While the made-up character is similar, Astrology is far richer in concepts, orchestration and story telling.
Technical analysis is the ultimate dumbification of market structure and dynamics, which in itself is a major dumbification of the formal economy, which in itself is a major simplification of the stuff-that-matters(TM).
The objective of technical analysis is to get as many low-information actors as possible to transact with as low-cost as possible technology (I would totally not be surprised if current "technical analysis" verbiage is 100% automated).
The entire idea behind technical analysis is that it's a self-fulfilling prophecy. The more people believe in a certain rule, the more that rule turns out to be true.
It might work that way with astrology too, but it's not so clear.
Astrology would be a self-fulfilling prophecy if enough people took it seriously.
For example if everyone agreed on that Gemini means good at science and Leo is good at art, the whole education system would be designed around this belief and it would hugely impact how children think of their own potential.
> you ask some parents about santa clause. they say we are athiests, but we pretend to believe in santa clause to make our child happy. then you ask the child about santa clause, and they say i pretend to believe to make my parents happy.
It's definitely not the entire idea. It plays a part, but that's just human psychology. The same reason that round numbers tend to act as support and resistance. These rules are not mystical; they are provable. There are a lot of metrics in Technical Analysis, and most of them I know nothing about. Technical Analysis doesn't claim to know the future (only the liars and fools), but embraces efficient market theory, which is about the present.
The article there looks at ONE use of technical analysis which is a moving average crossover. The nicest houses I know are owned by traders who know how to use technical analysis. it is very interesting that such an uniformed opinion is the top rated comment on YC tho.
I’ve always loved technical analysis discourse because it’s the starkest example of how to actually make money in financial markets, and that’s to actively cultivate information asymmetry among other market participants. If technical analysis were a successful strategy, it would, like most other techniques that can actually generate sustainable alpha, be a closely guarded secret. But it’s not. It’s something people shout about from the rooftops trying to get rubes to follow the bait. It’s the same kind of play as wallstreetbets, where you’re tying to increase the amount of stupid, predictable money in your corner of the market.
>The nicest houses I know are owned by traders who know how to use technical analysis.
If you have a large group of people who take risks while trading, and they form strategies indistinguishable from flipping a coin (like technical analysis), then at the end of the day you're going to have a lot of ex-traders who failed to make money and a few that look like rock stars - because taking large risks and being lucky is a "good" way to make money fast. It's the very definition of survivorship bias.
To be fair, the fact that [some traders own nice houses] doesn't imply [technical analysis is a good method]. It's possible that the profit from this sort of trading is essentially random, and there are a few people that get a large profit from that random distribution. I've frequently heard this sort of argument, but I don't have the expertise to determine whether it's true.
The people I know with the nicest houses are doctors and lawyers. I don't think either of us have a large enough samples size. Those who do take a large enough sample will see technical analysis is just a rain dance.
I don’t know about the nice houses, but technical analysis has one thing in common with astrology: one can make a living selling the ideas to other people.
How do we even know how these traders make their money? Maybe they make their money through commissions, i.e. trading other people's money, who maybe believe in technical analysis. Or maybe they make their money through arbitrage or market making. Just because someone "knows" technical analysis doesn't mean they make any money doing it.
> nicest houses I know are owned by traders who know how to use technical analysis
On the sell side, sure--you know when they'll under or overpay. Anyone buying retail flow should be running these models.
Technical analysis just looks at the surface of the order book--the transaction layer. If you're integrating the book, you can see when the surface is misleading and profit from it. There are technical heuristics, e.g. dead cat bounces, round-number tendencies, et cetera which are based in reality, part flow of funds and part psychological. But technicians' sole reliance on stock charts necessitates blindness to those underlying conditions.
In summary, a stock's near-term price history can, on its own, provide information that predicts the next tick. It's just a known subset of a broader set of signals. That the delineation is known makes those relying on these strategies possible to arbitrage.
Actually it totally makes sense. Most people here are/will never be rich. It's the software equivalent of the business professor who talks a big game in class but has never made money or built a business.
> The nicest houses I know are owned by traders who know how to use technical analysis.
One interesting thing about the stock market is that it’s entirely possible to be successful in it, attributing that success to strategy X, yet to be completely wrong about that.
