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JakilaTheHun (99.93)

Why Technical Analysis is the Astrology of Investing

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June 18, 2009 – Comments (34)

This was originally a response to a comment on Anchak's recent blog.  Visit that link if you want to read more. This blog explains some of my reasoning as to why I believe technical analysis (TA) is essentially equivalent to practicing astrology and provides no significant value to investors:

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While I won't deny that many scientists and mathematicians have searched for patterns in the stock market that can lead to accurate predictions of the future, many of the top scientists of the 17th century also tried to turn common metals into gold. "Scientists" aren't infallible. They are capable of the same delusions as all other human beings.

[Anchak's] critique of "fundamental analysis" is based on a bit of a straw man. You say that fundamental analysis relies solely on past data. This isn't strictly true. Certainly, most of the variables and the foundation come from financial statements (i.e. past data), but my valuations are never strictly derived from that info.

Rather, I run future projections to see how different future scenarios could affect the valuation of a company. I also analyze a company's underlying business and try to come up with future projections of growth/decline. I tend to buy in with a large margin for error due to my own conservatism with money.

While, it's impossible to predict the future, the past is your best guide. If you look at seemingly worst-case scenarios and buy in with a large margin of safety, you can outperform the market over time by a significant margin.

The Difference With Technical Analysis

How does this differ from technical analysis? It may seem similiar; after all, you are relying on past data for both FA and TA.  But with FA, you have some level of protection. Technical analysis isn't related to the underlying company you are investing in. Rather, one who invested strictly on TA would be solely trying to predict human psychological patterns for a large set of underlying transactions.

The main guide for TA'ers is past charts. From the past, TA'ers try to predict the future. But of what? Of a company's performance? Not really. TA'ers are trying to predict the future actions of an undefined group of traders based on the premise that all human psychology will be relatively similiar over time and can be fully understood, explained, and predicted by charts. That underlined part is key.  It suggests that all of human psychology can be understood by mathematical models that are based on charts that are based on pricing of individual transactions of many individuals over a period of time. 

How do TA'ers Fare?

Certainly some TA'ers fare better than others. The ones who understand portfolio strategies and have some comprehension of risk-reward will do better than the ones who don't over a long period of time. The TA'ers who do not base their analysis solely on technicals, but also look at the fundamentals will fare better than those who don't over the long-term.

But here's the real question --- which group of TA'ers would fare better over time: the ones who dogmatically use charting in order to predict future market behavior? Or the ones who inject their own common sense and their own understanding of their own emotional reactions to their analysis?

My issue is this --- unless a computer can analyze the charts and predict with an extremely high rate of accuracy the patterns of the future, how do you know that TA is actually working? How do you know that this isn't basically the case of the brilliant scientist who thinks he can turn a common metal into gold? Or that is to say, how do you know the individual using TA isn't simply convincing their self it works when in actuality, it plays virtually no positive role in their performance?

You can obviously argue that FA creates the same conundrum.  You can say that the patterns of a stock are so random, that you would not know whether or not your FA actually played a part in your performance.  But there's an issue with that argument.  

Fundamental Analysis in Perspective

On a very basic level, when you buy a stock, you are buying a company. You actually own a share of that company's assets and earnings. If you purchased more than 50% of the stock in a company, you could take it over, take over the board of directions, and pay out 100% of earnings as dividends to yourself (and the other shareholders).  So in actuality, you be entitled you to those earnings.

Why is this relevant?  Because it puts things in perspective.  It suggests that stocks are not "random".  While human psychology might make stocks drift upwards and downwards due to the uncertainty surrounding future earnings and various other factors (e.g. the honesty of management), stock pricing is not completely random.  You are buying a share of a company and you are entitled to your share of the results. 

If you buy a company with $0 net assets that earns $1 with a 3% growth rate for the rest of eternity, how much is that future revenue stream worth to you?  While the answer might differ from one investor to another, it's probably safe to say that not too many people would pay $200 for that future revenue stream and most people would be willing to pay $1 for it (assuming they had the cash). 

The Underlying Foundation for TA?  

