Tuesday, July 7, 2009

Technical Analysis is Rubbish !?

When Technical Analysis first get popular, people would make comments like "Fundamentals are Rubbish". Tons of seminars and training sessions were conducted. 30% of the students haven't even used a computer before, another 50% have NEVER trade in stock market.

Its been a while now, a small group of active traders start to make comments like Technical Analysis is Rubbish now. Usually the smarter traders may find out sooner reality is not exactly as taught in course. However, their smartness stops when they continue to fuss without finding ways to overcome TA, recycle and make use of the 'rubbish'.

Some of the comments also proves how ignorant we still are with regard to Technical Analysis, perhaps also explain why some fail to apply correctly to earn profit.

"If it works here, it should work there too."
"It should work in all conditions or NOT at all!"

Well, that is because most of us HAVE NOT truly understand the topic yet. Here is some reviews ...

First of all, Technial Analysis or short as TA, is a way trying to make senses out of some numbers without the help of any other qualitative information. The most primitif origin of TA is actually gambling. Or TA is basically the science of gambling.

As in any and all forms of gambling, the game is all about finding a win-lost ratio higher than 50%. Through out human history until now, there is no such thing as proven formula where the win ratio is more than 50%. At least not consistently for a period of time. This shouldn't be too hard to comprehend as ALL gamblings are created by man. Man made games like this to earn money as a business, if any game's win ratio is more than 50%, it is NOT a business that will earn.

Different TA techniques have different strength and reliability. It has to do with how the technique comes into existence at the first place. The originator may be expert on some specific topics, made some assumptions and therefore the technique they come up with may or may not apply to a particular specific market condition. Here are some of the reliable patterns used in candle sticks.

TA has parameters. By using different parameters, different signals will come out. At one instance, it may ask you to buy, on another it may give you a sell signal. Not only the parameters, even simple changes on the X-axis which usually show the duration information, may give opposite signals too. As described in this example

Lets look at 3 examples, Moving Average, MACD and Stochastic.

If you already know how to analyse trends without any tools by connecting the low and high points of a price chart, you are basically making the assumption that the price should come back up from the low points and the price may goes down after reaching the high points. This is called psychological barriers. Moving Average is exactly the same thing but it is drawing the trend systematically without any opinion. It does, however, has ONE parameter called period. Shorter period means higher sensitivity.

Because it is a psychological barrier, it works better when more people are using it. If you are the ONLY ONE using Moving Average then you are forming your own psychological barrier and that may not have much effect to the price movement. On the other hand, if most of the people share the same 'barriers' then chances are they may buy and sell at the same time, causing an effect on the price movement.

A good example is Moving Average 200 days. Almost the whole world is using it to determine if the start/end of bull/bear run has happened, as if it is a definition. This also explains the up swing since May.

The other 2 indicators are meant to track the big guys' movement. MACD signals when the big guys are slowly moving in or out of the market. Stochastic signals when there is an oversell or overbuy condition, ie. when the big guys start selling and causing others to sell too.

A whole book can be written on each indicator. But the key message here is, what do you do when you see such a signal ? Do you just buy and sell as the signal tells you to ? Do you agree that it is an oversell condition now ? Do you buy when the big guys start to move in or should you wait until it is also confirmed by psychological barrier break through ?

What parameters were you using on each indicator ? Are these parameters suitable for this market, this industry and this stock ? Have these parameters been proven in your investment condition ?

Answering above may or may not help you gain some advantages in your investment but understand true TA and apply them correctly definitely help you avoid mistakes caused by ignorance, worst still, without realizing it nor learn anything from it.

2 persons attend the same TA course but may bring out totally different result at the end, here is why.

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Anonymous said...

Even so, i still think TA is useless cos it can never help to predict anything. Beat me with the fact why are they not some fools chasing behind charts when a man behind the scene can make all PERSONAL/EMOTIONAL decisions anytime he likes it to effect the performance, of a company that he owns, or if he is a trader like Soros.

Michael Tsen said...

TA can tell when Soros is sneaking in and out, TA can also detect your so called man-behind ... whether you can use this info to 'predict' is up to your own talent. TA is useless to those who think its useless.

TA can only as good as the person using it.

alantanblog said...

Nobody can predict the future the future!

TA is full of whip saw signal even use widely by Professinal

Michael Tsen said...

true in this context but I do have stories that say, "Everyone can predict the future" :D

On the contrary, I find that its easy for small investor to use TA to spot the big guys, but in order for one big guy to spot another big guy, TA doesn't help much ... or the general TA we are using are not useful to them, because they themselves are causing the signals ...

Anonymous said...

As such you might want to have a 2nd episode of your blog post to share more of your ideas.

Michael Tsen said...

it has been the intention except its quite some work to post stuff here :D

Anonymous said...

You have a world of time to convince us with your ideas. Im sure alantanblog agrees with me. I myself cant wait to see how fools would like to cover himself and strive for not looking like a fool :P (kidding)

Michael Tsen said...

no matter how foolish the look would be, the aim would be for the fools to get what they want irregardless what the smart is trying to squeeze from the fools.

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