It’s actually not limited to the stock market – there’s tons of professionals out there that are completely unaware of why what they do works. This makes many people nervous, and they try to come up with a rationalization or mental model for it, and sometimes they get it completely wrong.
> The nicest houses I know are owned by traders who know how to use technical analysis.
By itself that doesn't mean anything, surely you realize?
What percentage of technical analysis traders own the million dollar houses?
You definitely can make huge amounts of money on short term trades if you get lucky. So occasionally a TA trader will become very rich and have a mansion.
But, do more than 50% of them strike it that rich? If not, it's just random.
It's like saying that powerball winners have mansions, therefore the best investment strategy is to buy powerball tickets.
Astrology has more of a culturally evolved or emerged nature. Of course, it's peddled by entrepreneurs who have an incentive to "make it up". Yet it's oddly coherent (with itself), at least from the POV of an uninterested person who encounters it a few times over decades.
Technical analysis is literally made up.
I think there's a gradient where technical analysis is in the far right and psychonalysis in the far left, with astrology in the middle. I can't discern it clearly on an empty stomach right now though.
Your going to have to define technical analysis for me. I'm questioning very heavily that we're talking about the same thing. You don't believe in trends?
In general the goal of trading is to know more than other traders.
High frequency trading is knowing about recent trades sooner than others. That's where the profit comes in.
I see a difference here to technical analysis. HFT clearly has a data edge over those who just look at historical trend lines.
I think it's reasonable to say this isn't technical analysis. It's not the historical analysis that gives the edge. It's the extra knowledge they have that gives the edge.
Technical analysis is very much rooted in purely the historical price. If you have a way to predict prices with more knowledge than just the historical price you're getting outside the realm of technical analysis and into the realm of plain regular analysis where you take as much knowledge as you possibly can about the stock and figure out the price based on that huge volume of knowledge.
This is why technical analysis is dumb. It assumes all the knowledge is in the price already and there's no way for some investors to know more than others outside the scope of that. HFT is in fact a great counter to that. Some people know incoming trades before the rest of the market. That extra knowledge allows for vast profits.
According to the efficient market hypothesis, information can only be valuable until there has been time for information to circulate through the market, and the market price to reflect that information. This seems to happen in under 15 minutes. That's why 20 minute delayed ticker prices are generally available for free.
HFT lives on happening so fast that the market price has not had time to catch up to the information that a trade is available. But it is a race against others in the same market. And an incredible amount of effort has gone into winning that race and making profits off of the increasingly narrow slice of time that markets are profitably inefficient for.
No, high frequency trading makes money via arbitraging across markets, market making, and some other strategies that make its actors come out ahead on average.
Technical analysis is largely astrology for stock markets for reasons many others here have already given, as far as I understand. (Note that it’s still possible to make money using a trading scheme based on astrology, namely if the market structure itself makes any participant come out ahead on average, and the scheme isn’t bad enough to outweigh that inherent advantage.)
Not a 100% AFAIK, there's some sentiment analysis on news as well and I suppose every other piece of machine-interpretable piece of information one can get their hands on. Along with human guidance still.
Glad to see this is the top comment. It frustrates me to no end to see people lapping up TA like it is remotely useful when we spent our first semester on finance at university essentially disproving TA signals. It was literally Finance 102.
Does that mean you spent time in university "disproving" e.g. mean regression? Or was it some unrealistically hardcore definition of TA like "any given indicator taken in isolation should lead to profits every time?"
If you expected to learn useful finance at a university, you already failed as soon as you applied. If anyone there knew what they were doing financially, they wouldnt be there, and especially not teaching Finance 102. In case you were not aware, nearly all professors hate teaching lower level classes, so they naturally get forced on the worst performing professors (the ones that are closest to getting fired).
Concluding that the entirety of TA can not be useful (the Null hypothesis is true for all input signals) just from seeing that a few strawman TA in finance 102 not work is beyond absurd.
>>Technical analysis is the ultimate dumbification of market structure and dynamics, which in itself is a major dumbification of the formal economy, which in itself is a major simplification of the stuff-that-matters(TM).
So basically Python is ultimate dumbification of C, which in itself is a major dumbification of Assembly, which in itself is a major simplification of Gates/Transistors?
At some point we have to deal with abstractions in one way or the other or just continue to indulge in mental verbosity of the most extreme kind.
Abstractions could be leaky but they work for the most part. Which is good enough for most situations.