Would you be so confident in buying out an entire company based on the signals a chart gives you? Probably not --- I don't think any TA'ers would buy out an entire company just because the chart said the stock was going up. So in a very real sense, TA has no real solid footing on which to stand.

You can convince yourself it works. On some basic level, I think nearly all of us can glance at the past charts, take our own understanding of human psychology, and apply it forward. I'll even argue that this can be beneficial to one's own performance. But I wouldn't argue that by merely coming up with elaborate methods for studying charts, that you can somehow accurately project the future.

TA and Occam's Razor 

Occam's razor is a scientific principle that the explanation of a phenemonon should involve as few assumptions as possible.  That the simplest explanation is probably the best explanation.  That the simpler model is probably the better model.  The more assumptions and intracacies you add, the more likely your explanations are inaccurate.

TA fails occam's razor.  Have you ever read a GoodVibe chart?  GV's blogs are enjoyable reading, but those charts are otherworldly in complexity.  Sure, I understand the principle of "what goes up must come down", and that's true to a limited extent, but stock market investing involves no gravity.  A rapid growth company can go up for twenty years if management is sound and stays ahead of the game.  Sure, it will have dips here and there, how do you explain the future performance of the stock via very complex mathematical analysis of a chart that is based on trading patterns of individual investors who are buying into a company? 

There is no direct line with TA.  You are merely gauging market psychology and there's no realistic mathematical model to predict human psychology on a mass level when you can't read the future and don't know what stimuli humans will even interact with

What if I use some TA that measures volume indicators.  It tells me the stock is overbought.  The next day, the company releases earnings and absolutely blows away expectations, earning $1 per share rather than $0.25.  It's pretty easy for me to guess the psychological reaction to this news --- model or no model.  But how would I have predicted that stimuli to begin with?  The answer is, you wouldn't have if you were simply staring away at a chart.  

Time is Money and TA is a Waste of Time

Don't get me wrong.  I'm not claiming there's nothing useful about technical analysis.  If I thought it was completely worthless, I wouldn't read GoodVibe's posts.  I'm not even suggesting that I don't use some level of TA when investing.  But I use TA at a very, very basic level.  I look at the past stock charts for companies I'm interested in.  I try to gauge market sentiment.  I might even look at volume for a stock.  But it takes me less than a minute to examine and analyze these items. 

If I had to quantify it, I'd say that stock picks are based 98% on analysis of the fundamentals and 2% on technical analysis.  I'm not saying that's a magic ratio.  I'm simply saying that on a basic level, there's a foundation with which to stand on with fundamental analysis.  My guess on the psychological element is simply a guess, which is why you have no foundation with TA.  You are basically sticking your money on the roulette wheel and hoping for the best. 

More importantly, I'm probably not going to do a significantly better job analyzing those technical trends with extremely complex mathematical models and charts than I would in one minute from examining the technical data.  I can see when the price chart has a line rocketing upwards or one plummetting downards.  I can see when volume is high.  I don't need any complex analysis to uncover that.  

The bottom line however is that if I buy a company at a certain price and I'm "wrong" about its prospects, I still might make a reasonable return if I bought in with a margin of safety based on the fundamentals.  If I buy a stock based solely on a prediction of whether it will go up or down based on a reading of a chart, there is no protection.  For all I know, that stock go lose 100% of its value or gain 500% in the next few months. 

For this reason, complex TA like EWP is simply a waste of time.  The chart has no relation to the underlying fundamentals driving the company.  Your time would be better spent analyzing those fundamentals rather than trying to guess at which direction the stock will move.  Time is money and complex TA is a waste of time.  

TA is Astrology

I'll admit that TA might have a more solid footing than astrology.  But not by much.  And the two seem function remarkably similiarly.  

Humans are very good at convincing themselves things work sometimes, even when there's no real rationale as to why it would and basic logic would suggest that it doesn't. You can't accurately predict the future of a stock any more by reading a chart than you can predict the future of your own life from a deck of tarot cards.  If you could, you'd be a billionaire by now. 

