the basic assumption of TA

[seesound]

Many technical analysts believe that the chart tells us everything including the fudenmentals.

I agree with it insofar as charts(indicators) may reflect the information in the PAST. However, charts just cannot reflect the information in the FUTURE. In other words, good pattern has nothing to do with the future bad news. TA just analyzes one of the aspects.

Just when I was typing these words, I came up with the thoughts that TA just gives you a higher chance of being right given anything else constant. am I right? just cannot figure out it thoroughly.

I am just a new comer to the trading world and soemtimes a bit critical and curious about whatever happens in the trading. Thank you for your patience and enlightenment.

 

[SOCRATES]

Hummm....that is because charts are limited only to record what has happened up to the present. You cannot trade the past. You can only trade the present and the future.

 

[Rhody Trader]

seesound:

The idea behind technical analysis is that the charts, volume, indicators, or whatever contain patterns of human behavior. The technician looks for those patterns, which repeat and can, to a degree, be anticipated.

That's the idea, anyway. Whether one can apply them effectively to make consistent profits is the debate of many threads on this site.

 

[seesound]

seesound:

The idea behind technical analysis is that the charts, volume, indicators, or whatever contain patterns of human behavior. The technician looks for those patterns, which repeat and can, to a degree, be anticipated.

That's the idea, anyway. Whether one can apply them effectively to make consistent profits is the debate of many threads on this site.

Thank you for your replies.
Rhody, you said TA is to explore the repetitive human behaviour, I agree. But how TA can deal with the future information which is separate from human behaviour. (for example, "you can never anticipate the future infomation whatever analysis you use. TA can perform better when status quo" This is only my guess)

 

[seesound]

To SOCRATES: it is very interesting to read your reply. Could you suggest me some reading to prevent me from being one of the nonsense group? I have been looking for such book.Thank you.

 

[nine]

Seesound,

I agree Rhody that you are looking for a pattern that repeats. When one knows the historic probability that the pattern will result in a price move of some magnitude one can predict a reward for entering after the pattern is confirmed.

An element of that repitition that is very important is that it gives you a way of determining when the predicted move has failed ... and thus when you should exit with a loss. Which seems to me to provide the risk side of the equation.

Also you may develop the basis for determining if the pattern, which worked historically, is no longer working.

As an aside, its interesting how many questions etc are now posed almost simulataneously on both T2W and Elite. Makes the discussion about numbers of traders interesting especially when you consider the number of multiple personalities on both boards.

 

[Rhody Trader]

Thank you for your replies.
.... But how TA can deal with the future information which is separate from human behaviour. (for example, "you can never anticipate the future infomation whatever analysis you use. TA can perform better when status quo" This is only my guess)

Future information is seperate from human behavior, that's true, but it's humans who react to that information and create price movement. Thus, you are still trying to anticipate behavior.

 

[peterpr]

Future information is seperate from human behavior, that's true, but it's humans who react to that information and create price movement. Thus, you are still trying to anticipate behavior.

That's my take on the subject too - in a nutshell. Charts price/volume are the footprints of money. There is a lot of human emotion (hope fear, expectation etc) invested in price levels which are plain enough to see. TA simply assists in identifying the levels that are of major importance to the most people , the trick is to extrapolate their likely responses to those levels being breached. In the intra-day trading environment. success is dependant upon you correctly judging how price levels and price action will be interpreted and acted upon by other traders. It's a people business first - TA/technology are just a tools.

 

[nine]

I wonder whether we should now use the term "market participants" rather than "people."

That way our analysis can create effective trading strategies whether the repetitive sequences are created by men or machines. I am sure that some of the short term strategies are following on the coat-tails of computer driven actions.

 

[peterpr]

I wonder whether we should now use the term "market participants" rather than "people."

Yep. No problem with that. But it's people who decide the trading parameters of the machines so it is still peoples' perceptions of the importance of particular price levels that are the over-riding drivers (although short-term probably less so - machines left to get on with it so to speak).

 

[seesound]

Below is my latest understanding.

During a very long period (or in a variety of markets), the "unanticipated" part should as equally be good as be bad, which has no affect on the "true" probability. It is absolutely the case that no pattern can "guarantee" a specific future price move. It has everything to do with the PROBABLITY. It is our task to discover that TRUE PROBABLITY. Today is Monday, and the market goes up. It is ridiculus for me to say that the market has a higher probability in Monday. What I must do is to examine the market performance in previous 100 Monday 1000 Monday 10000 Monday to see whether the phenomenon is robust enough for me to accept this rule. Then Statistics Theory starts to play its part. In addition, the basic explanation(human behaviour) for some "golden rules" is also necessary to determine whether they lie in the extreme of the probability distribution.

As I stated in the start, "the "unanticipated" part should as equally be good as be bad".However, even if the "unanticipated part" is not biased, it is also necessary for us to avoid these uncertainty given we are risk-averse. This "risk" (means uncertainty here) is not compensated. My conclusion is to tend to close position before the announcement of some crucial economic indicators or just doing the daytrading in order to make the "probability" operate consistently.

Am I right?

 

[peterpr]

<snip>....... My conclusion is to tend to close position before the announcement of some crucial economic indicators or just doing the daytrading in order to make the "probability" operate consistently.