> Abstractions could be leaky but they work for the most part.
Your abstraction of abstractions is leaky and is not working.
Technical analysis is not an abstraction of market behavior. It the fetichization of linear 2d representations of historical price timeseries.
In your analogy it would be to look at pictures of chips, identify faces and other objects in the clusters of transistors and argue that is the interaction of these patterns that determines chip function.
Didn't Renaissance Technologies made all their money from technical analysis? Who cares if it is simplification of something, if your goal is to make money, not understand it.
TA means something very specific, its not a proxy for all quantitative analysis. Actors with privileged access to information and superior execution capabilities may from time to time "beat the market". The rest are noise traders that are just being systematically fleeced.
They’ve made their money through a combination of information asymmetry and gray-area or outright illegal practices (e.g. tax shenanigans). Their returns are literally unbelievable if they are operating within the bounds of regulations.
>Technical analysis is the ultimate dumbification of market structure and dynamics
Technical analysis is the macroeconomics (macroeconomics, the discipline taught in school etc) of the stock market! It’s like drawing aggregate demand and supply curves and imagining that they move around monolithically as they drive the economy. Tail wags the dog
Technical analysis is an insult to technology and should be rebranded to "untechnical analysis".
Technical people would do analysis with state-of-the-art tools, from LLMs applied on github repos to discover lurking security bugs likely to bring stocks crashing, to vision models applied to satellite images to analyze business activity.
A serious question now: if we take all the mainstream news articles (or headlines) for 20 years and correspond them to OHLC data with e.g. hour and day granularity timestamps, could some sort of AI make hourly or daily predictions?
If modern AI can generate average-human-like text and images, couldn’t it day trade as well?
Yes, the glut of websites with stock “analysis” or “news” is almost 100% automated based on a number of financial and technical measures of any given stock. They are, as you say, pretty much worthless.
Ah this is silly. Technical analysis hmis grounded in sone level of useful information and technique. But it is ultimately a game of informed guessing, so in that respect, its a bit like astrology
This feels unnaturally harsh and likely incorrect. You seem to be suggesting that statistical tools are useless at predicting trends in time-series data.
If the assertion is true that this is useless for the stock market, that would imply the assertion is equally true for macro-economics, and extending further, climate change.
We are collectively deciding how to spend trillions of dollars based on the outputs of these models. Should we not bother then?
> You seem to be suggesting that statistical tools are useless at predicting trends in time-series data.
TA doesn't use "statistical tools" in any actually meaningful or predictive way. It's digital phrenology. Data-driven tea leaf reading. Programmatic palmistry. It deserves only scorn.
Stock price movements are literally text book examples of unpredictable (or more specifically, random walk) time series in university time series courses. A proper statistics course teaches you that you can predict with great certainty that the mean of the fraction of heads over many coin flips converges to 1/2, while you cannot predict anything about the outcome of the next flip. A good statistics course will also teach you how both can be true. TA is like trying to use statistics to infer something about the outcome of the next coin flip.
Technical analysis is based on statistics the same way astrology is: that is to say, it incorporates some of the jargon and features shallow, surface-level incorporation and features. TA is worse because it affects more people.
While we should be sceptical of any and all "models" of reality, we can't lump them all together.
Macroeconomic models have had spectacular fails but are fundamentally a semi-honest attempt to understand how the economy evolves (Only "semi" because ideology can be quite limiting).
Climate change models have a strong physical component that is neither made-up nor manipulated, but may suffer from not capturing biosphere dynamics all its complexity. Thats why there is uncertainty range around scenarios.
Long term investment decisions are in any case never based on TA. That technique is really a made-up pseudoscience tailored to provide comfort and talking points to the widest possible trading audience.
Yes. Although you should never trade on TA alone, it should be a signal that you trade based on your risk analysis of the situation. TA of index etfs today is saying a buy or sell signal is imminent but risk is still weighted to the downside so I’m staying conservative until the market makes a decision.
That said back in 2018 there were no less than 3 cup and handle indicators on SPY at almost every timeframe. I yolo’d the biggest gain ever because the TA was saying heavy buy and the risk was very low (bought long dated ITM calls with a strict exit date)
From the comments here, I think most people just read the headline.
