How about Apple
ST, you persist in putting up these charts and saying something to the effect “Can’t you see some difference?” To which I honestly have to say “No.” Now I freely confess to being a fundamentalist. I don’t see the point to charting. I understand that the technician believes that seeing the past allows you to make predictions about the future, but they persist in saying “It’s all in the charts.” I ask for a causal reason for saying the prediction will happen, but they insist that it is in the chart. I see the chart as nothing more than the path that an ant takes across the table. Telling me that it will continue north or turn south based on the past movements is as vacuous a statement as I can imagine. Saying it will turn North because that is the direction its nest is in, offers a true testable hypothesis. Saying it will turn South, for that is where the food source is, offers the same. Saying that it is in the chart is what we used to call a cop out. That is an untestable statement which has some ‘justification’ no matter which way the ant turns.BTW, “How about dem apples.” I am old; I am in the way, but I’m still willing to learn if you have something to offer.
Honestly ST, I’m just looking for someone who can explain to me why they believe technical analysis works, other than saying, “See it works.” I have a brother who actually teaches it, and I was the one who proofread his book, but I still don’t know what he is doing. Saying well if it don’t work for you, then don’t use it, doesn’t offer a justification.
Here’s the general problem, if someone says “When you see X, Y will happen afterwards,” we have a testable hypothesis. However, having been trained in analytic philosophy, I was very good in coming up with counterexamples. If I can show one instance of X happening and Y doesn’t follow, I’ve blown up your theory. The problem with these non causal relationships is that without a causal hypothesis, one instance that goes awry, destroys the whole theory. When you introduce a causal relationship, you can account from some instances where things don’t go as planned. Perhaps the ant crossing the table doesn’t go back to the nest because he smells the death throes of his brothers that walked across the poison you put across the trail.
I am not arguing that I will be right more often than you because I use fundamental analysis, only that I can give reasons that to me are clearer to see when things go wrong. Being able to correct a bad situation is key to long term success.Finally, there is a big difference between our investment schemes, almost every investment I make is in individual stocks, which I look at first as individual companies, then in their industry. The market as a whole holds almost no interest to me. Frankly Scarlet, other than my stocks, I could give a damn.
We know from information theory that given a set of information, if information is anything less than absolutely random, that it can be predicted with a greater chance than an i.i.d. choice. So basically a stock price over a given period (which we know is pseudo-random) can be analyzed for a pattern. If you log all patterns for all stocks (including various indices), then compare them, you will find that a lot of these match others. Then if you throw away the extras, you could create a library of models which then using technical analysis, compare current signals against each model in the library to find a one that has the lowest statistical difference and use that to compute the output of the next time unit. After the next time unit, you redo the entire process to see if another model has a higher statistical probability and if it does, switch your model to compute the next new time unit. This is basically the essence of signal processing (the computer version of technical chart analysis).
So while people aren't good enough to do that entire process, some people are good enough to know a few models and then figure it out enough of the time to make a profit. Others aren't good enough to do it and might be better at fundamental analysis. Then there are the other people who aren't good at either one and let someone else do all of it for them (most people).
What I mean to say by this is that both fundamental analysis as well as technical analysis are valid ways to manage your portfolio. In fact, in some aspects, they are even equally good for people (computers are better with technical analysis).
Tree, I have read/heard many explanations such as yours. Telling me that you are pattern matching is like telling me you can read the true interpretation of a Rorschach test. Telling me that it has some statistical significance based on probability doesn’t reassure me that you have a rational for risking real money. If I went to a doctor and I receive a diagnosis that I have this problem, and the doctor recommends that I proceed in this manner which has a 90% chance of success, I may very well following it. But I do so, not because of the high probability, but because I believe that the research which I don’t understand is understood by the doctor/scientist. They might not know everything about this, but they think they know the science well enough that the cure is largely successful. In other words they have a fundamental understanding of what is going on, not a perfect one, but it is better than throwing dice (even if they know that the dice are weighted.)I’m not saying that you should stop using technical analysis, if you find it useful. I am however saying, that your explanation is only persuasive to those who already accept it.
I was just saying what it was as I've read and from what I know about statistical modeling (by the way fundamentals are a way of betting on a statistically based business model). My background is in statistical communications system modeling so I would say I have some leg to stand on in the modeling aspect.
