Why in the world should TA work ?!

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Old Jan 10, 2017, 12:52am   #1
 
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Why in the world should TA work ?!

I need some help here please. Regarding market efficiency, particularly Technical Analysis and Price action. I really believe in TA and have observed that some patterns really has a positive expectancy (though not very big but big enough to beat random entry at least). My question is:
If anyone can easily recognize and trade the exact same pattern, then why in the world would anyone think he has an edge over the market ? I just can't get it, what am I missing here ?!
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Old Jan 10, 2017, 9:08am   #2
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Patterns are not the most important or helpful aspects of TA, they're not to be believed and traded off as if they were traffic lights. They may be handy guides for confirming what price action on the chart is already suggesting.
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Old Jan 10, 2017, 10:13am   #3
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Hi lolo55,
Welcome to T2W.
Quote:
Originally Posted by lolo55 View Post
I need some help here please. Regarding market efficiency, particularly Technical Analysis and Price action. I really believe in TA and have observed that some patterns really has a positive expectancy (though not very big but big enough to beat random entry at least). My question is:
If anyone can easily recognize and trade the exact same pattern, then why in the world would anyone think he has an edge over the market ? I just can't get it, what am I missing here ?!
When you say that you 'really believe in TA' - what do you mean by that? That's not a trick question and I'm not trying to be clever or funny - it's a serious question. TA has become an ill defined generic term that means different things to different people. For example, many traders regularly look at charts, but have little understanding of - or interest in - the basic tenets of Dow Theory. (If you're not sure of these yourself, this Sticky provides the briefest of introductions: Essentials Of Technical Analysis.)

Regarding your question, patterns that you may be able to observe do not in themselves provide a trader with an edge or a positive expectancy. There's nothing inherent in a chart that provides a trader with either of these: both are created by the trader himself in response to whatever it is that he thinks he observes in the chart. You could take a hundred traders who all understand and are able to identify a head 'n shoulders pattern - but very few of them will be able to trade it profitably and consistently over the medium to long term. If successful trading was simply about pattern recognition and nothing else - then most members of T2W would be fabulously wealthy!
Tim.
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Last edited by timsk; Jan 10, 2017 at 10:19am.
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Old Jan 10, 2017, 10:44am   #4
 
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Originally Posted by timsk View Post
Hi lolo55,
............ then most members of T2W would be fabulously wealthy!......
Tim.
I thought they were
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Old Jan 10, 2017, 12:16pm   #5
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I think the study of TA innately draws new traders towards unnecessary complexity. Its partly a result of our upbringing and all of our experiences in other fields. More knowledge must be better, more skills must be more efficient, more data must support better decisions, some training is better than none, etc. etc.

Forget all these innate assumptions in trading. They will help in a career as a GP but not in trading.

If you only know this you can start trading -
Successively rising (or falling) prices over a period of time make a trend. Trends tend to continue. Trends don't move in a straight line. Trends that have paused but not reversed will probably resume.
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Old Jan 10, 2017, 2:48pm   #6
 
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Quote:
Originally Posted by lolo55 View Post
I need some help here please. Regarding market efficiency, particularly Technical Analysis and Price action. I really believe in TA and have observed that some patterns really has a positive expectancy (though not very big but big enough to beat random entry at least). My question is:

If anyone can easily recognize and trade the exact same pattern, then why in the world would anyone think he has an edge over the market ? I just can't get it, what am I missing here ?!
Technical analysis is about behavior, particularly motivation: why are buyers and sellers transacting prices here and not there? Sometimes these transactions appear to form patterns, and since it's "easier" to look for patterns than to think about the whys of demand and supply, inexperienced traders look for the patterns. But the patterns are just bunnies in clouds. What matter are motive and desire.
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Old Jan 10, 2017, 4:59pm   #7
 
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Originally Posted by tomorton View Post
Patterns are not the most important or helpful aspects of TA, they're not to be believed and traded off as if they were traffic lights. They may be handy guides for confirming what price action on the chart is already suggesting.
For me any analyzing price action means nothing but detecting patterns that might work , not necessarily classical chart patterns.
What do you think ?
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Old Jan 10, 2017, 5:11pm   #8
 
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Quote:
Originally Posted by timsk View Post
Hi lolo55,
Welcome to T2W.

When you say that you 'really believe in TA' - what do you mean by that? That's not a trick question and I'm not trying to be clever or funny - it's a serious question. TA has become an ill defined generic term that means different things to different people. For example, many traders regularly look at charts, but have little understanding of - or interest in - the basic tenets of Dow Theory. (If you're not sure of these yourself, this Sticky provides the briefest of introductions: Essentials Of Technical Analysis.)

