Honest View on Technical Analysis

#1
I was talking with a friend recently who was telling me about his system where he does all sorts of technical analysis on a stock in order to predict the price. he uses all sorts of methods with names i cant even remember. He was talking about retracement levels, and fibonacci levels, and tried to make it sound scientific.
I have read the same things on this forum. I wonder how many people realize....that even after doing all that....all they are actually still only doing is guessing :)
All technical analysis is based on the old perfect market principle, and of it being an efficient finder of prices.
The theory was that at all prices, the ratio of buyers and sellers in the market will determine the real price of a product, and the price will move accordingly. And that the market has complete and 100% knowledge of all possible events and through this price finding mechanism will factor it in.
Technical analysis started simple. people would look at the charts and try and figure out where a stock was trending generally. Was it going up? was it going down? in a general trend.
Then as there was more money to be made, people started trying and coming up with more and more complicated ways and terms and tests to try and predict a movement in the market.
They try and apply fibonacci retracement levels, why....because fibonacci numbers are found in many places in nature. .... so? what does that have to do with markets? why should that be important?
Ive seen people looking at charts that are years old, and trying to draw lines all over the place. how is any news that is more than a year old that relevant? things change so fast in todays world...how can you use something from a year ago to predict?
To a degree, i can understand support and resistance points. If people were hesitant to overvalue or undervalue a stock beyond a certain point in the recent past, then its a good reason to hesistate to overvalue or undervalue it again.

if you read some of the texts written by some of the great traders that the world has seen, they never used technical analysis. They realize that the world changes by the day. new correlations are found, old correlations are removed. The past is relevant, but the present even more so. The future is always uncertain. if you are going to gamble, it is always better to gamble on a company rather than a chart.

Just because you want to give a name like "technical analysis"....doesnt make it either scientific or a reliable predictor of the future. You can throw around names of fancy systems, you can use the number of petals in a flower to predict the movement of a stock (which is what the fibonacci numbers are....flower petals are always in fibonacci numbers ) ....
but how is this different from tantrics who cut open an animal to predict the future?

We are all gambling on the stock market. Lets not forget it.....at the end of the day, its all speculation.
 
#2
Keep it up brother ! You are on way to become a great trader.

This is the first step in becoming a great trader- remove all indicators from charts and trade price action.

Market is a set of 'repeated human behavior'. You need to 'retrain' your mind to handle volatility, whipsaws and recognize market patterns which gets repeated.

Today Nifty Future pattern got repeated again as European markets rose after 12:30 and Nifty Future rose along with it.

Focus your energy in watching markets intently, making notes and familiarizing your self with market repeated human behavior pattern.

It will take around 220 sessions (1 year) to 'retrain' the synapses and neurons inside the brain.

Also keep reading about trading psychology. 'Trading in the zone' by mark Douglas will change your life as a trader and will push you in thinking like a top trader.:)

Full respect and regards to all technical traders.
 

rajeabc

Well-Known Member
#3
........................
I have read the same things on this forum. I wonder how many people realize....that even after doing all that....all they are actually still only doing is guessing :)

May be you are right that we make guesses. BUT I would put this in another manner , I would say that we are trying to learn and understand market rules which are followed by active players.

All technical analysis is based on the old perfect market principle, and of it being an efficient finder of prices.
The theory was that at all prices, the ratio of buyers and sellers in the market will determine the real price of a product, and the price will move accordingly. And that the market has complete and 100% knowledge of all possible events and through this price finding mechanism will factor it in.

Yes you are right the price has news affect in it then price should not change on daily basis or unless there is some relevant news ? To understand this

First we need to understand what are the elements which constitute charts(or resources for technical analysis ). As you said , fundamental is just price and volume(buyers and seller) rest indicators are just combinations of price and volumes. So basically you are just seeing price and volume in different fashions.
As you know basic concept is DEMAND/SUPPLY. So what do we do with these charts. Using these charts (available information) we try to analysis how other players in the market is going to behave . But we don't know exactly what kind of tools (informations and thought process ) they are using to understand the market(us).





Technical analysis started simple. people would look at the charts and try and figure out where a stock was trending generally. Was it going up? was it going down? in a general trend.
Then as there was more money to be made, people started trying and coming up with more and more complicated ways and terms and tests to try and predict a movement in the market.
They try and apply fibonacci retracement levels, why....because fibonacci numbers are found in many places in nature. .... so? what does that have to do with markets? why should that be important?

In this process we just keep learning more and more to understand our opponents' moves . And you know things become complicated as go higher. Same is happening in the Stock market as well.


Ive seen people looking at charts that are years old, and trying to draw lines all over the place. how is any news that is more than a year old that relevant? things change so fast in todays world...how can you use something from a year ago to predict?