The article looked at 50/200 day simple moving average crossovers on the S&P 500 index (using SPY etf). Which are really just indicators of momentum. Buy when going up, sell when going down. This underperformed just buying and holding the SPY 480% return versus 520% over the last 25 years. However, it avoided big draw downs, so the risk adjusted return was better. In other words, it works in a world with no trading commissions and no bid ask spread. Is it worth it in real life? Probably not.
How many people really buy and hold and don't question their strategy when the 30%+ drawdowns come? We know sticking to your plan is key to long term success. Can the masses stick to simple buy and hold long term?
I don't know about how many people keep holding, but we just experienced a 30%+ fall in tech stocks (and 25% fall in sp500) last year. I held all my stocks because, well, what else was I going to invest in? And if I don't have a different preferred allocation, then I'm just trying to time the market.
My experience (thankfully not paid for with real money, but fake trading) has shown me I am not good at market timing, particularly knowing when to get back in, so I don't bother trying.
It doesn't really take restraint so much as an acceptance that I will likely not do better than buy & hold. I don't enjoy seeing my balance go down, but I am not close to retirement, so I accept that I need to wait it out to catch market rallies because I am not paying super close attention to markets.
Me! I’ve only ever bought total market index funds and they’re just gonna sit there for as long as I live, no matter what. If the world’s total stock value crashes permanently, I’m probably worried about something other than my retirement plans.
>>Can the masses stick to simple buy and hold long term?
This statement here is the key. This is why many times real estate investments work. You more likely to pay monthly payments on a loan with discipline, than have discipline to DCA into a index.
People think and work very differently under 'compulsions' and 'freedom'. There is always a phone to buy, car to change, vacation to take, and eating out to do with the money if you were not forced to put it away, like a compulsory monthly payment.
Even in cases where I have seen disciplined folks, one emergency/pleasure life situation is enough to ensure they fall of the wagon(spend thrift'ism).
This is why most calculations that don't take into account emotional aspects of investments are doomed to fail. And they almost always do. One thing nearly everyone is bad at is waiting, with patience.
Anecdotally, all my moderately- to very-well paid tech friends have a robo investor and don't touch anything ever until they need to withdraw. I'd say most people don't play the day trading game, and that includes HODL'ing (man, that term is literally the only thing that came from crypto that I like) during bad downturns.
Transaction costs are not limited to broker fees, you also pay the spread and eventually slippage. That's why I didn't include them in the article, that's too many variables and I'm lazy.
- The patterns are real in that they can be used to roughly identify groups of buyers and sellers who have price floors and ceilings. E.g. it's a way of gauging the momentum of a trend. However the signal:noise ratio is very high especially when traders try to act on these patterns so that their activity drowns out the original signal
- The patterns then become a schelling point and those who can read the patterns faster can front-run those who read it more slowly. The patterns themselves become reality rather than just a representation of reality.
The value is most likely fully drained from it in that there is no longer any alpha but remains sorta-kinda truish occasionally like "if they don't look you in the eyes it means they're lying" or "changing the lighting improves productivity"
"The patterns themselves become reality rather than just a representation of reality."
This is known as a "hyperstition". It's a cool concept that I believe is more and more relevant as the world becomes more and more connected. Things like "meme magic", etc.
So to summarize, the opportunity of pattern trading is self-fulfilling, which also means if any become unfashionable then the signal will cease to exist. From that fact alone we can conclude there is no basis in the economic reality of the business or its public stock. Greater fool theory, essentially.
It’s very easy to tell if it works. If you go to an interview with Goldman Sachs and mention that you are an expert in TA what would be their reaction?
This is not an endorsement of TA but look at what they do, not say. They are highly influneced by chart movements. Price predictions and buy/sell recommendations are constrained by recent trends and observed prices. Even if they want to say they are driven by fundamentals. These “fundamentals” change in reaction to price action.
If a meteorite hits earth, aliens are discovered, quantum computing breaks encryption, someone launches a nuclear bomb, etc, any of those will affect the stock market by a lot. Technical analysis can't predict a meteorite or any of those other things, therefore it cannot work.
It "might work if nothing significant happens" but that is just a weasel way of saying it doesn't work.
Now if you're saying you decided to invest in something and you're trying to get an entrypoint and you spot a moment of large deviation from the mean and you use that to influence your operational buying mechanics like how you space out your buys or time them, that I can definitely see. But online you always see these two very different things mixed together.
