Stock Market Technical Analysis

[Francesca R]

ignoring technicals for information about stock pricing for picks you have already made is just silly.

I do beg to differ. If you are satisfied that "technicals" have zero expected value in the realm of buying shares, then ignoring them is sensible. Giving them the time of day is, well, silly.

 

[jimbob]

No its not. Imagine the roulette table is missing 0 (and 00 for fun since those are common as well). The probability of red/black is 50/50 and is unrelated to all previous spins.

The stock market is not a die throw. It is a market. People buy and sell. There are many factors that make it too random to model. If you trend a roulette tables spins you cannot use the information to make a prediction on future spins (assuming a perfect table with perfect dealers).

Let's pretend you want a 1995 Nissan mini-truck. You research and find that over the past year they have sold for between 1500 and 2500 dollars. You decide that if you buy that truck, you would rather pay closer to the minimum price than the maximum. Now, if you put the price volatility of that truck's listing prices and sell prices on a chart, its somehow flawed data.

Again, as the studies show, TA is not a panacea for _picking_ stocks. However, ignoring technicals for information about stock pricing for picks you have already made is just silly. Shrewd buyers want to buy things that are bargains and they will pass on a stock if it doesn't meet their entry point.

Long Term Capital Management


OK it mightn'y actually be TA, but theior approach had some similarities...

And they were well regarded at the time....

 

[corplinx]

The stockmarket is fundamentally different, because an increase in price actually leads to higher demand, and vice versa. This is a positive feedback loop, it's why the marketprice for a stock is unstable. And without stability from a negative feedback loop future trends can't be predicted from previous data.

That is a bit over-generalized. And since it is not 100 percent accurate I must say that it is always wrong and you probably believe in pseudo science and like the Sammy Haggar Van Halen better.

 

[egslim]

That is a bit over-generalized.

The presence of a powerful positive feedback loop is what makes future short trends in the stockmarket unpredictable from previous data points.

And since it is not 100 percent accurate I must say that it is always wrong and you probably believe in pseudo science and like the Sammy Haggar Van Halen better.

That's a funny quip, because your position throughout this thread has been remarkably similar to those who use astrology. With the common argument that while it may help little, it doesn't hurt either, so it's worthwhile to include.

Here's a hint: The argument works as well for TA as it does for astrology.

 

[jimbob]

The stockmarket is fundamentally different, because an increase in price actually leads to higher demand, and vice versa. This is a positive feedback loop, it's why the marketprice for a stock is unstable. And without stability from a negative feedback loop future trends can't be predicted from previous data.

That is a bit over-generalized. And since it is not 100 percent accurate I must say that it is always wrong and you probably believe in pseudo science and like the Sammy Haggar Van Halen better.

When is this positive feedback absent?

I agree that *obviously* it is not the only driver of price, but that was never proposed.

Even if it is absent on some (rare) occasions, how does that justify saying it is wrong 100% of the time?

 

[corplinx]

se your position throughout this thread has been remarkably similar to those who use astrology.

You've been arguing like a creationist. (neener neener)

Don't act childish. "You argue like a woo" is so overdone.

 

[corplinx]

Even if it is absent on some (rare) occasions, how does that justify saying it is wrong 100% of the time?

It was sarcasm. Actually, in this case sarchasm.

 

[jimbob]

It was sarcasm. Actually, in this case sarchasm.

Sarcasm, IHMO, works best when it either makes a valid point against an argument, or when it is amusing...

Humour is subjective, but this example didn't work for me.

Egslim's point is valid because the positive feedback is present sufficiently often to ruin TA as a predictive tool. At best it could allow people who don't use TA to predict how TA adherenets would price a "share"... Just as an astronomer with knowledge about astrological theories could predict what predictions an astrologer should make in the future.

I am assuming that speculative trading is a zero-sum game: both parties are trying to maximise their rate of growth of money, so there are winners and losers, unlike (say) long term investments, where one could consider a future income to be worth a certain price, and where both parties could be better off from the trade.

 

[egslim]

Egslim's point is valid because the positive feedback is present sufficiently often to ruin TA as a predictive tool. At best it could allow people who don't use TA to predict how TA adherenets would price a "share"... Just as an astronomer with knowledge about astrological theories could predict what predictions an astrologer should make in the future.

