in defense of technical analysis

[arepo]

When will you TA's guys understand that TA is just self-fulfilled prophecy?
TA is just a bunch of guys relying on apophenia and techniques built with the presumption that past performance does predict future results, which it doesn't.
The only investing is value investing, period.

The rest, including TA, is just gambling.

there have been many, many discussions about this. if you have this belief, and you have good evidence to back it up, feel free to start your own thread. don't spam someone's TA thread...

It is not a belief, it is a fact.
And this thread proves it.

hey all you TA nay-sayers out there! this is your chance. i'm opening a thread for discussion on this very important point so you guys can stop spamming mine and lucif's threads.

let's set some ground rules:

-try not to repeat points.
-TA is a hypothesis that needs to be discredited properly (rigorously), i.e. not in the manner that nanopene employed.
-'disproving' TA involves proving a negative, which is not possible. avoid the use of that word altogether and stick to the idea of evidence.

let me also open with a well-defined hypothesis:
"Since there exist time-dependent autocorrelations in price data, past performance sometimes correlates with future results."

evidence against TA would be evidence that time-dependent autocorrelations do not exist in price data.

for example, a random walk does not exhibit any autocorrelations.

some examples of things that do not count as evidence against technical analysis:

-the relationship between technical analysis and herd behavior
-individual examples of poor analysis (stop picking on lucif )
-the fact that certain kinds of analysis (e.g. elliot waves) are prone to apophenia.

another note: if you don't understand the central premise here -- autocorrelation in stochastic functions, read up some more before replying for everyone's sake.

-===-

and with that i'll leave you with something cool: daily all-time price data compared to the DETRENDED PRICE OSCILLATOR, just an hour or so before the crash.



do you see what i see?

[nanopene]

Lets talk about empiricism, lets talk about real world cases of people who became filthy rich by doing only Technical Analysis.
How many TA do you find among the Forbes richest people?
So, far I find... lets see... one, two... NONE!

Lets see those who followed the value investing methods proposed by Ben Graham and David Dodd... how about their direct disciple Warren Buffet? Then followed by Carlos Slim, Li Ka-shing, David Koch, Charles Koch.
Value investing was born as a direct response against the chart reading, which is as effective as any pseudo-scientific school.

Investing is investing if you invest. Swallow that truism.
Also, data without context is meaningless.

PS: Oh, btw, don't exclude "elliot waves" as more prone to apophenia, we are prone to anything and everyone as long as we have human brains.

[arepo]

Lets talk about empiricism

...

How many TA do you find among the Forbes richest people?

-facepalm-

this is not empiricism.

-===-

let's not get offtrack here, because i gave a very straightforward hypothesis in the OP which you did not even touch, but one point -- 'proneness to apophenia' doesn't correlate with invalidity. it just makes the analysis easier to screw up (read: bias). that's all i was trying to say.

also, it's not surprising that well-known methods of technical analysis do not work. this is actually a good point. this is probably due to the fact that markets are anti-inductive. the fact that markets are anti-inductive also works against the so-called "Lemming Effect" that many claim is responsible for any apparent success.

[gmiwenht]

"Since there exist time-dependent autocorrelations in price data, past performance sometimes correlates with future results."

This is a general observation, but it does not support any specific technical analysis results. The fact that autocorrelations exist does not allow you to write arbitrary laws about these correlations. Your laws need to be stated as theorems and backed by proofs. Otherwise all you are saying is "observation: heads sometimes follows tales", therefore any time heads follows tales we can invoke technical analysis in support of the observation.

The problem with technical analysis is that due to its fractal nature it is unclear what time scales to consider. Any analysis that works on one time scale can be completely contradicted on another time scale.

As much as I enjoy looking at charts, the bottom line is there is nothing to it. It's just alchemy.

[nanopene]

Lets talk about empiricism

...

How many TA do you find among the Forbes richest people?

-facepalm-

this is not empiricism.

let's not get offtrack here, because i gave a very straightforward hypothesis in the OP which you did not even touch, but 'proneness to apophenia' doesn't correlate with invalidity. it just makes the analysis easier to screw up (read: bias).

also, it's not surprising that well-known methods of technical analysis do not work. this is actually a good point. this is probably due to the fact that markets are anti-inductive. the fact that markets are anti-inductive also works against the so-called "Lemming Effect" that many claim is responsible for any apparent success.

It is empiricism of the efficacy of the discipline as a whole, stop and think.
Empiricism is the experience gained through the trial and error to see what works and what doesn't.
Given the millions of people using TA, experts traders, none of them seem to have made it. Why?
You can use all the excuses you might want, but the conclusion is clearer than water: it is useless in the real world.

In other words, the lack of successful technical analysts making it to the Forbes list is empirical evidence of its uselessness, especially considering that charting existed since the 17th century.

[Ichthyo]

hey all you TA nay-sayers out there! this is your chance. i'm opening a thread for discussion on this very important point so you guys can stop spamming mine and lucif's threads.

Hey, lets get the facts straight. You are constantly spamming this forum with your threads advertising the so called "methods" of "technical" "analysis". This is annoying at least

Even the mere fact that you use the words "technical" and "analysis" for some kind of coffee cup reading is infuriating for anyone who has learned his way in the hard sciences and knows how technology works.