If a "model" beats the market 60% of the time, what's to suggest that the practitioner didn't throw some fundamental analysis or plain ole' common sense into the analysis?  How could one show that the extra 10% was solely due to the success of the TA.  If TA really works, shouldn't there be someone who has near 90% accuracy with it? 

Ok, I realize that there aren't fundamental-based investors with 90% accuracy either, but once again, this goes back to the foundation.  You *know* the fundamentals provide a look at the foundation of a company with a reasonable level of certainty.  There is of course, fraud, but even that can be better predicted by finding "red flags" in the financial statements.  How do you know with any level of certainty that (a) charts provide realistic models of human behavior, (b) the charts themselves aren't distorted by poor fundamental analysis by investors, and (c) complex human behavior can be predicted by mathematical analysis of the charts? 

With TA, sometimes people win over the short-term, but over the long-term, TA does not allow one to consistently outperform.  Instead, practitioners simply convince themselves that their readings were correct (even if it takes weeks for them to play out) and they gloss over the failures.  In that sense, TA is very much like astrology.  The best practitioners of TA happen to be the most ambiguous. 

Attack Away

For whatever reason, I've noticed that TA'ers seem to be more emotional about criticisms of their models.  This has actually solidified my belief that it is basically astrology.  If someone criticizes my analysis of a stock respectfully, I don't get offended.  Oftentimes, I'm happy they gave me additional perspective.  So based on my past indictators of reactions of TA'ers, I fully expect to be attacked here.  So attack away. ;)

34 Comments – Post Your Own

#1) On June 18, 2009 at 2:15 PM, catoismymotor (< 20) wrote:

You have laid out your point in a very understandable manner. I thank you for that. I don't think you are wrong. I think going on straight technical analysis is a mistake. I believe if you Graham and Fisher all you can a better chance is to be had of finding winners than strictly using technical analysis.

Like you I expect to catch some heat for my opinion. I believe those that use TA as their main method of finding great prospects have a gift the rest of us don't. Or they have been lucky. Or they are taking other factors into account, on a subconcious level. All that matters is what works best for you. If I believed reading tea leaves would help I would give it a shot.

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#2) On June 18, 2009 at 2:17 PM, JustinTheFool (99.45) wrote:

Nice comparison...

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#3) On June 18, 2009 at 2:18 PM, SkepticalOx (99.44) wrote:

Regardless of whether you are using fundamental analysis or technical analysis, or whether or not the market is efficient, to beat the market consistently and over the long term is hard, PERIOD.

And, unfortunately, whatever claims one side or the other bring here regarding their analysis of choice, I doubt anyone (online) will really put up their real record and portfolio returns to prove it. Instead what you'll get more often than not is an anecdotal evidence on how they used blah analysis to get 50% return in a month.

 

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#4) On June 18, 2009 at 2:24 PM, portefeuille (99.60) wrote:

You are merely gauging market psychology and there's no realistic mathematical model to predict human psychology on a mass level when you can't read the future and don't know what stimuli humans will even interact with.  

This is not a direct answer to the quotation above, but something related and spending a few minutes looking at the following might convince you that a very simple mathematical equation does an astonishing job at describing stuff that you would probably consider incredibly complex processes that involve lots of human interaction/psychology and go on for rather large time periods (up to a few hundred years). This innocent mathematical equation is the "logistic equation"(1,2).

To see some processes that are "ruled" by this little (utterly "non-complex") equation have a look at these papers by Cesare Marchetti: 3 (pdf), 4 (pdf). Looking at the charts might do for a start.

For another example see figure 2.2.7 here.

My favourite quote on the topic of "logistic" processes is the following (see bottom of p.25 here):

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"Three parameter logistic equations fit the evolution of the car population perfectly. The behavior suggests quasi-biological, internally generated determinism that belies the significance of engineering, economics, marketing, and media as diffusion stimuli. Their role is seen to be more a response to, than an initiator of, change."

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Trying a translation of the sentence that follows that quotation:

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"That would be explosive sentences - if you were allowed (or "if you could") to indiscriminately infer from the logistic course (or "distribution") of data the logistic mechanism of their generation.

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Again, have a look at figure 2.2.7 here.