It's a lot more simple than that. You don't need to discover aliens to move the market in unexpected ways. A crop failure halfway across the world, a border skirmish between two countries, discovery of a new oil reserve, a ship blocking a canal, a tech company not selling as many phones as anticipated in a quarter...all have ripple effects through the economy and can screw all market projections. Stuff like this isn't a "black swan"...it happens every month.
If you want to use math and statistics to get an edge in the market then become a quant trader. People who aren't smart enough for that but want to feel smart get into "technical analysis".
Cicada populations in two different countries emerge the same year, decimating sesame crops while Indonesian crops remain unscathed and the futures shoot through the roof.
Yet, similarly to brownian motion, the thousands of events that cooccur more or less cancel each other out in the grand scheme of things.
>Technical analysis can't predict a meteorite or any of those other things, therefore it cannot work.
This feels like you're attacking a strawman version of technical analysis. The claim isn't that you can predict future price movements with perfect accuracy, it's that you can predict it well enough that you can make some money from it. None of our economic models can predict a meteor hitting the earth either. Does that mean we should conclude that all of them "cannot work"?
The fundamental problem is that everyone else—particularly people with unfathomably deeper pockets and much better access to information to you—can do the same TA as you. To whatever extent it does work, that opportunity is rapidly exhausted.
So all that’s left is the unpredictable bits, and those are what you’re at the mercy of. And the unpredictable bits are happening constantly.
I think TA is bad because it's priced in but your argument seems like nonsense.
It boils down to "the market is probabilistic and you can't know for sure it won't get impacted by things" but if TA gives you even a couple % edge (with black swans averaging out in both directions) it would have been worth it.
You're conflating micro and macro price movements. Sure, you can't predict black swan events with technical analysis, but it wouldn't be out of the question to predict short term fluctuations based on a mixture of market psychology and herd thinking.
I don't employ any technical analysis in trading, nor am I a strong advocate, but technical analysis is more about reactionary psychology than about predicting the future. In the most micro sense, the market is dictated by single individuals buying and selling stock, and in the broadest sense, it's a statistical result of millions, or billions of unknowns. Those are two totally different games.
To add, it provides a general measure of sentiment. It's a measure of actions taken rather than words. It's not a crystal ball, but does give a slight edge if you figure out which indicators to use.
I've used it for years and had very good success when I was actively trading (traded longer timeframes. Usually made weekly/monthly trades) to the point I was able to live off of it. The last couple of years I've taken off from trading to focus on developing my business, but will likely jump back once that launches and is in a good enough place, as it's both a time and emotional drain.
While I agree that TA is an invalid method for investing, I disagree with your take on it. What you describe are, charitably, outlier events. Statistical models generally aren't useful for predicting singular events, even if they aren't outliers. So you aren't really invalidating the use of TA with that argument.
You may think so, until it’s revealed that one of the bidders makes all bidding decisions by roll of a die / flip of a coin (you can invent some scheme for doing so).
It depend on whether they are also trying to use each other's bids to determine each other's psychology. At that point you may be observing a recursive system (I know that he knows that I know that he knows...) and can't be sure how many layers of reasoning each actor is employing.
Not with the prices alone. You need a context to use the prices for insight. They could literally be using the bids as a channel to communicate with each other because they are colluding, or as a performance for observers.
Behavior is different at different scales but I see your point. I typically walk to my car after an event, but if I see a group take off running with urgency I will probably do the same thing. Know what I mean?
Does non-technical analysis work for those events? Nope. TA can incorporate all currently known information about the likelihood of those events though. As they say on WSB, it's priced in.
Doing that is not technical analysis. Technical analysis is predicting stock prices strictly from the previous price history.
The steel-man position for technical analysis is that humans are herd animals, who tend to do things in similar, predictable ways. Such as, people who pick stocks like to sell and take profits after the stock reaches some nice, round number. When enough people do this, it can result in repeatable, predictable patterns in prices.
The massive caveat there is of course that while that might be true in the absence of outside stimuli, any news always trumps that. It doesn't matter how nice your patterns are, if it comes out that the company somehow did worse than expected, it's price is going to fall, and if it did better than expected, it's going to rise. Trading on technicals might be something that works if you are really fucking careful, but it seems to me like you are picking quarters in front of a steamroller, in a way. The actual reliable profits from technical analysis are always going to be small, and the risks of investing with no understanding of the fundamentals seems fraught.