Why do we celebrate April fool on 1st april ? Simple , because this has been happening for so long and every one is doing and if you don't know(not asking to do ) then you will be surprised if you see some one doing some thing.
Same thing is in market if most of the players are following certain believe then technical analyst just try to follow what he/she see on charts. TA just analyse the rules of game , they never make/change any rules.


To a degree, i can understand support and resistance points. If people were hesitant to overvalue or undervalue a stock beyond a certain point in the recent past, then its a good reason to hesistate to overvalue or undervalue it again.

What are Resistance and support level ? There are many fundamentalists who will have different price for same stock . They are the level where most of people agree .There are many stocks which are undervalue(below book value) but no one is buying because majority believe in that.

if you read some of the texts written by some of the great traders that the world has seen, they never used technical analysis. They realize that the world changes by the day. new correlations are found, old correlations are removed. The past is relevant, but the present even more so. The future is always uncertain. if you are going to gamble, it is always better to gamble on a company rather than a chart.

Charts are always for short term . You can not invest for long term based on your chart. You chance to win a gamble will improve if you have a chart (or information on how things are happening inside)

Just because you want to give a name like "technical analysis"....doesnt make it either scientific or a reliable predictor of the future. You can throw around names of fancy systems, you can use the number of petals in a flower to predict the movement of a stock (which is what the fibonacci numbers are....flower petals are always in fibonacci numbers ) ....
but how is this different from tantrics who cut open an animal to predict the future?

We are all gambling on the stock market. Lets not forget it.....at the end of the day, its all speculation.

Let me tell you difference between gamble and trading using chart.I will take two ex:
1: Some time in last sept you decided to invest in SBI (Price 1900 )assuming that it has got a good future. Now you tell me when will you take your profit out ? There are two ways to do it, just leave it for long term or keep analysing and book profit when it start falling . Any trader would have got at least three opportunities to trade SBI in last 9 months .and made same profit what you might make after few years . It happen just because of technical analysis (or say analysis if you have problem with Technical word).

2: I have taken a bet in CALS. Looking at chart , I shouldn't have invested in this but they are trying to set up a refinery so I thought just take a bet as they might announce FC soon. But there is bad news as well -they might packup. This called Gambling .

IN MY UNDERSTAND , technical analysis is a method to use price and volume in various fashions to understand our opponents' moves to have advantage over them. BUT we should not forget that even opponents are try to analysis our move so smart(faster ) people make money.

For ex: As you understand Resistance and support level. Every one know that if a stock crosses resistance with high volume means it will go up more. So if they are shorting stocks they will keep stop loss at/just above the resistance . BUT so many time you would see that stock will start coming down just after crossing resistance level . WHY THIS ?
WHY against the normal believe ? because there are more powerful smart players in the market who know that most of the stop loss would be around resistance so they try to take that out. So if you have chart in front of you then you can see how volume and price is moving and make sure if the resistance break was a genuine .

Hey , if some thing you did not like please ignore that. Just mentioned what I think.
 
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#4
Keep it up brother ! You are on way to become a great trader.

This is the first step in becoming a great trader- remove all indicators from charts and trade price action.

Market is a set of 'repeated human behavior'. You need to 'retrain' your mind to handle volatility, whipsaws and recognize market patterns which gets repeated.

Today Nifty Future pattern got repeated again as European markets rose after 12:30 and Nifty Future rose along with it.

Focus your energy in watching markets intently, making notes and familiarizing your self with market repeated human behavior pattern.

It will take around 220 sessions (1 year) to 'retrain' the synapses and neurons inside the brain.

Also keep reading about trading psychology. 'Trading in the zone' by mark Douglas will change your life as a trader and will push you in thinking like a top trader.:)

Full respect and regards to all technical traders.
*sigh*

Two quotes from Mark Douglas himself:

There is a random distribution between wins and losses for any given set of variables that define an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. what you dont know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. when you really believe that trading is simply a probability game, concepts like right and wrong or win and lose no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.
(from Trading in the Zone)

You need to understand that technical trading systems are not designed to be out-guessed. What I mean is, they aren't designed to give you isolated signals of an opportunity to be taken when it seems right. What they do is mathematically define, quantify, and categorize past relationships in collective human behavior to give you a statistically probable outcome of the future.
(front page of his website)

Looks like he agrees with me. Its all speculation. All that technical analysis systems do is try give you better than a coins toss chance. i.e. if you took a dartboard of stocks, threw 100 darts at them, in a normal market, about 50% of should go up. (50 -50 chance, go up or down).

Now, you want to talk about indicators, and then you bring up the european market. In other words, why are you doing a technical analysis on indian stocks. You should do technical analysis on european stocks, see if they will go up or down, then on that basis recaluclate the index, and then buy or sell indian stocks no?
 