I think this is pretty convincing "evidence" that a large variety of seemingly very intricate processes that are thought to be ruled by a very complex interplay of a multitude of human beings over very large time periods can to some significant extent be described by a very simple mathematical equation.

 

 

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#5) On June 18, 2009 at 2:26 PM, catoismymotor (< 20) wrote:

"Blah Analysis". That is my new favorite phrase. I have family members that plug their ears and say "Blah-Blah-Blah!" when I speak of stocks. Blah Analysis is now how I will refer to their childish responses. Thank you, SkepticalOx.

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#6) On June 18, 2009 at 2:28 PM, JakilaTheHun (99.93) wrote:

 to beat the market consistently and over the long term is hard, PERIOD

SkepticalOx,

But that's precisely my point.  Over the long-term, the fundamentals drive stock valuations.  Psychology of the market plays a role, but you know for a fact that if you are successful at analyzing the fundamentals, you can make very good returns.  You have no underlying foundation when it comes to TA.  You are simply making guesses that mathematical models could predict trading patterns with such accuracy, that you could actually beat the market.

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#7) On June 18, 2009 at 2:39 PM, anchak (99.85) wrote:

I will give you a rec(due to 1 section of this blog) .....but your thinking is warped.....absolutely.

This is not a cogent argument either way. Mostly anecdotal stuff - and as I said you missed the point of the blog - it was to put EW into a structured domain.

Ocam's Razor: This is the "complexity" parameter associated with models. I said this plain and simple - keep it simple!

EW fails to do that at the micro level. Which means you extend periodicity to smooth out the multiple signals and try to develop something which is more structured and manageable ( computer program as you say - and I did mention that we know of a few Automated EW platforms - it is certainly doable)

I also think doing TA on anything other than EXTREMELY LIQUID ( mostly index or highly traded stocks) - is not worthwhile. ( The generalization thru the population will not work)  Of course that is the domain of all the Wall St traders - hence your success probability is certainly diminished.

 What you are not getting is - I do not irrefutably say that TA works. Its a strategy. Just like FA is. Combining them makes perfect sense.

However none of them can claim to be accurate.

I gave the GE example to showcase - that a mechanical strategy would actually have saved you a lot of heartburn in one of the pillars of the economy stock ( Its Mom-and-Pop you know).

You say you did not value GE - yet you bought them in 2008. I did too.  You sold - when you became aware of their problems - when was it?

I did value GE - I am very familiar with the business. I invested after the initial drop - because I thought their concentration of assets should not have impaired the value in the short-term. Their is a cascading problem in my view.

If you simply state that you took action on GE due to its GECS problem - you are essentially doing no analysis - but correlating to other events and hearsay.

Lets come back to the analysis piece.

I have an old blog ( I think around mid-July last 2008) - just after Wachovia reported ( I used to have a Recd Pitch)  - where I estimated the losses  on the Option ARM book and said they would need about $38 BN additional to cover - Wells provisioned that figure.

Yet I never could esitmate the marks on GE in Q1 2008. As I said their entire Non-prime exposure was only about 2.3 BN at that time.

I have been right and I have been wrong. Makes FA also extremely subjective.IMHO. I would trust an analysis by FB ( FloridaBuilder) in a heartbeat - and he maybe DEAD WRONG! But I know he understands the business to do the analysis in the first place. Most people do not.

Which is why I tend to use Piotroski or other screeners - due to the mechanical aspect to do initial research.

This is a meaningless debate - I never said TA is superior/inferior   - I simply do not know. I know at least the assumptions or inner workings. That is what I hope will keep me away from Red flags.

Incidentally, you should have tracked Morningstar's valuations of Homebuilders - and what sort of an adjusting time series that was - and what FB said here in CAPS.

A mechanical system is mindless in execution - if you are not comfortable with that , that is fine.

Let me tell you this - you are not informed enough to make a judgment either way. AND NEITHER AM I - Hence I do not try to do that either.

 

 

 

 

 

 

 

 

 

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#8) On June 18, 2009 at 2:42 PM, anchak (99.85) wrote:

Hans....I thank you for the logit ( Logistic) example. A very good scientific exhibit - your availability of credit depends on it.