Corplinx' statement that positive feedback isn't present and dominant all the time actually supports my position. Because if it were, then if the price of a share goes up once, it would go up perpetually and predictably. And vice versa.

However, in the real world nothing is infinite, so that positive feedback mechanisms often collapse. That's a recipe for chaos, which is what screws TA.

Don't act childish. "You argue like a woo" is so overdone.

Do you deny that your argument in favour of including TA is that: "While it may help little, it doesn't hurt either, so it's worthwhile to include"?
Do you deny that's the same argument used by astrologers when they are forced to admit there's no hard evidence that astrology works better than chance?

 

[corplinx]

Corplinx' statement that positive feedback isn't present and dominant all the time actually supports my position. Because if it were, then if the price of a share goes up once, it would go up perpetually and predictably. And vice versa.

However, in the real world nothing is infinite, so that positive feedback mechanisms often collapse. That's a recipe for chaos, which is what screws TA.


Do you deny that your argument in favour of including TA is that: "While it may help little, it doesn't hurt either, so it's worthwhile to include"?
Do you deny that's the same argument used by astrologers when they are forced to admit there's no hard evidence that astrology works better than chance?

No, I don't allow others to frame my arguements for me and then ask me to defend or reject their framing.

On one hand, you talk about positive feedback with stocks. On the other, you reject any value of TA. Now, I've solidly rejected that TA should be used a "picking tool". However, many of things TA charts are just normal parts of DD. It seems to me however that if you claim that positive feedback is a very likely phenomenon with stocks, that TA would be just another tool for trying to make an educated guess about the potential for that same phenomenon.

I think there is something inconsistent in that position.

 

[egslim]

No, I don't allow others to frame my arguements for me and then ask me to defend or reject their framing.

Then do explain how the way I frame your argument differs from how you intend it.

Because on the one hand you admit TA doesn't really work. ("I've solidly rejected that TA should be used a "picking tool".") Since if TA does work better than chance, then it logically follows TA could effectively be used as a picking tool.

But on the other hand you insist it should be included. ("However, many of things TA charts are just normal parts of DD.")

Either it works (to some degree of accuracy that's better than chance), or it doesn't. If the latter, it should be discarded. Like astrology.

It seems to me however that if you claim that positive feedback is a very likely phenomenon with stocks, that TA would be just another tool for trying to make an educated guess about the potential for that same phenomenon.

No, because the effect is non-linear. Which means a small change in input or future events results in an entirely different outcome.

Since neither the input nor the future are precisely known, the outcome is unpredictable. An approximate prediction would only be possible if the effect was linear.

All TA that doesn't require massive computerpower requires (and assumes) linearity. Therefore it's completely useless to predict a non-linear system like the stockmarket.

 

[jimbob]

Egslim's point is valid because the positive feedback is present sufficiently often to ruin TA as a predictive tool. At best it could allow people who don't use TA to predict how TA adherenets would price a "share"... Just as an astronomer with knowledge about astrological theories could predict what predictions an astrologer should make in the future.

Corplinx' statement that positive feedback isn't present and dominant all the time actually supports my position. Because if it were, then if the price of a share goes up once, it would go up perpetually and predictably. And vice versa.

However, in the real world nothing is infinite, so that positive feedback mechanisms often collapse. That's a recipe for chaos, which is what screws TA.

Indeed...


But it is not "classical" chaos as in physical systems like weather... because the "rules" are subject to arbitary change (aka "sentiment").

Even with weather forecasting, an approach akin to TA was tried and failed, and this is in a nonlinear system with constant rules.

 

[corplinx]

Either it works (to some degree of accuracy that's better than chance), or it doesn't. If the latter, it should be discarded. Like astrology.

Mr. All-or-nothing is back. Good to see you again. Fundamental Analysis doesn't work all time. It should be discarded, like astrology.

Instead of researching fundamentals, technicals, news, and trends to make stock picks, people should just put their money in CDs and savings I guess.

No offense, but there is a real slippery slope to your argument. Again, your argument is just plain silly.

"If TA is not a shoe-in way of picking stocks based on TA alone, then TA has no value at all in evaluating stocks you are already screening."

There, I framed your argument for you.

 

[jimbob]

I would disagree that this is the "all or nothing fallacy" because this is a valid set of options:

Eiither it has utility or it lacks utility (there is a third option of neutrality).