So this thread is your chance.

let's set some ground rules:
try not to repeat points.
TA is a hypothesis that needs to be discredited properly (rigorously), i.e. not in the manner that nanopene employed.
'disproving' TA involves....

And here you start with your manipulation and propaganda right away.

Again, lets set things straight.
By this "disproving" approach, you are implying that TA is even anything of a method.

This is not the way it works. Rather, you are proposing some kind of method, which you like to label "technical" and "analysis"
Now you have to show that this method indeed exists, and provide a verifiable description of it.

This works by starting from a null hypothesis, and disproving this.

So the null hypothesis might be:

• TA is not an exact method, i.e. it does not consist of any clearly delineated description of operations, which can be conducted with precision and lead to a predictable and verifiable result.
• and especially: TA is not a method yielding any reliable predictions of market behaviour with a probability significantly above picking of random hypothesis

So to disprove this null hypothesis, we need to give (1) a precise description of some method or algorithm, which can be executed in a reliable, rational, and verifiable way. And (2) we need to execute that method under controlled and verifiable conditions and yield a significant score of prediction.

Unless we succeed with that, there is no such thing as "Technical" "Analysis". It simply doesn't exist.
And thus its use should not be advertised further.


But maybe there is a third solution. Maybe there is something much more level-headed. Something along the lines of "a long time trader's rules of thumb". Something more of a craft, than being technology or analysis. Then we should be so prudent to ditch all that pseudo-math and pseudo-scientific furnish and handle it just as that: a bunch of rules of thumb and gut feeling. There is nothing wrong with that.

[Peter Lambert]

let's set some ground rules:

-try not to repeat points.
-TA is a hypothesis that needs to be discredited properly (rigorously), i.e. not in the manner that nanopene employed.
-'disproving' TA involves proving a negative, which is not possible. avoid the use of that word altogether and stick to the idea of evidence.

let me also open with a well-defined hypothesis:
"Since there exist time-dependent autocorrelations in price data, past performance sometimes correlates with future results."

evidence against TA would be evidence that time-dependent autocorrelations do not exist in price data.

'disproving' TA involves providing an example of a prediction made by TA that turned out to be false. It happens all the time on this forum. I do not have the time to do it now, but it would be pretty easy to take a bunch of charts from the past, ask the TA people to predict what will happen next, then reveal the next week of the chart and check their answers.

[bitcoinBull]

let me also open with a well-defined hypothesis:
"Since there exist time-dependent autocorrelations in price data, past performance sometimes correlates with future results."

That's not a hypothesis. You have a premise "there exist autocorrelations", and then you restate that premise in the form of a definition. There is no inference/conclusion, so no hypothesis here.

evidence against TA would be evidence that time-dependent autocorrelations do not exist in price data.

Of course there exists time-dependent autocorrelations in price data. Why else would people be buying on speculation? Because there's an upward channel going up, a (highly correlated) time-dependent autocorrelation. Pretty much everybody here loves TA, I don't know who you are talking about by making a general address to "TA nay-sayers". You should qualify it by bearish TA nay-sayers.

do you see what i see?

I don't know, what do you see? Are you (again) calling the top, a reversal?

[omarabid]

There is money in TA, and I guess the HFT in Wall-Street are not a myth and they DO make money (actually lots of it).

However, let's see the following: Can TA predict the Apple Stock growth? How can TA knows that Steve Jobs will make the iPhone and iPad?

It can't. Simple. and that's why Apple stock was almost dead in the first few years.

What TA can do is analyse past trends and try to predict future trends based on these past trends. This works on a very short period of time levels, and assuming that nothing changed.

For example, in the last bubble, there have been certainly a pattern to the quick raise and full. This bubble it might be similar or different. What TA bet, is that it's similar (or the analyst bet that his prediction based on his knowledge/skills will happen).

However, when it's a small market like Bitcoin (and a relatively long period) between the two bubbles, things have certainly changed (people holding the bitcoin wealth, the mentality of the new owners, past experience with the last bubble...) which mean there will be a different pattern.

Who's TA have expected the price to jump again to $42 after that crazy drop?

Everyone knows this will end somewhere in the bottom, unjustifiable high increases in BTC value with no accompanying economic value will certainly result in a burst.

[nanopene]

There is money in TA, and I guess the HFT in Wall-Street are not a myth and they DO make money (actually lots of it).

However, let's see the following: Can TA predict the Apple Stock growth? How can TA knows that Steve Jobs will make the iPhone and iPad?

It can't. Simple. and that's why Apple stock was almost dead in the first few years.

What TA can do is analyse past trends and try to predict future trends based on these past trends. This works on a very short period of time levels, and assuming that nothing changed.

For example, in the last bubble, there have been certainly a pattern to the quick raise and full. This bubble it might be similar or different. What TA bet, is that it's similar (or the analyst bet that his prediction based on his knowledge/skills will happen).

However, when it's a small market like Bitcoin (and a relatively long period) between the two bubbles, things have certainly changed (people holding the bitcoin wealth, the mentality of the new owners, past experience with the last bubble...) which mean there will be a different pattern.