Am I right?

You're certainly giving the matter the sort of intelligent thought it warrants before putting money on the line. Statistics and probabilities have their place, as do a host of other technical/scientific disciplines (AI; Cycle theory; various types of regression analyses etc). But finding you way through to a profitable system is a complex journey. IMHO that is what is required - ie your OWN system - not some off-the-shelf black box that leads you by the nose. My experience is that in arriving at a profitable system, one of the biggest problems is in deciding, among all the clamour and noise of newsletter writers and various 'systems' providers, aspiring gurus etc etc, who is providing disinterested information and actually knows what they are talking about

The last two points you make are part of my own rules. I never try to second-guess the effect of news, I just make certain I am aware it is pending and take action (or not) in the light of subsequent price action. I rarely leave a position open overnight - after all the next trade is only a commission away as they say.

 

[SOCRATES]

That's right.

When in doubt, stay out.

When certain, smack it hard.

 

[seesound]

Thanks everyone. I think i have come to the conclusion: avoid anything as much as possible which is not under control.

Thanks again.

 

[Effkay]

TA is based on the very simple premise of supply and demand, if the prices are going up, demand must be exceeding supply and vice versa. The technician doesn't care WHY the demand is outstripping supply, it just is. So if we see a stock rising on new news, we don't care, it looks as if someone somewhere wants this stock for whatever. Now it can be that someone knows something that we don't and hence TA can be seen as predictive of good news, but this is not it's primary use.

Hope this helps.

 

[TheBramble]

TA is based on the very simple premise of supply and demand

I'm not in total agreement. TA, at its most basic, indicates what happened in the past. We can choose to make judgements about what might happen next, or what might have the highest probability of happening next, based on analyses of that past price & volume action as fed to us by any number of vanilla-to-exotic indicators and more traditional TA chart setups. But TA isn't based on supply & demand...

if the prices are going up, demand must be exceeding supply and vice versa.

Disagree very strongly. Price going up may mean demand is exceeding supply. It may also mean someone wants to raise the price in preparation for quite some other intention and purpose.

 

[Effkay]

Sorry bramble, perhaps my wording wasn't great, TA isn't based on supply and demand, the premise of TA is based on supply and demand.

For prices to go up, demand must exceed supply, (I'm not talking about manipulation, manipluation can work to some extent, and can create random noise).

So TA simply looks at trying to predict when demand is likely to exceed supply, and vice versa so we can profit from the price change. Now how do you do this? Well that's the challenge!

The most obvious way is to look at when demand has started to exceed supply (prices rise) and go with it. (Trend Following)

 

[ducati998]

CHARTING,
The graphical representation of a security on a PRICE & TIME axis.

TECHNICAL ANALYSIS
The adding to a basic chart of measurement constructs. These "measurements" may measure volume, volatility, etc.

From the BRAMBLE

But TA isn't based on supply & demand...

I would concur, and probably most would cite VOLUME as a "measurement" of supply & demand.

Volume is a record of the number of transactions within the timeframe measured.
Supply & Demand implies "intent", which is not what volume measures.

So, again from the BRAMBLE,

Disagree very strongly. Price going up may mean demand is exceeding supply. It may also mean someone wants to raise the price in preparation for quite some other intention and purpose.

And this is one important reason for the theory of "PROBABILITY" attached to a chart, or technical positions sinking into the mire of failure.

cheers d998

 

[JumpOff]

As I stated in the start, "the "unanticipated" part should as equally be good as be bad".

"Should" be. And you are wise to stand aside during announcement times if its not part of trading plan. It also helpful to keep in mind that some instruments (stocks) have special rules (you can only sell on an uptick - or if you already own the stock) that are supposed to take some of the sting out of these unanticipated events. Of course all they really do is delay the sting. Some would argue these uptick and circuit breaker rules actually make things worse, because they increase the time anxiety factor..

JO

 

[nine]

Sorry bramble, perhaps my wording wasn't great, TA isn't based on supply and demand, the premise of TA is based on supply and demand.

For prices to go up, demand must exceed supply, (I'm not talking about manipulation, manipluation can work to some extent, and can create random noise).

So TA simply looks at trying to predict when demand is likely to exceed supply, and vice versa so we can profit from the price change. Now how do you do this? Well that's the challenge!

The most obvious way is to look at when demand has started to exceed supply (prices rise) and go with it. (Trend Following)

I was about to leap in and argue with bramble but then I realised that he had underlined "based" so I found myself in agreement with him. So instead I find myself disagreeing the Effkay's clarification. Hmmm, argumentative this morning

Effkay, I don't think that even the premise of TA has to be based on supply on demand. The reality of TA is that it uses historical prices, volumes and related activity to predict something about the future that may or may not be based on supply and demand principles. I think that you can usually use as supply/demand frame to explain what is happening under longer term market moves and that understanding s/d can help you select valid repititions to trade but they are not necessary to TA. All that is necessary is repetitive patterns that can be traded to extract money.

I offer some definitions to help:
http://www.google.com.au/search?hl=en&lr=&oi=defmore&q=define:Technical+Analysis