You can predict situations like crop failure - if you're an expert in agriculture and have access to data that impacts crop yields.
Some things, like weather and major political issues are easily obtained bits of information and are high-impact events. Data like satellite imaging of fields are available at a price and will tell an awful lot about what best-case production figures will be like. Lastly, insider information is around too - asking companies what they planted, sales data on seeds/fertilizer, etc. If a disease is hitting one company, it's probably hitting a lot of them, especially true with live stock.
People do pay for this information, and they use it to trade futures. Which is how it eventually gets "priced in."
Forecasting is a huge factor in a successful agriculture business. Which is part of why a lot of niche industries tend towards vertical integration - it's much easier to forecast demand when you produce a lot of derivative products. Buy your own stuff; if you planted a surplus then create new products / markets, if there's a shortage, cut production on lower profit items.
Mostly. I've been known to get my hands a little dirty using historical pricing combined with deep due diligence efforts. Think of my use of TA like the cherry on top, not the actual cake. I already know I want cake or I wouldn't be sitting at the table. But, I might consume the cake a little bit differently depending on the nature of the cherry.
For example, I'll listen to an earnings call or other investor presentation to determine if I even want to do business with some corporation. After I have committed to my decision to purchase based upon DD, I might look at how the market has historically treated their business up until today to develop an actual strategy for acquiring a position (or more of a position).
The most recent instance of this for me was AT&T and Verizon getting bad news raked over the coals last week. I already know I want to be in business with these organizations (already am), so I looked at how the market was reacting in near-real-time to the news and adjusted my cake-eating strategy accordingly.
Ultimately, the outlook you are working with is what will drive all of this. I don't ever sell stock. If I decide to buy something, I know I want to hold it for at least 3 years. Never selling and strategically buying seem to be a simple rule for not getting fucked over with how investors typically try to use these tools.
The least tortured analogy I can come up with is to compare pure TA investing strategies to poker. Is it gambling? Kinda yes. Is it also strategic? Maybe also yes. Really depends on the context and mindset of the participants going into it.
I imagine, even if equity prices are imagined to have an ideal or true value based on fundamentals, nearly all of the work of making a profit comes from maneuvering appropriately relative to competition, and the data on that is nothing but "technical".
The problem is that if you could actually time the best execution moment, you could make that profit trading options or futures as well. If you don't think you can, you might as well just buy now.
Well that was pretty shallow. Only a single pattern was included and even that performed worse than the index. If you were to include the transaction costs and the cost of time spent analysing that, the perf would be even worse.
So a shallow article with a wrong conclusion.
Since past returns are not a reliable indicator for future returns any back testing will only show if a thing would have worked in the past not in the future.
Yes, well the headline "Is this particular 50/200 day simple moving average crossover strategy just S&P500 astrology?" isn't a sweeping enough generalization
Yes. And what's more, not too long ago this was common knowledge. Every professional trader knows that TA is crystal-ball-tier nonsense. But the influx of morons in cryptocurrency and WSB memetrading have to learn this lesson all over again (and in an adversarial environment, since there are tons of '''gurus''' poisoning the well with bad info, insisting that their TA is totally legit and anyone saying otherwise probably has "political motivation")
Mandelbrot (of the set) studied the effectiveness of technical analysis and wrote about it in The Misbehavior of Markets: A Fractal View of Financial Turbulence. This PDF [1] has a summary of the findings.
Readit News
While the made-up character is similar, Astrology is far richer in concepts, orchestration and story telling.
Technical analysis is the ultimate dumbification of market structure and dynamics, which in itself is a major dumbification of the formal economy, which in itself is a major simplification of the stuff-that-matters(TM).
The objective of technical analysis is to get as many low-information actors as possible to transact with as low-cost as possible technology (I would totally not be surprised if current "technical analysis" verbiage is 100% automated).
It might work that way with astrology too, but it's not so clear.
For example if everyone agreed on that Gemini means good at science and Leo is good at art, the whole education system would be designed around this belief and it would hugely impact how children think of their own potential.
> you ask some parents about santa clause. they say we are athiests, but we pretend to believe in santa clause to make our child happy. then you ask the child about santa clause, and they say i pretend to believe to make my parents happy.