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#9) On June 18, 2009 at 2:43 PM, catoismymotor (< 20) wrote:

I'll see your algorithm and raise you a bossa nova. Just kidding! I admire anyone that feels they can accurately time the market around TA or Super Bowel victories. To me it is too much like trying to count cards when all you have is an approximation of the number of them in the deck.

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#10) On June 18, 2009 at 2:43 PM, JakilaTheHun (99.93) wrote:

Portefeuille,

Here's my basic issue:  if TA could accurately forecast human market behavior over a long period of time, then why have I not heard of any billionaire investors that strictly use TA?

Even if TA could provide predicative models, why would humans not *adapt* their behavior to this?  And if humans did *adapt* their behavior to this, why couldn't I come in and buy up 50% of the stock of a particular company once the price fell below a level of reasonable valuation?  How would the TA'ers predict this outcome?  Certainly, once I started to buy, they could see the volume spike and jump aboard, but how would've they have known beforehand of my intentions?

Also, the specific portion that you quote from my original blog is one of the biggest flaws with the arguments in favor of TA.  Even if you could *predict* human behaviorial patterns of the long term via these charts, how on Earth would you know what stimuli humans would come in contact with in the future? 

As I said, my "model" could tell me to buy, but what happens the next day when a major fund sells off its $20 million stake?  What happens if earnings drop from $3 per share to $0.25 per share and the market wasn't anticipating it?  

Certainly, both you and I could predict the human behavioral response to that after the fact.  But how would we have predicted the stimuli from a chart to begin with?  

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#11) On June 18, 2009 at 2:53 PM, JakilaTheHun (99.93) wrote:

I also think there's a good argument that TA'ers are mostly profiting at the expense of other TA'ers.  If TA'ers are the most active traders, they are possibly doing the most to drive the price.  Maybe there wouldn't be nearly as much volatility without the TA'ers. 

For a company that only had 3 shareholders who all held large sums of the total shares, there would be little movement in the stock price.  The only movement might be if another large buyer comes in and believe he can make a real profit by buying in.  So he meets one of the 3 holders' thresholds and comes aboard.  There is virtually no "activity" other than large buyers using fundamentals. 

To some extent, even the more frequently traded stocks on the NYSE are limited by these large, inflexible, holders who are buying based on their own analysis of the company's fundamentals.  So a great deal of stock price fluctuation is coming from active traders.  And a great deal of active traders are TA'ers.  It seems quite circular to me.  They follow trends that are created to a large extent by them.  But once valuations become absurd, the FA'ers are probably going to come in.

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#12) On June 18, 2009 at 2:58 PM, anchak (99.85) wrote:

Jakila....

"Here's my basic issue:  if TA could accurately forecast human market behavior over a long period of time, then why have I not heard of any billionaire investors that strictly use TA?"

People always tend to think in the extreme. Your premise is - that by using TA - you'll be able to predict every turn of the market! That is freaking impossible!

Mebane Faber's 50/200 MA crossover TA model - has I think something like a 4-5 alpha. Good enough to make a Billionaire in 70 years maybe if you started with $10K and simple Indexing.

However as I am trying to say - TA is a mechanical strategy. ( mostly - its when you try to put strange shrouds on it - it becomes very very opaque) Antictrade's system which is FA based is also mechanical.

In both cases - you are trying to play the probabilities. TA is trend following/reversing. FA is hoping the trend to come up to meet a level - or if you are shorting going down.

No guranteed success either way.

Most great investors do actually use TA ( I am going to use this term loosely now) - ie a timing based thinking approach. Otherwise they would not have made money. Their thinking is just much more broad-based and us humble beings.

Buffet's GE or GS deal is a perfect example. The Yield spread he got - was pure timing. Now he is sitting pretty on his warrants also ( Which is valuation based). I am a BRK-B shareholder , by the way

 

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#13) On June 18, 2009 at 3:09 PM, JakilaTheHun (99.93) wrote:

People always tend to think in the extreme. Your premise is - that by using TA - you'll be able to predict every turn of the market! That is freaking impossible!

