or all kinds of other convoluted theories to do TA. 

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#3) On July 08, 2010 at 8:23 PM, starbucks4ever (97.39) wrote:

Why not topology or systems of 500th-order differential equations?

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#4) On July 08, 2010 at 10:26 PM, AbstractMotion (53.21) wrote:

TA works to a degree, personally I've found it to be a very useful tool for detecting directional changes in the market.  It's good for helping to visualize market activity as well and alert you to potential risks.  When it comes to price targets and such though I think it tends to be very inaccurate, trends and patterns can be heavily distorted in a lot of cases.  In general I'd say it's a good tool for detecting potential changes in the direction of a stock or the market and finding good buy in points, but going much beyond that is reaching.

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#5) On July 08, 2010 at 11:17 PM, russiangambit (29.24) wrote:

What trap? Last 2 days were classic TA by the book. 1040 was former support, broken, became resistance. We approached 1040, but strong resistance is rarely broken at the first go, so everybody shorted it and the market sold off. On the second try, retest, everybody was watching which way it will go, it broke, so everybody started shortcovering, thus 3% rally. Today we again got to resistance (1077?), and then went down and then up again into the close on shortcovering.

You can actually tell that HFT computers are running this market because it works completely on technicals.

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#6) On July 08, 2010 at 11:49 PM, simplemts (< 20) wrote:

Russian, Agreed on your comment about HFT.

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#7) On July 08, 2010 at 11:59 PM, starbucks4ever (97.39) wrote:

#5,

And what are the practical conclusions from this classic TA by the book? I mean, in terms of predicting future, not explaining the past. If we translate that gobbledygook into plain English, we'll get the following: there is a resistance level some 2% above from where we are now. Tomorrow we will either break that resistance or, well, not break this resistance. If we break this resistance, we'll go up, but if we don't break this resistance, we'll go down. If we go up, there will be another resistance level and we break it, we go up but if we don't break it we go down. If we go down, there will be a support level. If the support holds, we'll go up, but if the support doesn't hold, we'll go down. If we go up, we will again retest the resistance level and go either up or down. If we go down, we will retest the next support level and go either up or down. When you finish this thoughtful analysis, you'll come up with this profound insight: the market will be moving in a sequence of steps where each step will be either up or down. Now, TA trading is easy, is it not?  

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#8) On July 08, 2010 at 11:59 PM, starbucks4ever (97.39) wrote:

#5,

And what are the practical conclusions from this classic TA by the book? I mean, in terms of predicting future, not explaining the past. If we translate that gobbledygook into plain English, we'll get the following: there is a resistance level some 2% above from where we are now. Tomorrow we will either break that resistance or, well, not break this resistance. If we break this resistance, we'll go up, but if we don't break this resistance, we'll go down. If we go up, there will be another resistance level and we break it, we go up but if we don't break it we go down. If we go down, there will be a support level. If the support holds, we'll go up, but if the support doesn't hold, we'll go down. If we go up, we will again retest the resistance level and go either up or down. If we go down, we will retest the next support level and go either up or down. When you finish this thoughtful analysis, you'll come up with this profound insight: the market will be moving in a sequence of steps where each step will be either up or down. Now, TA trading is easy, is it not?  

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#9) On July 08, 2010 at 11:59 PM, starbucks4ever (97.39) wrote:

#5,

And what are the practical conclusions from this classic TA by the book? I mean, in terms of predicting future, not explaining the past. If we translate that gobbledygook into plain English, we'll get the following: there is a resistance level some 2% above from where we are now. Tomorrow we will either break that resistance or, well, not break this resistance. If we break this resistance, we'll go up, but if we don't break this resistance, we'll go down. If we go up, there will be another resistance level and we break it, we go up but if we don't break it we go down. If we go down, there will be a support level. If the support holds, we'll go up, but if the support doesn't hold, we'll go down. If we go up, we will again retest the resistance level and go either up or down. If we go down, we will retest the next support level and go either up or down. When you finish this thoughtful analysis, you'll come up with this profound insight: the market will be moving in a sequence of steps where each step will be either up or down. Now, TA trading is easy, is it not?  

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#10) On July 09, 2010 at 12:02 AM, starbucks4ever (97.39) wrote:

sorry for multiple postings, still can't figure what went wrong.

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#11) On July 09, 2010 at 12:35 AM, NOTvuffett (< 20) wrote:

I don't doubt the utility of TA, I use it all the time... it just shouldn't be your primary tool. 

Russian is probably right, HFT programs probably propelling the market right now.  This is both good and bad, provides liquitity but perturbs the markets just on technical basis. There is so much apprehension about the global economy I doubt that there are many people in the market besides traders at the moment.

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#12) On July 09, 2010 at 9:26 AM, russiangambit (29.24) wrote:

>And what are the practical conclusions from this classic TA by the book

Can't remember the trader's name ( it is one from the Market Wizards) but he put it the best. We don't know what the market will do once it reacehs resitance/ support but we know that it will reach it. That is predicting the future, isn' it?

Meaning, if the market is going up, you need  see where the next resistance is and hold until then. Once resistance is reached you need to see if it fails, and decide whethere continue to hold or not. A trader would sell slightly before that and then go short if it is a first pass at resistance, quickly covering if resistance is breached. This is all day trader stuff which I don't think many on CAPS (including myself) have time for.

Also notice, how trend accelerates once resistance/ support is breached or held. It alsmot goes vertical next 15-30 min.A lot of traders come in once it is decided one way or the other. Again, as a day trader you can make a lot of money just riding this intial wave and quickly exiting.

TA works wonders on short time frames. On longer time frames it is not very useful for me personally, you have to look at macro and earnings. However, if you look at IBD, which is 100% TA based momentum method, their results are pretty good on long timeframes as well. They managed to avoid all the pitfalls of the last 2 years. I don't use IBD myself ebcause it doesn't suit my personality but I ahve to acknowledge that it seems to work.

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