That's a good point. Best traders know how to use technical analysis, they just don't use it to invest their own money.
If you have a large group of people who take risks while trading, and they form strategies indistinguishable from flipping a coin (like technical analysis), then at the end of the day you're going to have a lot of ex-traders who failed to make money and a few that look like rock stars - because taking large risks and being lucky is a "good" way to make money fast. It's the very definition of survivorship bias.
On the sell side, sure--you know when they'll under or overpay. Anyone buying retail flow should be running these models.
Technical analysis just looks at the surface of the order book--the transaction layer. If you're integrating the book, you can see when the surface is misleading and profit from it. There are technical heuristics, e.g. dead cat bounces, round-number tendencies, et cetera which are based in reality, part flow of funds and part psychological. But technicians' sole reliance on stock charts necessitates blindness to those underlying conditions.
In summary, a stock's near-term price history can, on its own, provide information that predicts the next tick. It's just a known subset of a broader set of signals. That the delineation is known makes those relying on these strategies possible to arbitrage.
One interesting thing about the stock market is that it’s entirely possible to be successful in it, attributing that success to strategy X, yet to be completely wrong about that.
It’s actually not limited to the stock market – there’s tons of professionals out there that are completely unaware of why what they do works. This makes many people nervous, and they try to come up with a rationalization or mental model for it, and sometimes they get it completely wrong.
By itself that doesn't mean anything, surely you realize?
What percentage of technical analysis traders own the million dollar houses?
You definitely can make huge amounts of money on short term trades if you get lucky. So occasionally a TA trader will become very rich and have a mansion.
But, do more than 50% of them strike it that rich? If not, it's just random.
It's like saying that powerball winners have mansions, therefore the best investment strategy is to buy powerball tickets.
Technical analysis is literally made up.
I think there's a gradient where technical analysis is in the far right and psychonalysis in the far left, with astrology in the middle. I can't discern it clearly on an empty stomach right now though.
Checkmate atheists
High frequency trading is knowing about recent trades sooner than others. That's where the profit comes in.
I see a difference here to technical analysis. HFT clearly has a data edge over those who just look at historical trend lines.
I think it's reasonable to say this isn't technical analysis. It's not the historical analysis that gives the edge. It's the extra knowledge they have that gives the edge.
Technical analysis is very much rooted in purely the historical price. If you have a way to predict prices with more knowledge than just the historical price you're getting outside the realm of technical analysis and into the realm of plain regular analysis where you take as much knowledge as you possibly can about the stock and figure out the price based on that huge volume of knowledge.
This is why technical analysis is dumb. It assumes all the knowledge is in the price already and there's no way for some investors to know more than others outside the scope of that. HFT is in fact a great counter to that. Some people know incoming trades before the rest of the market. That extra knowledge allows for vast profits.
HFT lives on happening so fast that the market price has not had time to catch up to the information that a trade is available. But it is a race against others in the same market. And an incredible amount of effort has gone into winning that race and making profits off of the increasingly narrow slice of time that markets are profitably inefficient for.
Technical analysis is largely astrology for stock markets for reasons many others here have already given, as far as I understand. (Note that it’s still possible to make money using a trading scheme based on astrology, namely if the market structure itself makes any participant come out ahead on average, and the scheme isn’t bad enough to outweigh that inherent advantage.)
Just curious about the details, thanks.
Concluding that the entirety of TA can not be useful (the Null hypothesis is true for all input signals) just from seeing that a few strawman TA in finance 102 not work is beyond absurd.
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So basically Python is ultimate dumbification of C, which in itself is a major dumbification of Assembly, which in itself is a major simplification of Gates/Transistors?
At some point we have to deal with abstractions in one way or the other or just continue to indulge in mental verbosity of the most extreme kind.
Abstractions could be leaky but they work for the most part. Which is good enough for most situations.
Your abstraction of abstractions is leaky and is not working.
Technical analysis is not an abstraction of market behavior. It the fetichization of linear 2d representations of historical price timeseries.
In your analogy it would be to look at pictures of chips, identify faces and other objects in the clusters of transistors and argue that is the interaction of these patterns that determines chip function.
