Trading: Problems of Technical Analysis Revisited
"However, their final task is to predict the future."
Maybe not/
In most time, tech analysis is assistant to people, or one kind of Psychological need for people in fact.
;)
Good article, I shall re-read it during quieter hours...
The task in my view isn't one of identifying the flaws (absence of exclusivity or negative correlations) in technical analysis, rather of having a body of second-tier analysis which supports correlations of when to apply particular analytical tools. The two sets of numbers, however, tend to leak in to each other, and the rate of transfer (=to muddying the waters) is not predictable from one moment to another (correlation is only apparent). Is P = NP? There's a million dollar prize if you can prove it one way or the other.
Very well versed and heart catching article but I think it’s the matter of advancement in mathematical indicators techniques and supportive technology that may enhance some skills to get the understanding of the market.
As far my understanding I think mathematical indicators shows what the market feels right at particular time where as how it will behave further on is matter of assumption and guess work from ones previous experience to get odds in his favor .
I think mathematical indicators on charts can resemble thermometer which only indicates what’s the environment temperature rather than controlling the temperature. By denying the thermometer or breaking is not going to change temperature as the reasons of temperature fluctuations are others than measurement instruments, but surely one can assume that if reading shows high temperature and also outdoor he sees the dark clouds coming than he starts assuming that the environment temperature is going to get down but not sure how soon or how much its going to get down but with his experience and latest observation he sets that particular scale of measurement as resistance and wait for down trend.
Theirs is nothing wrong with indicators but with variable scales which bring a no standardization in a system, but yes how are you going to standardize a market where two sane persons are agreed upon price but disagree on value ???? Amazing … that’s the beauty or other wise market will become dull, odorless, tasteless, worthless, and unadventurous in short love without emotion.
Great article, very thought provoking and I really enjoyed reading it, even though, and I am NOT saying "You are wrong", I don't agree with all of your conclusions.
Fundamentally, a market is where things are exchanged at an agreed (read accepted) value. Value is what something is worth. What is it worth? Well, whatever you can get someone to pay for it. So, one may buy an item for $1.50 and, at the same time, somewhere else someone bought the same thing for $1.30. Did the first person get ripped off or did the second get a great bargain? Subjective to sat the least, but in reality, That item was worth BOTH $1.30 and $1.50 at the same time. Value and worth are only psychological perceptions, and they can be influenced by external factors, a bottle of water is worth more in the desert than it is beside a stream from a pristine mountain spring. Nothing has any intrinsic value!
So, in the stock market, a trader needs to buy low/sell high and vice-versa to walk away with his profit, but an investor may be looking to get dividends or accumulate positions over time with bonus shares, etc, whilst another may be buying shares to acquire voting rights for control.
Elders was indeed on track talking about the mass psychology. ALL transactions are performed by humans and all humans are influenced primarily by emotion, including those at institutions (Spock and the Vulcans have not come to Earth yet). The financial crash of 2008 was caused by institutional greed (emotion on steroids!).
There is some validity to Fibonacci ratios as, since they are so prevalent in the natural world around us, including us ourselves (ever looked at your fingers?) so they would have to be somewhat impregnated into our subconscious. So a pullback would "look about right" near a fib ratio.
Also there is the fact that so many, including institutional traders, using various tech analysis bits, will act similarly because they respond to the same thing in similar ways, creating the self fulfilling prophecy of sorts.
However, not all traders are trading the same time frames or using the same systems. How many little trends are on the m5 within a single daily candle? Some trade to grab the middle of a move waiting for a confirmed impulse, some trade the pullback, some try to catch the tops and bottoms.
I do not believe there will ever be holy grail science around it. Rather, I see that intuition, unquantifiable and undefinable like a surfer riding waves, will always be a big part of trading. Technical analysis and indicators can help traders "read the market", and since we all see things differently, no system, no indicator, whatever, will provide a "one size fits all" solution. Many of these "tools" may well be scientifically nonsense, but some people will be able to use them to create profit, while others, trying to do exactly the same thing fail, just like one surfer somehow manages to consistently make it through the tube while others consistently get wiped out!
We can get fooled looking at charts and fancy looking indicators that make it look like we are part of a NASA program, but in the end, that is just a display, and it is, in reality, people driving the markets, and I repeat, as Elders said, (and it has been scientifically quantified) people a far more emotional than rational when it comes to decision making.
So maybe it is more that we need to recognize technical analysis for what it is, rather than expecting there ever to be an intrinsic understanding of the market to build a science around, because the latter is the real unachievable "holy grail".
Hi Constantin, referring to the point in the article:
Mistake 3
Taking undue freedoms with time.
I'm curios of what you, the author, may think about alternative representations of chart data called Renko charts - Range bars - KAGI charts, that, as far as I read, don't use the time to draw chart data.
I'm also curios of what you may think about recent alternative methods for
representing 'clusters' of prices of opened (and pending) buy and sell positions
(in short, something like the dealer book levels expressed in graphical form) such
as the one called Market Profile. (https://www.mql5.com/en/code/9857)
And, referring to the point:
Trading Volume
I'm curios of what you may think about a proposal for an indicator "Market Volume Profile or Volume Histogram" (see forum at https://www.mql5.com/en/forum/102928).
As I understood from this article, the author describes a method for "adapting" the time variable to fixed number of market ticks, towards on increased homogeneity of statistical data.
Thank you for your excellent and insightful article
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New article Problems of Technical Analysis Revisited has been published:
At present, technical analysis along with the fundamental one is the most important method to analyze stock market. Being one of the predicting methods of stock market pricing dynamics, the technical analysis has a large amount of disadvantages that cast some doubt on its practical applicability.
At present, technical analysis along with the fundamental one is the most important method to analyze stock market. In Russia, it is used by the most of traders. We can even state that knowledge of at least basics of technical analysis is a kind of "entrance ticket" to the market: This is not a place for anybody without this.
Being one of the predicting methods of stock market pricing dynamics, the technical analysis has a large amount of disadvantages that cast some doubt on its practical applicability.
The followers of technical analysis ought this to the following: "Technical analysis requires high analytical qualification. Being used properly, it helps to achieve really good results. So the matter is not in any problems in technical analysis itself. The problem is in its proper use".
However, in my opinion, the problem is rooted in that technical analysis as a method of analyzing and predicting the market pricing dynamics has some inherent defects located in its fundamental postulates and in its ideology itself.
NB: All errors are rooted in technical analysts' aspiration to analyze the chart but not the market.
The market talks riddles with people. A chart is words, wet clothes, sore feet. We need to get to the bottom - how many quails did the hunter get down, how many fish did the fisher hook? The list of chartists "died in the bath" will probably be rather long.
Having found an object in the chart, an analyst hastens to exclaim: "The market turns its direction since I see the object in the chart!". However, one should act differently. Having observed something in the chart, one has to ask him or herself: "What process happening in the market caused appearance of this graphical object in the chart? Will this process result in a turn or just in some correction?"
Neglecting the essential contents of processes that take place in the market resulted in the worst mistakes in further development of technical analysis.
Author: Constantin Tsarikhin