Mebane Faber's 50/200 MA crossover TA model - has I think something like a 4-5 alpha. Good enough to make a Billionaire in 70 years maybe if you started with $10K and simple Indexing.

It's not "in the extreme" at all.  I merely used billionaires because I'm sure you could find some millionaire TA'er who likely gained most of his millions from other activities. 

The world actually has a sizable number of billionaire investors. See Warren Buffett.  See George Soros.  See Jim Rogers.

The world has even more individuals with net worth over $100 million.  But how many of them made the significant amount of their fortune from TA? 

Is it even possible to make that kinda money with TA?  Wouldn't you eventually run into the problem that your own volume was driving stock prices to such a large degree that you had no real choice other than to buy on fundamentals?

Investing on TMF and investing in the real world are different beasts.  I can buy on here and it doesn't affect the price on bit.  If I buy $10 million in the real world, I'm going to make lower returns with each incremental purchase because I'm driving up the price due to my own activity. 

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#14) On June 18, 2009 at 3:10 PM, SkepticalOx (99.44) wrote:

Over the long-term, the fundamentals drive stock valuations.  

Remember that quote there? What was it?

"In the short-term, the market is a voting machine, while in the long-term it's a weighing machine"  -Ben Graham

I'm guessing the TA peeps are trying to figure out which way the votes go in the short-term. Which is a valid purpose, if it works.

While not-really technical analysis, computers looking and trading based on non-random market movements (patterns) have worked out well for some large quant hedge funds (RennTech comes to mind, with 35% annualized returns after fees for a couple decades). But it's really no comparison to what most chartists (amateur traders sitting in front of their multi-monitored PC) do everyday.

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All that matters is what works best for you. If I believed reading tea leaves would help I would give it a shot. 

This is exactly the problem with TA. Who knows how successful it really is? You usually don't hear about the majority you try to use TA and end up losing to the market by a significant margin. Most academic research shows that TA pretty much doesn't work (and this is like the only piece of semi-credible evidence we have to rely on regarding the success of these strategies).

The key is whether or not you should waste your time trying it out, or if it would be better just to invest in an index fund.

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#15) On June 18, 2009 at 3:16 PM, SkepticalOx (99.44) wrote:

"Most great investors do actually use TA ( I am going to use this term loosely now) - ie a timing based thinking approach. Otherwise they would not have made money. Their thinking is just much more broad-based and us humble beings." 

OK, I agree with you that you're using that term WAYYYYYY too loosely. I doubt Buffett sat their looking at a chart and running TA stuff on them before he made the investment.  

I would fathom a guess that Buffett was just following his principle of "being fearful when others are greedy, and greedy when others are fearful". I don't call that technical analysis. He just bought because he thought it was cheap, while everyone else was running for the hills and selling everything that had to do with banks.

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#16) On June 18, 2009 at 3:19 PM, anchak (99.85) wrote:

I will stop here - this has long before devolved into a non-productive diatribe.

Please read this paper ( for Open minded individuals - definitely read the paper) This is the paper which Everyday had pointed me to.

http://trendfollowing.com/whitepaper/CMT-Simple.pdf

Ridiculously simple - and it works - over time.

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#17) On June 18, 2009 at 3:24 PM, Gumfactor (48.24) wrote:

No time for a well-reasoned argument at the moment. But I dare say that the truth in your argument is only partial.

Paying attention to TA alone is folly.

Paying attention to FA alone is, however, also folly in my opinion. Because TA does work, even if not perfectly enough to be used alone.

Personally I use FA to decide what stock to buy, and TA to decide when to buy it.

Anyone interested should check out a couple of my blog articles on TA from last summer. I'd be interested in hearing other's opinions on them.

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#18) On June 18, 2009 at 3:26 PM, SkepticalOx (99.44) wrote:

Because TA does work, even if not perfectly enough to be used alone.

It does?

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#19) On June 18, 2009 at 3:40 PM, anchak (99.85) wrote:

Also if you are interested in broadening your horizons beyond - this is a blog by Everyday and my - hopefully constructive discussions - on this topic.

