TA - self fulfilling prophecy?

[jls483]

It occurred to me that if a large proportion of the market is looking out for support, resistance and trend lines then their affectiveness will increase.

For example if people believe there is going to be support at 4000 then as the price drops towards 4000 people are going to be less keen to go short and so the balance of power moves to the buyers and the price stabilises. If people had not been using charts then the price would have drifted down through 4000 and turned at another point.

It is almost as if support, resistance and trend lines are a secret pact being followed by TA'ers, which apply until the larger forces in the market force a breakout.

 

[Gary777]

I agree 100%. It's certainly why things like pivot points work.

But at the end of the day if it 'works' then that's all that matters?

 

[TBS]

The market place is too big. Sure there are certain levels at which many people would expect a market to be supported - psychological round numbers - that is generaly because we all talk in round numbers, and the rounder it is the more 'important' it becomes.

if you consider that everyone has different methodologies:

Value
growth
LTBH
FA
TA
Combination
Tick traders
Day traders
Scalpers
Swing traders
Position traders
LTBH

etc..............

Not to mention different risk tolerances, then to consider TA as self-fulfilling is frankly wrong.

Plus, consider that TA in itself is a huge subject with hundreds of sub-divisions (most of which are Mathematical Analysis rather than pure charting).

Chart patterns, support/resistance etc is a function of the whole marketplace, the price action will always follow the path of least resistance as the whole 'herd' moves, all TA does (in terms of Charting anyway!) is provide a framework that identifies the trait of the herd and the interactions of fear and greed. It hasn't changed in the past 100 or so years, it is unlikely to change now - history repeats itself.

 

[Helenqu]

Hiya,

Get hold of copy of JJM and read pg 16 the section on TA as self-fulfilling prophecy

It concludes:

"for any forecasting technique to become so popular that it begins to influence events, it would have to pretty good. We can only speculate as to why this concern is seldom raised regarding the use of fundamental analysis".

See he does have a sense of humour

 

[TBS]

See he does have a sense of humour

Oh definitely, he devotes a chapter to indicators

 

[Steve-E]

Any TA system that becomes very popular can create a self fulfilling prophecy, people tend to work out trendlines and the such in very similar ways.
'Trading fairytales' was a good description that I heard.

Support/Resistance is slightly different, for example...

12/11/2002 BAE Systems
Open- 163.500
Close/Low-131.000
Volume-110970928

A massive drop and then gapped down nearly 30 points the next day. Considering the volume traded, a lot of people were left swinging in the breeze with this one.
All those people holding them at 131 because they thought it was the bottom are now just waiting to dump them as soon as the price rises. The price has now bounced off 131 four or five times since as people offload.

It's not really belief or a self fulfilling prophecy in these cases, it's just people trying to minimise their losses.

Hear endeth the granny-suck-these-eggs lesson...
(you can wake up now)

 

[FTSE Beater]

Hi Steve-E

Welcome to T2W

I agree with you, and people waiting to dump the stock is going to be shown in that chart in the form of a large gap - which may or may not get filled.

Just my thoughts

 

[reactor]

black-scholes pricing model

the black-scholes pricing model is true only because everybody uses it to price various derivative products except for american puts where they use trinomial trees.

everything hinges upon supply and demand and the big investment banks with their trading floors move the markets more than any individual player. they know the where the prices of all the securities should be and therefore when the market steps too far out of line from the true price, their traders move in to lock in a profit as they move the market back to where the equilibrium should be. their actions causes other players in the market to jump on board causing a snowball affect. as a result equilibrium is overshot and so the security will have to ride the other way eventually.

if they were to use any kind of TA it will be pricing channels because they are based upon supply and demand principles and will tell you when something is overpriced or underpriced. pricing channels are more complete than support and resistance lines as they use the price to determine the boundaries rather than letting the eye determining. TA will become true if everyone uses the same indicator there is no doubt about it but it would mean the investment banks won't have their edge and they would lose business. remember they have all the numbers that move the markets.

if you really want the edge then you need some contacts on the trading floors of the big banks so they can tell you their plan for the day as they rig the markets.