**The Problem with Technical Analysis** **The problem with TA is simple, it's in its calculation, which is hardly ever objective and almost always subjective.** What do I mean by this ? Very simple really, we as traders are trying to forecast where future prices might be. A future price is a number in the future which is itself based on numbers. Therefore why should we not use the claculation of number to analyse prices ? There really seems no good reason why this should not be the case.
Let's take the old example of drawing trend lines. The phrase itself should make you gringe, tell you that something is untoward, it means exactly what it says using your hand to draw a trendline. Bearing this in mind, we should know that no two people are going to draw trendlines the same. Yes I am well aware of the so called rules of drawing where you join higher lows to even higher lows to get an uptrend and lower highs with lower highs to get a downtrend. But even then, where is the objectivity in this, what math was used to get this result ? **None, so just because some guru says it is so then all it means is this is the way he draws lines , it is no more valid than the way how you or I or anybody draws lines.**
Solution: Use linear regression , that will produce an objectively drawn straight line through all the data points calculated by maths, available freely on many broker software
NB. This is still very very basic there are even better ways to produce trendlines.
Now let's come to another bugbear of mine RSI. This is supposed to measure changes in the momentum of prices in hope that you can forecast where they will go in the future.
Momentum is a concept well establish in physics and is calculated by p = m * v, where is p = momentum , m = mass and v = velocity.
So why is it calculated by this concoction:
RSI = 100 - (100 / 1+ RS)
Where RS = Average of x days\' up closes / Average of x days\' down closes
This has no foundation in any concept in hard science and has been plucked out of the air or even other places by Welles Wilder. **It is thoroughly unobjective and totally subjective.** What true value does it have ?
Solution : Use equations based on proven hard science concepts. **NOTE: THIS IS NOT ABOUT IF TA WORKS OR NOT; THIS IS ABOUT HOW MOST TA IS CALCULATED, END OF.**
Also nothing to stop people from using both *
Last edited by wisefoolx; Sep 13, 2017 at 1:29pm.
* |