The paper actually tests and tries to prove Timing DOES NOT work:

I take no sides here - just trying to understand the point of view - and in my view there's flaw in how the paper approaches the problem - which by the way is a very well accepted technicallly robust methodology

 

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#20) On June 18, 2009 at 3:42 PM, SkepticalOx (99.44) wrote:

Jakila, according to our handy Wikipedia, apparently there are quite a few rich TA users:

John W. HenryLarry HiteEd SeykotaRichard DennisWilliam EckhardtVictor SperandeoMichael Marcus and Paul Tudor Jones 

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#21) On June 18, 2009 at 3:48 PM, hmkassis (< 20) wrote:

This is a great article. Check out our article we wrote recently, entitled TECHNICAL ANALYSIS DOESN'T WORK http://www.collegefinance101.com/2009/05/technical-analysis-doesnt-work/

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#22) On June 18, 2009 at 4:17 PM, russiangambit (29.42) wrote:

> "Here's my basic issue:  if TA could accurately forecast human market behavior over a long period of time, then why have I not heard of any billionaire investors that strictly use TA?"

Tudor Jones.

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#23) On June 18, 2009 at 4:27 PM, JakilaTheHun (99.93) wrote:

I just looked up Paul Tudor Jones and everything suggests he looked at the macroeconomic picture and fundamentals, as well.  My basic premise is that, even in the case that people utilizing TA are successful, the TA is not the primary driver of that success.  Rather, they convince themselves it works b/c other aspects of their analysis have worked. 

If it worked, you would be able to put models into a computer and trade (real money) based on those money and outperform the market for a significant period of time (at least 3-5 years). 

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#24) On June 18, 2009 at 4:28 PM, JakilaTheHun (99.93) wrote:

* and trade (real money) based on those money

Trade (real money) based on those models

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#25) On June 18, 2009 at 5:19 PM, nottheSEC (81.00) wrote:

Imho all analysis is beneficial and you use both TA and FA.I would say for the average investor like me we use a screnner to put 1000's of stocks on trial to arrive at 50 posssibilities which becomes 5-10. Lets say I want stock A of the 50

1) I read all I can about the company

2) I wanna know where it is compared to its 50, 200 DMA

3) I wanna know how 10+ experts/computer system sites feels about Stock A. To some degree they use use TA. i.e MSN's stockscouter rating from 1-10 appears to be at least 25% TA and they have outperformed for years. 383.7% compounded since 8/1/2001

 

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#26) On June 18, 2009 at 7:28 PM, RussWild (< 20) wrote:

Do you believe in the growth curve, Jakila?

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#27) On June 18, 2009 at 7:38 PM, Mark910 (< 20) wrote:

You imply that mathmatics cannot model something like human behavior in the market, and therefore I need no longer concern myself with anything else you have to say.  Mathmatics has modeled far more complex systems.  Do they have an ignore on CAPS?

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#28) On June 18, 2009 at 7:45 PM, RonChapmanJr (56.93) wrote:

TA doesn't work. Pretty graphs that mean nothing.  Look at GoodVibe's (or any other TAer) score as an example.    

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#29) On June 18, 2009 at 8:48 PM, SkepticalOx (99.44) wrote:

You imply that mathmatics cannot model something like human behavior in the market, and therefore I need no longer concern myself with anything else you have to say.  Mathmatics has modeled far more complex systems.  Do they have an ignore on CAPS?

What is more complex than human behavior? People buy/sell for a myriad of reasons, and have an abundance of irrationality. Finance and economics is rife with people building elegant models to try to predict human behavior, and time after the time, these models fall flat when something unexpected happens (Black Swans).

As Buffett says, beware of geeks bearing formulas. 

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#30) On June 18, 2009 at 11:06 PM, columbia1 wrote:

When Buffett was interviewed about his China Petrol purchase and sale, Buffett indicated he sold it because it reached intrinsic value. But he also mentioned in passing that he bought more shares when they made a pullback and sold them as they approached intrinsic value again. That comment (from the Fox Business Network interview, which doesn't seem to be available anymore) tells me his organization uses technical analysis to help implement the fundamentals-based value investment decision.

