New Trader: What is the point of TA

[agedevil]

Hi,
I have read several trading books (most are based on fundamental analysis) and none of them mentioned the purpose of TA. I am new to trading; not even in college, but i have read many books on trading. From my perspective, stocks should be chosen based on fundamental analysis and only the part of entering and exiting a trade should be based on TA. Nevertheless, I want this question to be answered because it has confused me for a while now:

What is the purpose of studying TA and does it really work?

I tried programs such as metastock and seen several charts, trends, MAs, etc. BUT i was not able to make anything out of them. I can only assume! However, in the market is assuming really worth it. I believe it is a risk. However, I am really interested in TA and want to learn about it. Basically, I find it hard to believe that TA can help you make money in stocks (ironically, I know it can).

Basically, i want to know the purpose of TA in the stock market.

Thanks

 

[jimbo57]

.

 

[roguetrader]

What is the purpose of studying TA and does it really work?

I find it hard to believe that TA can help you make money in stocks (ironically, I know it can).

Erm, that kinda takes care of that.

Of course that's not really very constructive, it's just that a thread like this often turns into some sort of battleground, anyways, here's a link to get you started

 

[ZDO]

The reason for TA is that "we humans love our patterns” (whether those patterns are adaptive or not – we use them to process info and ‘behave’, etc. all the time). The markets (price charts AND indicators) have repeating patterns that human minds are attracted to. Some are more ‘susceptible’ than others to patterns, and some are more gifted at accomodating the ‘fuzziness’ than others (the patterns more rhyme than actually ‘repeat’ exactly). The odds for each pattern can be roughly ‘backtested’ – but that information provides no information about whether the next instance of a given pattern will unfold as ‘expected’ / ‘desired’ / with the odds … (Actually, fundamentals are just cause / correlation ‘patterns’, too.)
Anyway, patterns are stupid and entries are stupid… you make a trading plan to trade 1 or more (price and / or indicator) pattern(s) and you take every instance of the pattern(s). Upon entry, the keys are 1) to have exact rules for what it means for that pattern to be working or not working and 2) to stay with the pattern if it’s working or GET OUT if it isn’t. Beware: perceptions and reason can get narrowed by limbic overactivity, overwhelm, etc – which spawn development and entrenchment of quite automatic, repeititive coping ‘patterns’ (like the "draw all the way down" pattern that gets a large percentage of participants)…hence the psychology subsections and threads ( ie subjective pattern issues that must be dealt with, each to his own degree, by everyone btw) …. got it?

 

[LongandWrong]

If you are in acedmia, everything you will learn will point to FA as being the yellow-brick road to financial utopia. Plenty of very clever people utilise this learning in professional life and do very well from it.

However, from my experience a conflict can arise, compared to those who have created a mechanical trading appoach from TA, and that is an academic bias which I believe is a common downfall in that people would rather be right than be rich.

FA requires you to continually re-confirm your own mental opinions of the market - rather than accepting an opinion of a positive-expected trading methodology from TA.

Finding what best suits you will be a journey that, it sounds, you are on the path to.(FWIW, I know both FAs that get paid well and TAs that earn well :cheesy: )

Good luck with it.....

 

[agedevil]

thanks for all your help. I am currently reading "William J O'Neil - How To Make Money In Stocks" and it deals with mostly FA. However, i was currently in the process of getting the book that jimbo57 reccommended which was "Technical Analysis of the Financial Markets".

-Thanks

 

[dbphoenix]

thanks for all your help. I am currently reading "William J O'Neil - How To Make Money In Stocks" and it deals with mostly FA. However, i was currently in the process of getting the book that jimbo57 reccommended which was "Technical Analysis of the Financial Markets".

-Thanks

Not that I want to start anything, but, for an introduction to the subject of TA, reading Murphy's TA of the Financial Markets is a bit like consulting Larousse Gastronomique in order to find out how to boil a potato. I suspect you'd be much happier with Murphy's The Visual Investor.

Only problem is that it's much too expensive for what it is. Get it used or get it from the library. Or check eBay. This book will also make a fine companion to O'Neil's book, which is to be commended for avoiding indicators, but which is more than a little out of touch with regard to productive patterns, due largely to his Buy High, Sell Higher bias, which applies primarily to strong bull markets, not sideways markets (and we've been drifting sideways for quite some time).

The strength of O'Neil's book is that he uses fundamental analysis to determine what to buy, then TA to determine when to buy it. But then he also urges the reader to sell based on TA rather than wait for the FA to deteriorate since the chart will always tell you ahead of time of this deterioration.