Who's TA have expected the price to jump again to $42 after that crazy drop?

Everyone knows this will end somewhere in the bottom, unjustifiable high increases in BTC value with no accompanying economic value will certainly result in a burst.

If you are talking about HFT, it is algorithmic trading, not charting (TA). In HFT there are many strategies and factors weighted in that are beyond the capabilities nor interests of a charter. I can guarantee you that if you make a HFT software based solely on TA principles, you will lose all your capital in no time.

[Dargo]

Well, that "crazy drop" bounced exactly off the 20 day EMA, which has been tested several times during this run, so by this measure the uptrend is still intact. "Support bounces" off of rising moving averages (i.e. for securities that are in a nice uptrend like Bitcoin is) is a very common set-up for technical traders, so this bounce is not at all unexpected from technical analysis. My two cents in this debate is that technical analysis does work, but you have to understand how to use it. My sense is that most people who claim it doesn't work don't know how to use it. It takes at least 6 months of intensive study to learn technical analysis, and that would be for someone who picks it up pretty quickly. However, it is also true that really good fundamental investors make more money than technical traders. But technical traders make bank too. Personally, I take the fact that we have bounced so hard off the 20 EMA as a sign that the bears shouldn't get too excited yet. I can't speak for the OP's analysis - not familiar with it, and I take the successful 20-day EMA test as more significant, though it hardly guarantees that we will go on to new highs from here.

[piramida]

As long as we run above 32, this ain't no reversal. If it goes below that, to 29 at least, then maybe it could reach 22. But I still don't believe that, my voodoo charts analysis tells me it's just slowing down of pace, which been craaaaazy for a couple of days there. Back to a comfortable 1% per day growth for us.

[prof7bit]

I love chart patterns. I don't use any other technical indicators, only patterns. This pattern (yesterday) has the potential to indicate a spike to 55$ (next few days, maybe even today!).

[humanitee]

CHECKMATE BULLS

[Puppet]

Who's TA have expected the price to jump again to $42 after that crazy drop?

Nostradamus' did.

At five and forty degrees dollar, the sky will burn,
Fire approaches the great new city,
Immediately a huge, scattered flame leaps up,
When they want to have verification from the Normans.

Those at ease will suddenly be cast down
The world put into trouble by three brothers,
The enemies will seize the marine city,
Famine, fire, blood, plague, all evils doubled.

Two times put high, two times put low,
The East also the West will weaken:
Its adversary after several battles,
Driven out by sea will fail at the time of need..

Quite obvious and much less open to interpretation that all that TA nonsense.

[ineededausername]

Lets talk about empiricism, lets talk about real world cases of people who became filthy rich by doing only Technical Analysis.
How many TA do you find among the Forbes richest people?
So, far I find... lets see... one, two... NONE!

Lets see those who followed the value investing methods proposed by Ben Graham and David Dodd... how about their direct disciple Warren Buffet? Then followed by Carlos Slim, Li Ka-shing, David Koch, Charles Koch.
Value investing was born as a direct response against the chart reading, which is as effective as any pseudo-scientific school.

Investing is investing if you invest. Swallow that truism.
Also, data without context is meaningless.

PS: Oh, btw, don't exclude "elliot waves" as more prone to apophenia, we are prone to anything and everyone as long as we have human brains.

http://en.wikipedia.org/wiki/James_Harris_Simons is pretty rich.... from advanced quantitative trading techniques.

[Richy_T]

http://en.wikipedia.org/wiki/James_Harris_Simons is pretty rich.... from advanced quantitative trading techniques.

Maybe, maybe not...
 http://en.wikipedia.org/wiki/Survivorship_bias

[gmiwenht]

This thread is pretty pathetic. If this is really the sum total of what this forum has to offer in defense of technical analysis then it really paints it in a much worse light than I originally thought.

[Richy_T]

This thread is pretty pathetic. If this is really the sum total of what this forum has to offer in defense of technical analysis then it really paints it in a much worse light than I originally thought.

I'm sure it has its uses. The problem is, people tend to think "Look, something we can measure and fit a curve to, let's apply it to everything". You need to know what you're using, why it is what it is and if, why and how it applies to Y when it was derived from X.

If you want an example from a hard science outside the field, look at the black body radiation curve. Classical physics produced models that didn't match reality. Einstein came along and resolved the conflict by inventing the quantization of electromagnetic radiation. Just because something works in one scenario, doesn't mean it'll work in another.

[humanitee]

This thread is pretty pathetic. If this is really the sum total of what this forum has to offer in defense of technical analysis then it really paints it in a much worse light than I originally thought.

I'm sure it has its uses. The problem is, people tend to think "Look, something we can measure and fit a curve to, let's apply it to everything". You need to know what you're using, why it is what it is and if, why and how it applies to Y when it was derived from X.

If you want an example from a hard science outside the field, look at the black body radiation curve. Classical physics produced models that didn't match reality. Einstein came along and resolved the conflict by inventing the quantization of electromagnetic radiation. Just because something works in one scenario, doesn't mean it'll work in another.

Planck*