It isn't htat it works some of the time and not others.

It is that you are just as likely to lose in the long run when using it. In fact, if other "players" factor in that you use TA, then they are more likely to win against you.

I am assuming that speculation is a zero-sum game, unlike long term investing.

 

[corplinx]

I am assuming that speculation is a zero-sum game, unlike long term investing.

I always wonder why people just don't buy Kraft.

 

[jimbob]

I am assuming that speculation is a zero-sum game, unlike long term investing.

I always wonder why people just don't buy Kraft.

I was stating a (possibly hidden) assumption behind my reasoning.

What was your point?

My assumptions, expanded

I am assuming that to make money in trading, the goal is to make the money in the act of trading, i.e. to buy cheap and sell dear, and to sell quickly, as otherwise the money is tied up.

I would call this "speculation" as one is buying with the intention of selling soon, before receiving any dividends etc. One is only looking for an increase in price.

I think there is evidence that a lot of stock prices are strongly affected by such considerations.

I say that this is a zero-sum game because in any trade between a group of speculators, the seller thinks they can make more money buying and selling on something else, whilst the buyer thinks they can make more money buying and selling on this "product". One will have lost.

I would also argue that TA only attempts (and fails) to predict short-term movements, so would only be of possible interest to short-term speculators.

What was your point?

 

[Francesca R]

Instead of researching fundamentals, technicals, news, and trends to make stock picks, people should just put their money in CDs and savings I guess.

No, because there is an equity risk premium which is compensated over time (not all the time) and while return compounds with time, risk does so with the square root of time.

If you were to say "Instead of researching fundamentals, technicals, news, and trends to make stock picks, people should just put their money in passive ETFs, or index futures + cash, or index tracking low-fee funds I guess." then your statement would make a lot of sense.

The idea that one is going to beat the market with an array of sources of information like that is a long shot, to say the least. (Plus "technicals" and "trends" are really not different things)

"If TA is not a shoe-in way of picking stocks based on TA alone, then TA has no value at all in evaluating stocks you are already screening."

One statement does not follow from the other, that is true. But it seems that TA does indeed have no monetary value at all in evaluating stocks. It might make some investors feel better about their choices but that is likely to be a monetary cost not a gain.

 

[drkitten]

I would disagree that this is the "all or nothing fallacy" because this is a valid set of options:

Eiither it has utility or it lacks utility (there is a third option of neutrality).

No, there isn't. "Utility" is a continuous, quantitative, variable. "Has utility" really means "has expected value greater than zero"; similarly, "lacks utility" really means "has expected value less than or equal to zero."

There is no third option, any more than there's a number that's somehow greater than zero but not positive.

Which is why we keep asking what value (i.e. utility) TA adds. If it has a positive expected value under any set of circumstances that can be clearly defined, then it works. If it never has positive expected value, then it simply doesn't work -- so far, all of the actual evidence (studies and such) suggest that it doesn't work.

 

[jimbob]

No, there isn't. "Utility" is a continuous, quantitative, variable. "Has utility" really means "has expected value greater than zero"; similarly, "lacks utility" really means "has expected value less than or equal to zero."

There is no third option, any more than there's a number that's somehow greater than zero but not positive.

Which is why we keep asking what value (i.e. utility) TA adds. If it has a positive expected value under any set of circumstances that can be clearly defined, then it works. If it never has positive expected value, then it simply doesn't work -- so far, all of the actual evidence (studies and such) suggest that it doesn't work.

True.

I *had* been thinking of positive, negative and neutral, but "neutral" in this case is still a waste of resources, so negative.

my bad

 

[roger]

As an sort of aside, I strongly recommend the book Evidence Based Technical Analysis to JREF readers. I say "aside" because it is worth reading not only for understanding the topic of this thread, but because the author is essentially one of us. Originally a prop investor using TA, he became suspicious of the intellectual underpinnings of it, and underwent a critical thinking oddessy that included reading people like Shermer. The first few chapters are extremely lucid descriptions of critical thinking and how we apply that to topics such as TA. Along the way he eviserates things like homeopathy, astrology, religion, etc. He's probably not saying anything that hasn't been said here on JREF many times, but the clarity of his writing makes the reading a pure joy.