#5
Hey , if some thing you did not like please ignore that. Just mentioned what I think.
It was a good reply. I dont agree with a few things, but you are always welcome to what you think. i wanted to start this thread so people could say what they wanted to .
it was definitely one of the more intelligent replies ive heard on this forum:thumb:
 

simple_trader

Well-Known Member
#6
I am not good in English language. Still let me try to express myself. Technical Analysis is not everything in trading. There are many other things, which affects loss or gain. If one knows market is going to move from 4000-5000 in next one year and market does so, does not mean that one can make money. What price he/she is buying what's SL and whether guy is clever enough to book profit etc., would determine profit or loss.

Though TA seems to be a tool for gambling as people make loss even after following TA. This is because all are trying as per TA, but only 10% people will win in the market rest will lose money. Also TA is a diplomatic thing, it never says price will go up or down, as per TA both sides are justified. There are patterns and there are failure or patterns. Sometime people make money following pattern and sometime people trade failed pattern.

So we can not blame as TA is a gambling tool. It helps in understanding market.
Max loss comes due to following reasons -

1. our biased views on market
2. Not proper trade management, which in includes, bad entry, risk management, position sizing.
3. Wrong choice of probability - One example, we tend to get attracted by trades, which happens once in a year or so. Like buy some PUT and expect market to crash or lower circuits. 1/20 trades can be correct. People lose in pure probability.
4. Also money power, sometime we need money power to over some situations.

Again successful traders seem to have their own way to overcome difficult situations. I guess all go through those and get out. But many try to escape, in doing so they choose some wrong trades or do not participate in good trades.
So TA is not everything in trading. We can tell just seeing at the price movements it is a bearish pattern or not. We do not need sstoch to confirm negative divergence!!
 
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crown

Well-Known Member
#7
thanks for starting this thread
it will surely help me a lot
 
#8
Looks like he agrees with me. Its all speculation. All that technical analysis systems do is try give you better than a coins toss chance. i.e. if you took a dartboard of stocks, threw 100 darts at them, in a normal market, about 50% of should go up. (50 -50 chance, go up or down).
I have heard traders saying either price will go up or go down. So we have a 50% chance.

I say either traders will win 100% or loose 100%. How?

There are only 2 ways to earn money in market-

1) Buy low, sell high

2) Sell high, buy low.

If a trader is doing a reverse- buying high, selling low and selling low, buying high- 100% he/she will loose.

Traders deal in 'risk'. I will like to use 'risk' rather then 'probability'. If my 'directional bet' is wrong like i explained above, i will loose 100%. Probability of loosing is 100%.

So, the crux of the matter is 'directional bet'. It comes with an anticipation- A top day trader could anticipate at 8:30 a.m how nifty future will look like. After he has drawn the road map, then he will work out the 'risk'- entry, exits and SLs.

The problem with technical analysis is they are lagging indicators while day trading is an 'anticipation business'. How anticipation comes? 1) Retraining the brain by watching out markets and observing the behavior.

Now, you want to talk about indicators, and then you bring up the european market. In other words, why are you doing a technical analysis on indian stocks. You should do technical analysis on european stocks, see if they will go up or down, then on that basis recaluclate the index, and then buy or sell indian stocks no?
Doing technical analysis on Nikkei 225 or FTSE 100 (two markets which i watch 24 hours) will defeat the purpose as i dont use any sort of technical analysis.


Day trading is a pressure cooker game. Sometimes you can take one bet for 60 points (assuming day range is 80 +) or you have to take 2 bets of 20-25 points each.(assuming range is 50 points like it was today)

In a pressure cooker game, asian and european markets has an important role to play. I will explain you why-

When ever you are free, you can watch FTSE 100 and Nifty Future charts after 12:30 P.M. They will show you consistent movement sometimes even tick by tick.

We homo sapiens are same across the globe. So market participants who are trading FTSE 100 will repeat their behavior.

With training, once a day trader gain experience in Nikkei 225 and FTSE 100, at 8:30 A.M he can make a roadmap how Nifty Future will look like.

If we have BSC, MSC, PHD in trading and if people learn and experience trading just like we learn and apply our academic studies, mind retrain itself.

Day trading and bodybuilding are similar. There is lot of crap floating how to do body building. But how muscles break it self using weights in gym, then rejoin itself during rest and diet making them stronger is the simplest concept which even a 5th class student can understand.

If you search how to do body building in google, you will find out billions of web site. Similar is day trading where a simple game has been complicated.

The concepts of bodybuilding and day trading are simple but to master them and get fruits, obviously hard work is required either in gym or every day watching nifty future.
 

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