To what instruments is tech. analysis applicable?

Rhody Trader

Senior member
2,620 264
"This practice has its basis in the presumption that investors act rationally and without biases, and that at any moment they estimate the value of an asset based on future expectations."
If you ever see anything that presumes rationality among investors be very skeptical. Even in academia there is a ton of research which documents "anomalous" price behavior - stuff that isn't rational.

To the larger point of the thread, Technical Analysis can be said to attempt to recognize and utilize the not-fully-rational and efficient nature of the markets.
 

dbphoenix

Legendary member
6,952 1,244
See:

https://en.wikipedia.org/wiki/Share_price

"In economics and financial theory, analysts use random walk techniques to model behavior of asset prices, in particular share prices on stock markets, currency exchange rates and commodity prices. This practice has its basis in the presumption that investors act rationally and without biases, and that at any moment they estimate the value of an asset based on future expectations. Under these conditions, all existing information affects the price, which changes only when new information comes out. By definition, new information appears randomly and influences the asset price randomly."

However,

"Empirical studies have demonstrated that prices do not completely follow random walks.[1] Low serial correlations (around 0.05) exist in the short term, and slightly stronger correlations over the longer term. Their sign and the strength depend on a variety of factors."
Beginning traders commonly make the same mistake: they study books and similar printed material rather than the market. Those who take the former route often/usually adopt whatever set of beliefs are propounded by the book(s). Those who choose the latter route develop strategies that are tied to market realities rather than theoretical and philosophical constructs.

Rather than "see" some quasi-academic work, observe the market. Apply the scientific method to whatever hypotheses occur to one. Develop a consistently-profitable trading plan. Then adhere to it.

It's that simple.

Db
 

IFeelFree

Active member
109 19
Beginning traders commonly make the same mistake: they study books and similar printed material rather than the market. Those who take the former route often/usually adopt whatever set of beliefs are propounded by the book(s). Those who choose the latter route develop strategies that are tied to market realities rather than theoretical and philosophical constructs.

Rather than "see" some quasi-academic work, observe the market. Apply the scientific method to whatever hypotheses occur to one. Develop a consistently-profitable trading plan. Then adhere to it.

It's that simple.

Db
I've been investing and trading for 30 years, so I don't exactly consider myself a "beginning trader". As I have a strong math and programming background, my preference is toward algorithmic methods. Obviously, there are many other successful methods of trading. To each his own.

My effort has been to use sound statistical approaches to trading, so as to avoid being "fooled by randomness" -- seeing elephants in the clouds, that is, perceiving patterns that are really the product of randomness. We all have have a tendency toward cognitive biases, so we have to adopt a disciplined approach to trading. As you say, "Develop a consistently-profitable trading plan. Then adhere to it."
 

dbphoenix

Legendary member
6,952 1,244
And I've been trading and investing for 40 years, but that's not pertinent. The fact remains that we develop cognitive biases early. We may even approach the market with our biases already intact, e.g., trading is a "war". Those biases, however, are in us, not in the market, and if one intends to puzzle out the market, he's better off studying the market than studying monographs.

One can develop a consistently-profitable trading plan believing that markets are random. One can also develop such a plan believing the opposite. One can even develop such a plan that is based on planetary alignments. But a belief is not a fact, and to present a belief such as that markets are random as a fact does not reflect the intellectual rigor that mathematicians like to claim for themselves.

Db
 

Fugazsy

Veteren member
3,661 677
NIce conversation on this thread.....please keep it up.
 

tokyojoe

Established member
867 287
Hey everyone! I have a nooby question for you,

To what financial instruments can I apply technical analysis? I am still new to this and I've been reading TA for Dummies as my first TA book and it seems to be focused on stock, I haven't seen any other instruments being used for examples.

What I mean by the question is, it sems highly applicable to stock, but for example, not so applicable to commodities futures since these move due to fundamental reasons or I am wrong? Is there such a thing as an "over\under-valued futures contract"?
Can you apply TA for options? Or Forex?.. Spreadbetting? Anyways what instruments you think it works best with?

-Can you apply TA techniques that you use, say, for stock, on futures markets? or index trading?

-What about timeframes? The TA techniques I've seen so far seem to be applicable on a few weeks timeframes, but what about those who trade minut-by-minute? Or maybe there are specific tools applicable to these short timeframes?

Ayways, hope I made myself clear here, I'd appreciate your help!

Thanks guys!
Hi iliavaco, good question, if you go down the day trading route you will find all TA tells you the same thing.

Price is traded at every single "TA" level, you will use TA then throw it away. I am glad I learned to use it, it helped me focus on the movement of price, but reliance then stole focus away (if that makes any sense) because at the end of the day that's all there is, movement of price, taking of stops & of course cutting loss quickly when the trousers have been pulled down (this is an art all on it's own)

I found it very useful to learn to read the confluence of multiple time frames & still I use 3 tf's together to this day.

No book will teach you to trade, you will glean some insights, but.....

I recommend reading flashboys if you haven't already, although it's been around a while it will highlight how outdated any book is as it comes to print in the trading arena.

All trading instruments work basically in the same way, it's price movement & the reading of not only the print, but the speed of flow (very very important) then it's a matter of trying to hold on to the coat tails of the money movers.

Fundamentals mean squat to me in each average session, aside major events, nfp's & having an eye on data release times all I am interested in is how it moves.

Ps Spreadbetting is very tricky, believe the hype ;) start small, good luck
 

Fugazsy

Veteren member
3,661 677
TA can be applied to all instruments and time frames, it is a great tool which encompasses the psychology of the mass participants, it is an art form and to get advantage out of it a good degree of a street smart attitude is a must combined with experience and proper money management, that way we can be wrong on a development of a certain pattern or technicality and still make money out of it.
 