Regarding your question, patterns that you may be able to observe do not in themselves provide a trader with an edge or a positive expectancy. There's nothing inherent in a chart that provides a trader with either of these: both are created by the trader himself in response to whatever it is that he thinks he observes in the chart. You could take a hundred traders who all understand and are able to identify a head 'n shoulders pattern - but very few of them will be able to trade it profitably and consistently over the medium to long term. If successful trading was simply about pattern recognition and nothing else - then most members of T2W would be fabulously wealthy!
Tim.
I believe that price action contain some valuable information about balance of supply and demand, order flow created by more informed traders or market makers. I believe that price action shows the path of least resistance.

Sorry, but I tried to understand what do you mean but you lost me!
What I understand that plain vanilla price action can't provide an edge, but if used in combination with other distinct information it may work , Am I understanding right ?!
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Old Jan 10, 2017, 5:13pm   #9
 
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Originally Posted by tomorton View Post

If you only know this you can start trading -
Successively rising (or falling) prices over a period of time make a trend. Trends tend to continue. Trends don't move in a straight line. Trends that have paused but not reversed will probably resume.
This is very helping, thanks!
So you are saying that plain vanilla price action works, right ?
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Old Jan 10, 2017, 5:25pm   #10
 
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Originally Posted by dbphoenix View Post
Technical analysis is about behavior, particularly motivation: why are buyers and sellers transacting prices here and not there? Sometimes these transactions appear to form patterns, and since it's "easier" to look for patterns than to think about the whys of demand and supply, inexperienced traders look for the patterns. But the patterns are just bunnies in clouds. What matter are motive and desire.
I understand, so if i have a hypothesis that some pattern occurs and repeats because of underlying behavior of traders , maybe a panic, or greed , or gambling or rapped in a losing position, or whatever, does this make a difference. Still It's a pattern in price action. Knowing the reasons behind or not doesn't make a difference. What do you think ?
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Old Jan 10, 2017, 5:42pm   #11
 
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Originally Posted by lolo55 View Post
I understand, so if i have a hypothesis that some pattern occurs and repeats because of underlying behavior of traders , maybe a panic, or greed , or gambling or rapped in a losing position, or whatever, does this make a difference. Still It's a pattern in price action. Knowing the reasons behind or not doesn't make a difference. What do you think ?
The patterns you see may result from some sort of repeated behaviour or they may not. Understanding why they may be occurring is helpful.

Try charting a series of coin tosses and you'll see a lot of those self same patterns occuring, but sure as hell that's not going to help in determining what is more likely on the next toss.
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Old Jan 10, 2017, 5:50pm   #12
 
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Originally Posted by lolo55 View Post
I understand, so if i have a hypothesis that some pattern occurs and repeats because of underlying behavior of traders , maybe a panic, or greed , or gambling or rapped in a losing position, or whatever, does this make a difference. Still It's a pattern in price action. Knowing the reasons behind or not doesn't make a difference. What do you think ?
If it made no difference, then the "head and shoulders pattern" would "work" every time. But it doesn't, largely because most of those who look for it and trade it don't understand why it's being formed. It's the behavior that determines whether or not the "pattern" will unfold in the expected way, not the pattern itself.

If following patterns were all there was to successful trading, the success rate would be many times higher than it is. Who can't follow a pattern?
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Old Jan 10, 2017, 5:51pm   #13
 
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lolo55 started this thread Still no answer to my question:
If anyone can easily know about and follow the same strategy; being pure price action or PA as a component in a larger but simple strategy, would not competition ruin the edge ?!
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Old Jan 10, 2017, 6:00pm   #14
 
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Originally Posted by lolo55 View Post
Still no answer to my question:
If anyone can easily know about and follow the same strategy; being pure price action or PA as a component in a larger but simple strategy, would not competition ruin the edge ?!
Your question is based on a false premise about patterns as has been discussed.
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Old Jan 10, 2017, 6:10pm   #15
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The problem is that any given pattern has zero correlation with other seemingly mirror patterns. Market conditions are forever changing and no 2 intervals are the same (different players, different circumstances, different sentiment). So what I am saying is that any given price structure ultimately doesn't signal a given outcome. It's more a case of perceived patterns by the observer having significance when in fact it doesn't. This is the inevitable cost of TA
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