In your example, that research is likely to be based on a number of trials which only X number succeed which means it's a statistically based outcome and therefore you are throwing the dice, just ones that may have better odds. The technical analysis has a lot of basis in behavioral finance which human behavior is fairly statistically predictable.
I'm happy to admit that both are highly valid and usable concepts. This is, to a great extent, why hedge funds usually have most of their money staked for a longer term in fundamental based strategies while they trade half or less, of their fund, using technical based strategies (source MM's and quant analysts).
This is one reason I like to say that it's good to combine the two even when you are using them on the same equity. For example, with Apple, for the long term I don't believe they'll stay high. However for the mid-term (2-3 years), I believe they will do well and therefore are a good investment to stick your cash. In the short term, I don't however, believe it's a great purchase (technically speaking) so I would end up selling OTM calls against them and then closing the positions to pocket some cash in the near term. This cash pocketing would be mainly to counter any downward movement in the stock's value and to capture a little extra cash while it stays sideways.
I would rather get the cash set into the stock early (even though I think the stock has nowhere to go for the moment) rather than wait for the next movement because it could end up peaking really high after the movement and I would like to have a chance of locking in a LTGR for taxes instead of a STGR for those gains. I don't mind paying an STGR for the short term options I'd sell because they would be there simply to hedge against my long term bet that Apple ends up heading towards $800-$1000. Basically I'd have a 10% stop limit on the stock and sell the CC's simply to try and reap enough cash to cover that 10% loss in case it ends up pulling back to my threshold.
There are also example of companies that have amazing fundamentals but have serious technical problems such as Google. They have a solid business model with expansions into many fields that make them a great company for the long term. However if you look at their stock price (they've had no splits or dividends since the IPO 8 years ago), it's basically been range bound for several years. So if I stuck my money there, I might never see a long term reaping because they won't give out any dividends and may never grow (their split coming up won't do much either), even if they company keeps growing. However, I could making money on their technical movements in the short term selling CC's to get myself a nice dividend each month especially since they generally run with rich premiums (3-5% for 2 weeks).
I know a lot of you guys like doing this type of thing to help make a monthly "dividend" on portions of your portfolio.
P.S. Sorry for the long post.
If you want to learn it go read your brothers book.
SimpleTrades, stop posting stupid charts...thanks
SPY volume below 100 million
no body takes the bait...
SP doesn't believe in technical analysis
I don't know which way the market will go
However, speaking to spshapiro's request to explain how technical analysis is any better than arbitrary nonsense, technical analysis, should be called trend analysis. It is an important tool that should be used by all investors. It can best be described by the real world example of trying to catch a wave to surf on. Certain signals indicate the probability of a large enough wave to make it worth the effort to start kicking and when you get it right it will carry you right to the shore, and you better get off before it face plants you on the beach. However, you will never be right 100% of the time, but the more you practice the more adept you become at identifying the signals and your odds of success will improve.
It is important to note that neither fundamental or technical analysis is fool proof, but both simply improve your odds of winning.
Visit www.oracole.com to see the low frequency, longer term signals suitable for traditional investors (i.e. 401K or mutual fund investing).
Take the time to plot both the price of a stock index and its rate of change over a long period of time. You will find that a histogram of the price itself is not random. However, generate a histogram of the rate of change and you will see that the histogram forms a bell curve that is practically normal (slightly skewed to the right - this represents the general desire of most market participants to see growth - also the reason a buy and hold strategy will generally work given enough time). This indicates that the rate of change is statistically normal, and therefore can be used to indicate reasonably reliable probable outcomes. Also the more data points in a data set the greater the certainty (i.e. 60 minutes in an hour vs. 3600 seconds in an hour) or 200 days vs 20 days.
It is very important to take into consideration the time frame of the analysis as it relates to your time frame of decision making (i.e. buy in, hold in, hold out, or sell out). This is often overlooked and most readily available technical analysis is meaningless to long term, low frequency trading investors.
It is important to note that we are dealing with probabilities not absolutes. If you play golf you will understand that you chose the path and placement of your shot based on the probability of success and there are many factors to account for.
Visit my blog at www.oracole.com to see some low frequency, longer term signals suitable for traditional investors (i.e. 401K or mutual fund investors) that I have put together. You can also view the historical performance charts and strategy page.