The Problem with Technical Analysis


Wisefoolx's original post is interesting with some astute observations. My study of TA has led me to the conclusion that momentum is the only tradable advantage that the retail investor can exploit. But momentum is physics--pure and simple. RSI (and oscillators like it) are voodoo and yield results that are in no way related to momentum.

The inputs to my formula for relative momentum are % return in various time framed weighted toward the present. This is the “velocity” half of the equation. (Some people might call this “weighted alpha.”) The “mass” part of the equation is volume. (So far, this is all objective.)

This gives me relative momentum figures for the S&P, the market sectors, and the individual stocks in my watchlists. (Of course, how these relative figures are used to pick trades is largely subjective.)

The academics have speculated for years over why momentum works, with most of their conclusions related to investor psychology. The answer, I believe, is very simple. Momentum is an easy and objective way to quantify the trend. And the trend, as we all know, is your “friend.”
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