Statistical approach, Money management & Charting


I've been "paper trading" for about six months now, only making two real trades (with Cantor) both of which showed a loss. I'm not too eager to trade for real until I know what I'm doing which I'm not sure is really the case right now :confused:

My question: why is technical analysis important _at all_ ?

Don't get me wrong: this is a tough question. For example let's assume that my money management techniques make sure that when I lose, I lose at most 1, but when I win I win at least 3. This allows me to be wrong 70% of the time and stil make a profit: 30x3 - 70x1=+20.

So, as long as I'm not worse more than 70% wrong then I can win. But then wait a minute: let's scrap the whole guessing game altogether and just toss a coin: head=buy, tail=sell. No matter what direction I decide to enter, my odds are 50%.

So, does technical analysis (from misapplied double tops, to flags that fail to break out, through fifth and final Eliott Wave that's not so final after all) buy you its weight? Because if applying it is not more effective than tossing coins, then let's toss coins!
Hi Verec

Your spot on with your workings that if your average win is higher than your average loss - you can be wrong more than 50% and still be in profit. :)

What TA aims to do is to show areas where price should expand and get to 3 units before getting to -1. Tossing a coin will only give you the decision, without an indication of how far the move will carry and picking an entry at random will be open to whipsaws i.e. getting to -1 before getting to 3.

Thinking in terms of average win, average loss and win % is a great way of accessing if a strategy works. :)

Tossing a coin will net you less than 50/50
because on the downtrends, things get worse quicker so you will tend to
lose more. Also, you will have the psychological barrier to overcome
that says" It will go up if I hang on"...... FATAL
As for TA, it can be used to give you the edge and move the odds in
your favour. _ perhaps not in scalping, but certainly in a longer time
frame- 10's of minutes to a few hours. I have always advocated " wait
until the chart shows it's hand" and then act. Think of it like this.
You are playing BlackJack, and these are the house rules:- you can't
place your bet until the dealer has dealt his hand AND turned over
both cards. Now you can walk away , or bet. You can see the dealers
hand and you can see your hand. Your hand is your strategy and only you
know it. The dealer's hand has his strategy "fixed"- they have to draw
lower than 16 and stick on 17. So, you know where you stand.The risk
now is minimal, and sometimes you will have an "unbeatable" hand.For
example, the dealer may show 18- he can't draw, and you are showing a
pair of Kings. Sometimes, you will have to weigh up the balance of
probabilities- the dealer is showing 16 and you are showing 19, but the
dealer has to draw..... will you bet that he goes bust on the next
card? that's about 60 /40 odds in your favour....... and so it goes on.
I have to say that without technical analysis you might as well burn
your money or put it in an ISA.The next problem is in deciding what
aspect of TA will you chose.? That will largely depend on your
timeframe. BUT as a starting point, I would suggest you look at 100
period moving average on a 1 min chart or 20 period MA on a 5 min
chart. Decide on a strategy that biases you towards trading in the
direction of that trend. If the trend is up, the price will be above
the MA line and so you should NOT be thinking about going short.
Remember that at some stage the price will turn towards the 100MA ( or
20MA) and that is NOT the time to be going long.
My personal favourites are CCI and RSI which combined can be very
useful. Others may advocate MACD/Stochastics etc. It is a very much a
personal choice. You alone have to decide what works for you, and ,
more importantly, that you understand WHY it works. There is no simple
answer, there is no "holy grail" and there are no get rich quick
schemes. You will only profit from hard work and dedication, as I and
many others have done.
If you look back through the archives, there is a year's worth of TA on
the DOW, that concentrates on CCI, RSI and 100MA. Well documented and
commented and a daily analysis of the action on the DOW. Even if you
don't want to trade the dow, the principles will hold true for any
instrument that you may wish to trade. You will just have to learn the
particular "nuances" of that instrument and how to intrepret the action
of CCI and RSI to the price.
Very often the CCI or RSI will develop into a bull triangle and you can
almost bank on the breakout. 3 peak negative divergent tops and 3 peak
positive divergent bottoms are a favourite of mine.
You could do worse than get JJ Murphy's TA of the financial markets- a
great starter book. I can't recommend any courses- they're generally a
waste of money. Read the archives here and you will save yourself a
fortune. It's full of gems. More than you will ever get from a course.
Lastly. CUT YOUR LOSSES. If you don't, it doesn't matter how good you
are, the losses will eventually wipe you out, one way or another......
Just a rider to this....... I think a lot of people that like/use TA make good use of it for making an entry or a decision on a stop loss.... fine..... Bu just how many of you use it to manage your trade? NAZ uses his expertise in managing his trades by way of L2 but I've not seen too many people use TA to manage their trades to good advantage. Pulling out too early is all too common. But wait, I hear you say, a profit is a profit and that's a fine thing and it's "in the bank". Those that "sell half" are on the right track but do they add to their position as the trade improves? Knowing how a stock or index responds to the TA signals will enable to manage your winners with better results. In these hard times, although managing your loses is the BUZZ word, managing the winners will pay dividends.
Finally, let's understand this..... When you get a sell signal/decision from going long, this is NOT an open invitation to go short ( and vice vercsa)