 

[agedevil]

The strength of O'Neil's book is that he uses fundamental analysis to determine what to buy, then TA to determine when to buy it. But then he also urges the reader to sell based on TA rather than wait for the FA to deteriorate since the chart will always tell you ahead of time of this deterioration.

This is the same idea that i gained from O'Neil's book. Nevertheless, I read Alexander Elder's book, "Come into my trading room" and it had a bit of TA. It seemed like an interesting thing to do :cheesy: .

Thanks dbphoenix, I checked out the book that you reccommended and it i was very pleased that the rating stated that it was great for beginners. I will be sure to read that before i read the "Technical Analysis of the Financial Markets"

-Thanks

 

[dbphoenix]

This is the same idea that i gained from O'Neil's book. Nevertheless, I read Alexandra Elder's book, "Come into my trading room" and it had a bit of TA. It seemed like an interesting thing to do :cheesy: .

Thanks dbphoenix, I checked out the book that you reccommended and it i was very pleased that the rating stated that it was great for beginners. I will be sure to read that before i read the "Technical Analysis of the Financial Markets"

-Thanks

Actually, that's "Alexander". I'm not familiar with the book you mention, but I do know "Trading for a Living", which is good. Unfortunately, Elder has a fondness for indicators that many if not most traders share, giving the impression that TA is about indicators, which it is not. People like you who ask whether or not TA "works" generally have been given this impression, and they unfortunately often reject TA due to the somewhat spurious claims that are frequently made for it.

If you focus on those aspects of TA which deal with trader behavior rather than esoteric patterns and mathematical formulas, you will likely find more of value in it than you would otherwise.

 

[majeasy]

i only trade index futures intraday,
thus i don't think FA could be used or could it have any value....
my favorite index is e-mini russell....
it pays 100 dollars per point, per contract traded,
thus, if you're trading 10 contracts and the market moves in your favor a single point you've made one K......
perfect days are not the norm....
but i took a pic of this one to save because it was so profitable...
it also shows one way TA can be used.....
in the early 1900's the "dow theory" became the first form of TA......
the support and resistance part of the dow theory is used by me on every trade....
the link below is to a picture of that day's chart.....

http://img476.imageshack.us/img476/9042/aperfectday6ca.gif

 

[wasp]

i only trade index futures intraday,
thus i don't think FA could be used or could it have any value....
my favorite index is e-mini russell....
it pays 100 dollars per point, per contract traded,
thus, if you're trading 10 contracts and the market moves in your favor a single point you've made one K......
perfect days or not the norm....
but i took a pic of this one to save because it was so profitable...
it also shows one way TA can be used.....
in the early 1900's the "dow theory" became the first form of TA......
the support and resistance part of the dow theory is used by me on every trade....
the link below is to a picture of that day's chart.....

http://img476.imageshack.us/img476/9042/aperfectday6ca.gif

Hmmm, nice! Have you seen this thread....

http://www.trade2win.com/boards/showthread.php?t=19834&highlight=whale

 

[majeasy]

the dow theory stuff is an easy quick read at :
stockchart dot com education/MarketAnalysis/dowtheory
(i'm new on this board and i don't know the rules on providing links)

the 2 most important forms of TA to me are the long and short trend, then, volume and volume ratio....

Identification of the Trend

The goal of Dow and Hamilton was to identify the primary trend and catch the big moves. They understood that the market was influenced by emotion and prone to over-reaction both up and down. With this in mind, they concentrated on identification and following: identify the trend and then follow the trend. The trend is in place until proved otherwise. That is when the trend will end, when it is proved otherwise.

Dow theory helps investors identify facts, not make assumptions or forecast. It can be dangerous when investors and traders begin to assume. Predicting the market is a difficult, if not impossible, game. Hamilton readily admitted that the Dow theory was not infallible. While Dow theory may be able to form the foundation for analysis, it is meant as a starting point for investors and traders to develop analysis guidelines that they are comfortable with and understand.

Reading the markets is an empirical science. As such there will be exceptions to the theorems put forth by Hamilton and Dow. They believed that success in the markets required serious study and analysis that would be fraught with successes and failures. Success is a great thing, but don't get too smug about it. Failures, while painful, should be looked upon as learning experiences. Technical analysis is an art form and the eye grows keener with practice. Study both successes and failures with an eye to the future.

 

[rols]

Hi,
What is the purpose of studying TA and does it really work?
Basically, i want to know the purpose of TA in the stock market.

Thanks

Nearly all traders use some form of TA and the majority of these trade unsuccessfully. Is this the fault of TA or the perception of the user? If we can only see in black and white then there really is no point in using a box of crayons.