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#31) On June 19, 2009 at 12:29 AM, SkepticalOx (99.44) wrote:

When Buffett was interviewed about his China Petrol purchase and sale, Buffett indicated he sold it because it reached intrinsic value. But he also mentioned in passing that he bought more shares when they made a pullback and sold them as they approached intrinsic value again. That comment (from the Fox Business Network interview, which doesn't seem to be available anymore) tells me his organization uses technical analysis to help implement the fundamentals-based value investment decision.

Nice spin. Intrinsic value is the value an investment analyst determines from fundamental analysis (in this case). If the market price is trading at a discount to the intrinsic price, then a value investor would buy the stock. If it's trading at fair value or above the intrinsic price, then the investor should sell the stock. Hey, if toilet paper goes on sale sale one week, wouldn't it be a prudent decision to buy more before price goes back to regular?

Buy low. Sell high. That's NOT an exclusively technical analysis term you know.

So tell me, where's this technical analysis you speak of? 

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#32) On June 19, 2009 at 2:05 AM, ekramer17 (< 20) wrote:

"Here's my basic issue:  if TA could accurately forecast human market behavior over a long period of time, then why have I not heard of any billionaire investors that strictly use TA?"

There are many billionaires who have made their money primarily from technical analysis.  John W. Henry, Jerry Parker, Bill Dunn, William Eckhardt, Ed Seykota, Bruce Kovner, Paul Tudor Jones, Bill Lipschutz, and Marty Schwartz, to name a few.  They don't get as much press as Buffett.

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#33) On June 19, 2009 at 2:27 AM, JakilaTheHun (99.93) wrote:

cabotb21, we've already been over this with Tudor Jones.  He didn't make his money "primarily from technical analysis".  I already looked him up.  He might have used TA on some basic level, but he was guided by macroeconomic outlook and fundamentals.

If complex TA works, then someone ought to be able to write a computer program that would allow them to become a billionaire.  Otherwise, the claims become as suspect as claims that someone could earn huge returns via psychic powers. 

I'm not looking up the rest of the list because, so far as I can tell, the primary strategy of proponents of TA seems to be to bombard those who challenge their beliefs with an absurd amount of irrelevant information. 

"If you're open-minded, you'll read these 32 books I've suggested to understand why TA works!" 

Uh, yeah. Ok.  I'll get right on that. 

Why can I explain in one paragraph the principles behind FA, but TA'ers can't seem to explain why TA works in anything less than a 32-volume tome? 

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#34) On June 19, 2009 at 1:27 PM, SkepticalOx (99.44) wrote:

Jakila,

I believe Paul Tudor Jones was quoted saying that he owes 50% of his success to FA, and the other 50% to TA. So even he admits he isn't using TA alone, and who knows what really did what.

Anyways, humans suffer from this thing called narrative fallacy. They like to make up stories after the fact and to explain things, to put patterns to things that have no patterns. They can't accept that many things in life are just pure randomness. They also suffer from ludic fallacy, and I'll let Taleb's own words say it:

"We love the tangible, the confirmation, the palpable, the real, the visible, the concrete, the known, the seen, the vivid, the visual, the social, the embedded, the emotional laden, the salient, the stereotypical, the moving, the theatrical, the romanced, the cosmetic, the official, the scholarly-sounding verbiage (b******t), the pompous Gaussian economist, the mathematicized crap, the pomp, the Academie Francaise, Harvard Business School, the Nobel Prize, dark business suits with white shirts and Ferragamo ties, the moving discourse, and the lurid. Most of all we favor the narrated.

Alas, we are not manufactured, in our current edition of the human race, to understand abstract matters — we need context. Randomness and uncertainty are abstractions. We respect what has happened, ignoring what could have happened. In other words, we are naturally shallow and superficial — and we do not know it. This is not a psychological problem; it comes from the main property of information. The dark side of the moon is harder to see; beaming light on it costs energy. In the same way, beaming light on the unseen is costly in both computational and mental effort." 

 

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