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tokyojoe

Established member
867 287
TA can be applied to all instruments and time frames, it is a great tool which encompasses the psychology of the mass participants, it is an art form and to get advantage out of it a good degree of a street smart attitude is a must combined with experience and proper money management, that way we can be wrong on a development of a certain pattern or technicality and still make money out of it.
Street smart attitude, like it, so true, even the algo farms are built in da hoods ;)
 
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IFeelFree

Active member
109 19
And I've been trading and investing for 40 years, but that's not pertinent. The fact remains that we develop cognitive biases early. We may even approach the market with our biases already intact, e.g., trading is a "war". Those biases, however, are in us, not in the market, and if one intends to puzzle out the market, he's better off studying the market than studying monographs.

One can develop a consistently-profitable trading plan believing that markets are random. One can also develop such a plan believing the opposite. One can even develop such a plan that is based on planetary alignments. But a belief is not a fact, and to present a belief such as that markets are random as a fact does not reflect the intellectual rigor that mathematicians like to claim for themselves.

Db
One of our cognitive biases is a tendency to explain random outcomes as non-random. We tend to overestimate causality and view the world as more explainable than it really is.

Randomness is defined as "the lack of pattern or predictability in events." The markets are affected by countless events every day, most of which are unknowable in advance, and so, in that sense are "random". Therefore, it makes sense to view asset prices as at least partly the results of random processes. To make money in the markets all you have to do is shift the odds a little in your favor, using whatever methods you have available to you. One of the things I like about statistical approaches is that I can quantify the uncertainty in my forecast of price changes. I can continually monitor the level of stationarity in my portfolio. If the internal structure of the market changes, I should see the statistics change, and this would be my signal to stop trading this strategy.

A belief is not a fact, but when an idea is supported by empirical evidence it rises to the level of a theory that you can have some confidence in. Even in science, our knowledge is subject to revision when confronted with contrary evidence. However, we don't call our scientific theories "beliefs", because they are more reliable than that. They give predictions that are found to be correct, even if those predictions are often statistical in nature (such as in quantum theory). Similarly, statistical approaches that treat asset prices as random are not merely beliefs. They are grounded in mathematical understanding. Treating asset prices as random is a way of analyzing them statistically. The external events that affect asset prices may in reality be deterministic. However, because such events are unknowable to us in advance, they appear as random. Debating whether asset prices are REALLY random isn't productive. For all practical purposes they are random.

If some individuals are able to make money based on hidden causal mechanisms, such as seeing patterns in patterns in random price movements or planetary alignments or whatever, I wish them the best of luck. However, I won't trust my money to such methods. My scientific training causes me to trust sound statistical methods that have been shown to be useful through empirical tests.
 

IFeelFree

Active member
109 19
If you ever see anything that presumes rationality among investors be very skeptical. Even in academia there is a ton of research which documents "anomalous" price behavior - stuff that isn't rational.

To the larger point of the thread, Technical Analysis can be said to attempt to recognize and utilize the not-fully-rational and efficient nature of the markets.
I agree. Investors are not completely rational. That's why trading opportunities develop. I suspect that investors over-react or under-react to events, causing prices to get out of whack. The statistical arbitrage methods I use are an effort to determine when prices have deviated significantly from equilibrium and to bet on their return to equilibrium. It is a form of mean-reversion in which the "mean" is dynamically changing.

My argument is that trading a stationary (mean-reverting) portfolio has a better grounding statistical analysis than much of conventional technical analysis. I'm not saying that technical analysis doesn't work, but that it's effectiveness is limited because of the high degree of randomness in financial time series such stock prices, etc. Others may disagree, but that's OK.
 

dbphoenix

Legendary member
6,952 1,244
One of our cognitive biases is a tendency to explain random outcomes as non-random. We tend to overestimate causality and view the world as more explainable than it really is.
Another is a tendency to explain non-random outcomes as random when they are not as well as to underestimate causality and view the world as less explainable than it is, largely because we don't understand how auction markets work.

If you want to believe in randomness, with quotes or without, you are welcome to do so. That doesn't make randomness a fact.

Db
 

IFeelFree

Active member
109 19
Another is a tendency to explain non-random outcomes as random when they are not as well as to underestimate causality and view the world as less explainable than it is, largely because we don't understand how auction markets work.

If you want to believe in randomness, with quotes or without, you are welcome to do so. That doesn't make randomness a fact.

Db
Randomness is not an inherent quality of some events. It is a statement about our ignorance of the causes of those events. In that sense it is quite real. I can't know everything. Most events are unpredictable.
 

doubletop11

Newbie
6 1
I have software that shows me everyday on just how non random the markets truly are. If you don't have context of trend and the current movement of supply/demand that the market is making then I don't think you should be trading because it is random to you and gives you to much flexibility for a 'random event' pullback, reversal bounce, or retracement to go against you.
 

Thales

Junior member
23 12
the ... mistake: they study books and similar printed material rather than the market. Those who take the former route often/usually adopt whatever set of beliefs are propounded by the book(s). Those who choose the latter route develop strategies that are tied to market realities rather than theoretical and philosophical constructs.

Rather than "see" some quasi-academic work, observe the market. Apply the scientific method to whatever hypotheses occur to one. Develop a consistently-profitable trading plan. Then adhere to it.

It's that simple.

Db
(bold added by Thales)

Everyone I know who has learned to day trade successfully has done it through observing the market and learning to think for themselves.

Best Wishes,

Thales
 
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timsk

Legendary member
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. . . Everyone I know who has learned to day trade successfully has done it through observing the market and learning to think for themselves.
Without wishing to sound facetious - how many do you know?
:p
 

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