Future of TA

[maxwe789]

Technical analysis has its roots in the psychology of the market participants. It is the greed and fear among other things that can provide inefficiencies in the market from which to profit.

The emphasis in the markets as time goes on seems to be professional institutional traders probably/possibly using mechanical systems. Does this not erode the effectiveness of TA?

What is the most likely shift in market behaviour for the future? Will the random walk academics ultimately be right?

 

[One Eyed Shark]

All those theories already exist in the market today.

Random walks, quants and the TA specialist.

Trading is a simple business, when it is going up you buy it and when it is going down you sell.

Only thing that will change the markets in the long term is a lack of volatilty.

 

[Rhody Trader]

Volatility, indeed, is the thing to watch. The more institutions dominate the action, the lower the volatility. That's probably even more true when you talk about algo trading. The institutions are more consistent in their behavior and in the implementation of their position taking. In competing with each other they continuously tighten the markets up, squeezing things to the point of making profitability increasingly difficult. It's the individual speculators that create volatility. They are more erratic, more prone to act on emotion.

The fun part of it all, though, is that at a certain point the emotions of the specs will blow apart the rational computers.

 

[shadowninja]

Interesting discussion. When a programmer writes code for an automated system, what do they tell the computer to base decisions on?

 

[tommog]

good thread,

i think the more people that focus on one style of trading the more the volatility will decrease in the short term, however, a by product of lots of people doing the same thing and volatilty decreasing is a greater likelyhod of volatility increase in the long term. Because when something unpredictable happens in the market everyone has a similar position or order entry technique which catches more people off gaurd.

To give an example, i used to trade the Bund which became a very mature market, by this i mean a lot of people traded it all in a very similar way. There was a time when if you were a local chances are you were involved in fixed income. The trading volumes became huge, the volatility became miniscule everybody was trying to do similar things. Then the subprime sector started to have negative rumours, these outside events cant be predicted, people started to panic and the market started to move more violent as the bigger players started reducing exposure. This caught a vast majority of traders unexpected, their techniques and systems had never seen this movement and to cut a long story short a lot of people lost their jobs because so many people started to bail out of similar positions. The company i trade at used to be almost exclusively fixed income traders, now there are only a handful. The bund is now a completely different market with completely diferent characteristics. Nothing stays the same in trading, but i believe the more people that do the same thing in the short term the more people get hurt in the long run and the market reinvents itself and becomes a young volatile market again as young blood move into it and mot probably make the same mistakes as the last generation of traders.

 

[maxwe789]

Thanks for the excellent answers.

Would adding a volatility aspect to system design help to overcome the changes in market behaviour or would you have to trade the market in a completely different way when change happens?

 

[maxwe789]

Interesting discussion. When a programmer writes code for an automated system, what do they tell the computer to base decisions on?

Price, volume, Indicators etc.

I've been trying to backtest the three ducks strategy that you have been trading Ninj with the 30 pip limit. Not quite got it coded correctly at the moment.

Max

 

[AC26XP]

Anybody seriously consider gaming theory, chaos theory, and/or large number theory in their techincal analysis ?

Thanks,
AC

 

[timsk]

Volatility, indeed, is the thing to watch. The more institutions dominate the action, the lower the volatility. That's probably even more true when you talk about algo trading. The institutions are more consistent in their behavior and in the implementation of their position taking. In competing with each other they continuously tighten the markets up, squeezing things to the point of making profitability increasingly difficult. It's the individual speculators that create volatility. They are more erratic, more prone to act on emotion.

This is the reason why, IMO, newbies and less experienced traders would be wise to stick with equity markets. A few months back, one of the Sunday papers carried an article about the number of new retail traders / investors in China. 5,000000 (yes, five million!) online accounts were opened in the first half of 2007 - with stocks being the most popular instruments traded. I accept tommog's point that volatility may be a problem when trading instruments like the Bund, but I very much doubt that it's a problem that's likely to affect the equity markets any time soon. For this reason I suggest that stocks are marginally easier to trade than instruments dominated by professionals. Additionally,many retail traders will being applying basic T.A. as opposed to the sophisticated algo' models of the pro's. Anyone who trades equities but goes a step or two beyond basic T.A., can really clean up big time. On these boards, Grey 1 is perhaps the best example of this.
Tim.

 

[maxwe789]

Anyone who trades equities but goes a step or two beyond basic T.A., can really clean up big time. On these boards, Grey 1 is perhaps the best example of this.
Tim.

Steps like Level II, statistical anaysis of time series?

Are the pros really that advanced?

 

[shadowninja]

Price, volume, Indicators etc.

I've been trying to backtest the three ducks strategy that you have been trading Ninj with the 30 pip limit. Not quite got it coded correctly at the moment.

Max

1) And what are the price and volume based on?

2) What system are you doing the code for? I use IG Index's thing so can do code but still haven't figured out how it works! (Mind you, I find BASIC quite challenging. )

 

[Rhody Trader]

This is the reason why, IMO, newbies and less experienced traders would be wise to stick with equity markets. A few months back, one of the Sunday papers carried an article about the number of new retail traders / investors in China. 5,000000 (yes, five million!) online accounts were opened in the first half of 2007 - with stocks being the most popular instruments traded. I accept tommog's point that volatility may be a problem when trading instruments like the Bund, but I very much doubt that it's a problem that's likely to affect the equity markets any time soon. For this reason I suggest that stocks are marginally easier to trade than instruments dominated by professionals. Additionally,many retail traders will being applying basic T.A. as opposed to the sophisticated algo' models of the pro's. Anyone who trades equities but goes a step or two beyond basic T.A., can really clean up big time. On these boards, Grey 1 is perhaps the best example of this.
Tim.

I will only partially agree with you here. When you're talking about smaller stocks, ones that are not components of major indices, then it is probably reasonable to say that those are easier to trade, less efficient. In the case of the larger stocks, they will be subject to the actions of institutions and their position through futures, baskets, hedges, arbitrage, and all that other stuff which ties futures contracts, options, ETFs, and individual stocks all together.

 

[maxwe789]

http://en.wikipedia.org/wiki/Algorithmic_trading

This makes me feel a little uneasy. Is there always going to be a place for the individual with these algo traders?

 

[maxwe789]

1) And what are the price and volume based on?

2) What system are you doing the code for? I use IG Index's thing so can do code but still haven't figured out how it works! (Mind you, I find BASIC quite challenging. )

I don't really understand your question, sorry.

I've been trying it in Ninjatrader. I'm a programmer so give me a pm if you need help with anything.