'They were learning to draw,' the Dormouse went on, yawning and rubbing its eyes, for it was getting very sleepy; 'and they drew all manner of things - everything that begins with an M - '

'Why with an M?' said Alice.

'Why not?' said the March Hare.

Alice was silent.

The Dormouse had closed its eyes by this time, and was going off into a doze; but, on being pinched by the Hatter, it woke up again with a little shriek, and went on: ' - that begins with an M, such as mouse-traps, and the moon, and memory, and muchness - you know you say things are "much of a muchness" - did you ever see such a thing as a drawing of a muchness?'

'Really, now you ask me,' said Alice, very much confused, 'I don't think - '

'Then you shouldn't talk,' said the Hatter.

 

[jimbo57]

[.

 

[timsk]

What is the purpose of studying TA and does it really work?
Basically, i want to know the purpose of TA in the stock market.

Hi agedevil,
. . . and welcome to T2W!

I've been a student of the markets for a few years now and, like you, I asked the same question early on. I arrived at some simple conclusions quite quickly and some subsequent conclusions that I am still trying to get to grips with.The 'simple' conclusions are as follows:

1. My introduction to trading came via SIGNet (Serious Investors Group Network) WWW.signet.org.uk - the local group of which holds meetings once a month. Historically, the focus is very much from a fundamental perspective. Indeed, one member, for whom I have huge admiration, is a brilliant fundamental analyst and can 'dissect' a company report in a way that would bring tears to the eyes of any C.E.O. He's a LTBH (long term buy and hold) investor with over 50 years experience and boasts a track record that in percentage terms at least, knocks spots off Warren Buffet. No mean feat. Having said that, he still struggles to come to terms with something I learned very early on. Namely, just because a company has sound fundamentals - a full order book, fantastic growth, great management, zero debt etc, etc, it doesn't necessarily follow that its share price will rise. (I should add: 'in the short term'. I believe that in the medium to long term - a year +, that share prices of fundamentally strong stocks are likely to rise and that their relatively weak counterparts will drift sideways or drop down.)

2. While F.A. may be of great value to the LTBH investor, it is in all probability not the best tool for making entry and exit decisions for the short term trader. So, if you don't use F.A. for this purpose, then you must look to technical analysis. If, when you ask whether or not T.A. 'works' you really mean 'will I make money trading head and shoulder patterns with xyz instrument(s) - then the answer is probably a resounding no. If, on the other hand, you mean 'do price charts of xyz instrument(s) contain all the relevant information upon which a profitable trade may be made' - then I believe the answer is a resounding yes.

That's the simple stuff! This is where it gets tricky - for me anyway. F.A. may be of use to the short term trader / investor as a way of filtering instruments - a la O'Neils CANSLIM system. Thereafter, you have to study the charts and develop an approach which is in synch' with the amount of time you have to devote to the markets, your trading objectives, your experience, your trading capital and your risk profile - etc, etc. Sorting out that particular can of worms is, in my experience, way more complicated and time consuming than assessing the merits or otherwise of T.A. Good luck!

Tim.

 

[majeasy]

Reading the markets is an empirical science.

errrr.......NOT

LOL,
shame on me.....copy and pasting what dow and hamilton wrote perhaps wasn't a good idea......
because i agree with you jimbo57....

i'm a rule based mechanical day-trader and the less i think about a trade the better....

i've been reading some of the other threads on this board.....
and clearly each trader has his or her opinion of what works for them.....
i'm sure many traders successfully use candlesticks, i can't,
some use drawn trend lines, doesn't work for me....
some use fibs and elliot waves, don't have the time to play with that stuff intra-day.....

but give me the long term trend first, then limit my short term trades to the same direction and to me at any rate it's easy....

 

[ZDO]

Nasty wrinkle #61

"In a world in which it's very hard to distinguish between economic growth and credit growth, between credit growth and liquidity, and between liquidity flows and technical trends in financial markets...in a world in which financial markets reflexively impact economic growth as much as they reflect economic fundamentals, it's almost fair to say that the Technicals ARE the Fundamentals." Oliensis

 

[TheBramble]

Good to see more support for Technicals leading Fundamentals. I feel like a lone voice sometimes.

 

[ZDO]

Coherent ??

Good to see more support for Technicals leading Fundamentals. I feel like a lone voice sometimes.

Bramble,

Are you talking Coherent Market Theory here ???

zdo

 

[TWI]

Markets influence the events they attemt to anticipate.

George Soros wrote "Alchemy of Finance" with this premise in mind.