TA or not TA? Tis the question

[tommog]

Markets certainly move for fundamental reasons. There needs to be a purpose for a market to exist, e,g FX's purpose is to facilitate trade between different countries and allow people to hedge their exposure in doing so. Bonds are safe way to protect capital in exchange for lending your money for a specified amount of time even weather futures (yes they do exist) are there for a purpose to allow producers of weather sensitive products to hedge risk. If there wasnt a purpose then we would all be watching computer generated lines on a screen gambling on which way they will randomly tick next (yes i realise the irony of this statement).

All these markets are driven by the people that use the markets for their intended function. Anyone see Euro Yen today? How many support levels did that take out?! This is the carry trade, people using FX for one of its designated purposes and exploiting the interest paid on one relative to another. I dont care how good your support level is in the S&P it wont mean sh*t if a plane flies into wall street, because people will make a fundamental decision that holding stocks in U.S companies that are being literally destoryed is not a sound decision and will cause panic.

However, although it is the fundamnetals that move the market it is possible to ride the coat-tails of these giant and unstoppable fundamental market forces. Ok today the carry trade is a dramatic example of a fundamental move however i sit very near some FX traders that trade FX soley through TA and they captured the whole move down. They dont care about the carry trade all they care about is their technicals gave them a sell signal. TA does work it does allow you to ride big moves but only if you respect that the markets are bigger than your set of lines and diagrams and move as the huge amounts of money are continually reinvested around the world for economic reasons.

The day you hear Jean Claude Trichet announce a rate cut because the Bund has reached a level and then this rate cut have no bearing on the market, that is the day fundamental analysis dies.

 

[dbphoenix]

Considering that 95% of traders lose money . . .

One of the more persistent myths. As I've pointed out elsewhere, the fact is that the "failure rate" among traders isn't that much different than the failure rate among small businesses in general (which may also be not dissimilar from the failure rate in professional schools, or, perhaps, the failure rate in anything), which is around 55 to 60%. And the causes are pretty much the same: lack of preparation and overconfidence. And both of these lead -- for traders -- to the most common specific cause: selling winners too soon and not selling losers soon enough.

Db

 

[Rhody Trader]

Markets certainly move for fundamental reasons.

Markets move to facilitate transactions. That's why they exist. The exchanges make money from transaction fees. Market makers make money by repeatedly buying at the bid and selling at the offer. They are both thereby motivated to generate at much transactional flow as possible and they do that by moving prices to the levels where the most buyers and sellers agree on value, even if only for a short time. How those buyers and sellers arrive at their own determination of value varies enormously, often with nothing to do with any fundamental motivation.

 

[nine]

It is true though that fundamental elements drive market moves.

I think that its much truer to say that "participants perceptions of fundamental elements and the likely behaviour of other participants drive market moves."



Re the OP's comment about paper traders at ET posting P&Ls: this displays a lack of awareness and someone who didn't do their research. The ET P&L thread primarily attracts posts by real traders and the reaction to any who are found to be otherwise is swift and aggressive in the way that is only found at ET.

The suggestion that those P&Ls are generated by following lagging indicators seems a little naive as as well. The "big" posters have usually left clues as to their strategies and although they are technical very few of them are likely to involve following MACDs around the market.

Technical trading is about using historical prices (maybe only milliseconds), perhaps volume, and possibly volume at price or bid/ask, to decide on trade entry and exit. It doesn't have to involve any particular indicators.

 

[dick_dastardly]

The "big" posters have usually left clues as to their strategies

I have often wondered if this may be the reason why ( on a site such as this with 75k plus members ) very few are prepared to post live calls.

Perhaps it's not that they're afraid of looking foolish for posting a losing trade but rather they fear having their trades back engineered.

Apologies if I'm getting a little off topic, I was just thinking out loud that's all.

dd

 

[breadman]

Fundamentals are best used long term and TA short term.
An example I give is gbp/usd
On fundamentals the pound and all other currencies bar the yen are rising aganist the dollar for the last 4/5 years.In the short term, the last week gbp/usd and the other currency pairs were making new highs then the China came out and told the world they were going to hold less dollars. On fundamentals this is bad for the dollar. The dollar then fell for another 1 to 2 days and then had a big reversal.Looking at TA would have told you short term the pound and other currencies were over bought.

 

[FXSCALPER2]

TA or not TA is definitely not the question. To make money trading, you really have to understand, at some level, this is a numbers game. If I talk to two people, one very proficient at TA and even fundamental analysis (FA), and the other a coin toss'er with a good grasp of probability and odds, I will invest with the latter.

Trading is tricky for reasons that most people do not uderstand. The reason is, it usually takes ages before the coin drops, by which time, the trader is out of money and busted. The only way you will ever learn what this game is about is by making sure you actually do not run out of money before you get the chance to find out. I am sure that all the books and articles you read mean absolutely nothing unless you actually have the experience, and experience will show you this ain't about TA or FA.

Trading is a very unfair game. When the typical trader starts in this business, he starts with a huge disadvantage. He doesn't know what he is doing and he typically does not have enough capital. The novice trader needs to have more money than traders who know what they are doing simply because he tends to make lots of mistakes and is inevitably wrong about the markets. These are serious handicaps.

What happens after you are at this business for a while is you get a kind of sixth sense about all sorts of things. For example, you tend not to really have a stop loss level to which you adhere. You get a good sense of where to get out before your stop is hit. Your selection of trades tends to be more accurate and so on. And you will realise that, what you are doing is not based, on the main, on TA or FA. Sure, you are still aware of S/R levels and the impact of news, etc, but what happens is, you develop a good sense of how to put all the information into a coherent whole that guides your decision-making.

I have been asked by friends and my sister to teach them how to trade FX, and each time I failed completely. I don't know how you can teach that extra thing you do when you make money trading month after month.

However, I know the one thing that will make sure you will fail: taking big losses and small profits. One of my friends was pretty switched on with the technicals and everything else, but he took losses that were too big from time to time. If you do that, it is a mathematical certainty you will fail. There is no point wasting your time and money doing something that will eventually fail.

So, if I were asked how to make money trading I would say this: most of the time you lose and win small amounts and sometimes you win big. If you are good at scalping, you can make money but you have to be ruthless with the losing trades.

Either you have to cut your losses and let your profits run; or you have to cut both your profits and losses and win more often than you lose; or give your losers some rope but make sure you win a very high percentage of the time. The process really is one of making a choice from these. The last one is dangerous and the middle one is hard. If you can do the former, you are going to do well, TA or no TA.

 

[nine]

Either you have to cut your losses and let your profits run; or you have to cut both your profits and losses and win more often than you lose; or give your losers some rope but make sure you win a very high percentage of the time. The process really is one of making a choice from these. The last one is dangerous and the middle one is hard. If you can do the former, you are going to do well, TA or no TA.

Great post ... I would disagree with one point, the difficulty of your middle option.

1. cut your losses and let your profits run
2. cut both your profits and losses and win more often than you lose
3. give your losers some rope but make sure you win a very high percentage of the time

The last one feels easiest but is dangerous because when one has to take the infrequent big loss it can be very hard to do. Also, if the edge changes in some way you may not notice it until its "too late."

The first one (taking as much as the trend will give you, or trend following) tends to have win rates in the 35% to 50% range and is thus harder psychologically than 2. In 2 you set a target that is likely to be reached frequently and is bigger than the loss. If you pick a good entry setup then you should be able to target 1.5 to 2 times your loss and win 70% to 80% of the time. Because you win frequently trading will feel easy. Because you win frequently then you will have smaller runs of losers and shorter drawdowns.

So I would argue that 2, trade with an exit target is psychologically the easiest for most new traders.

Ahhh ... but maybe I see your point ... you do have to have a good entry strategy to make that work. The trend following strategy can often work with an awful entry strategy because trailing stops can make up for poor TA.

 

[salska]

yes nice post that man ... FXSCALPER ... very eloquently put indeed. My response on this thread was intentionally brutal as trading success cannot be mechanical by the large majority of traders. Technical Analysis can be very powerful and as I successfully trade using TA I am not knocking my selection of tools that work for me.

However, there is that intuitive skill that one has to develop which only comes from losing experiences that must lead you to pause, rethink and recalibrate your trading instrumentation to make sure that it is actually working. When price behaviour diverges significantly from what your instrumentation is saying, then you need to think again and keep searching until you find what works with you.

What the proportion of successful vs failed traders are who knows! I would guess it's high and as I am a man who plays the odds, I would guess the crocs rarely stay hungry in this business.

Trading success for me is nothing more than a trendline and the supply/demand dynamic of a price bar on my chosen timeframes with supporting money management to fit in with the timescales that I will hold a position which must take into account the likely volatility of that instrument over that period.

Unfortuantely there is no other way of learning to trade successfully. You must get into the ring and fight for your life. If you can keep coming back and learn a few tricks that work for you in a consistent way wothout getting a Knock out blow, then you will do well.

 

[TickCOM]

60% of all buy-side banks and hedgefunds use algorithmic trading

Some numbers:

- 60% of all buy-side banks and hedge funds use algorithmic trading
- More than 1/3 of all trades are today executed by a algorithm running on a computer
- This is expected to rise to 50% in 2010, thats in two years

I think the above answers the question wether TA can be used profitable in trading, its more a question of knowing how to use TA.

 

[Rhody Trader]

Some numbers:

- 60% of all buy-side banks and hedge funds use algorithmic trading
- More than 1/3 of all trades are today executed by a algorithm running on a computer
- This is expected to rise to 50% in 2010, thats in two years

I think the above answers the question wether TA can be used profitable in trading, its more a question of knowing how to use TA.

Do not make the assumption that algo trading is all based on technicals. It most certainly is not. I know for a fact that there is a growing group of funds using news items as their inputs to trigger trades.

 

[Hoggums]

Some numbers:

- 60% of all buy-side banks and hedge funds use algorithmic trading
- More than 1/3 of all trades are today executed by a algorithm running on a computer
- This is expected to rise to 50% in 2010, thats in two years

I think the above answers the question wether TA can be used profitable in trading, its more a question of knowing how to use TA.

I think you'll find that most of this Algo trading is still abitrage where the calculations are simple and profits are immediate and apparent.

 

[FXSCALPER2]

I think you'll find that most of this Algo trading is still abitrage where the calculations are simple and profits are immediate and apparent.

I am sure they are. Otherwise, they are doing bad philosophy like the social Darwinians.

 

[salska]

i think you'll find that those institutions have slightly better leverage and a back up of funds to support their algorithmic approach to trading than the average trader ...

 

[TickCOM]

I think you'll find that most of this Algo trading is still abitrage where the calculations are simple and profits are immediate and apparent.

Profitable algos are not simple, thats for sure. There may be some profitable algos which are simple, but thats more an exception than a rule.

Even using 4 timeframes, more than 100 criteria to chose from, 8 combined OR algorithms for buying/selling and 8 other OR algorithms for your exit strategy, you will still find it a challange to make a profitable and stable algorithm !