Technical analysis is the macroeconomics (macroeconomics, the discipline taught in school etc) of the stock market! It’s like drawing aggregate demand and supply curves and imagining that they move around monolithically as they drive the economy. Tail wags the dog
Technical people would do analysis with state-of-the-art tools, from LLMs applied on github repos to discover lurking security bugs likely to bring stocks crashing, to vision models applied to satellite images to analyze business activity.
If modern AI can generate average-human-like text and images, couldn’t it day trade as well?
There are lots of giant trend following and quant funds that will likely fall into "technical analysis" category.
If the assertion is true that this is useless for the stock market, that would imply the assertion is equally true for macro-economics, and extending further, climate change.
We are collectively deciding how to spend trillions of dollars based on the outputs of these models. Should we not bother then?
TA doesn't use "statistical tools" in any actually meaningful or predictive way. It's digital phrenology. Data-driven tea leaf reading. Programmatic palmistry. It deserves only scorn.
Macroeconomic models have had spectacular fails but are fundamentally a semi-honest attempt to understand how the economy evolves (Only "semi" because ideology can be quite limiting).
Climate change models have a strong physical component that is neither made-up nor manipulated, but may suffer from not capturing biosphere dynamics all its complexity. Thats why there is uncertainty range around scenarios.
Long term investment decisions are in any case never based on TA. That technique is really a made-up pseudoscience tailored to provide comfort and talking points to the widest possible trading audience.
No, the suggestion is that technical analysis is useless at predicting future trends in stock prices.
That said back in 2018 there were no less than 3 cup and handle indicators on SPY at almost every timeframe. I yolo’d the biggest gain ever because the TA was saying heavy buy and the risk was very low (bought long dated ITM calls with a strict exit date)
The article looked at 50/200 day simple moving average crossovers on the S&P 500 index (using SPY etf). Which are really just indicators of momentum. Buy when going up, sell when going down. This underperformed just buying and holding the SPY 480% return versus 520% over the last 25 years. However, it avoided big draw downs, so the risk adjusted return was better. In other words, it works in a world with no trading commissions and no bid ask spread. Is it worth it in real life? Probably not.
My experience (thankfully not paid for with real money, but fake trading) has shown me I am not good at market timing, particularly knowing when to get back in, so I don't bother trying.
It doesn't really take restraint so much as an acceptance that I will likely not do better than buy & hold. I don't enjoy seeing my balance go down, but I am not close to retirement, so I accept that I need to wait it out to catch market rallies because I am not paying super close attention to markets.
Lots of people saving for retirement do though.
This statement here is the key. This is why many times real estate investments work. You more likely to pay monthly payments on a loan with discipline, than have discipline to DCA into a index.
People think and work very differently under 'compulsions' and 'freedom'. There is always a phone to buy, car to change, vacation to take, and eating out to do with the money if you were not forced to put it away, like a compulsory monthly payment.
Even in cases where I have seen disciplined folks, one emergency/pleasure life situation is enough to ensure they fall of the wagon(spend thrift'ism).
This is why most calculations that don't take into account emotional aspects of investments are doomed to fail. And they almost always do. One thing nearly everyone is bad at is waiting, with patience.
This is, by the way, the intended strategy behind most index-based retirement funds.
- The patterns are real in that they can be used to roughly identify groups of buyers and sellers who have price floors and ceilings. E.g. it's a way of gauging the momentum of a trend. However the signal:noise ratio is very high especially when traders try to act on these patterns so that their activity drowns out the original signal
- The patterns then become a schelling point and those who can read the patterns faster can front-run those who read it more slowly. The patterns themselves become reality rather than just a representation of reality.
The value is most likely fully drained from it in that there is no longer any alpha but remains sorta-kinda truish occasionally like "if they don't look you in the eyes it means they're lying" or "changing the lighting improves productivity"
This is known as a "hyperstition". It's a cool concept that I believe is more and more relevant as the world becomes more and more connected. Things like "meme magic", etc.
Brokers don't particularly care whether their customers make money. But they do like customers who trade early, and trade often.
The key point is that if you were a consistent expert in TA you don't need to interview anywhere. You can be a billionaire trading from home.
It "might work if nothing significant happens" but that is just a weasel way of saying it doesn't work.
Now if you're saying you decided to invest in something and you're trying to get an entrypoint and you spot a moment of large deviation from the mean and you use that to influence your operational buying mechanics like how you space out your buys or time them, that I can definitely see. But online you always see these two very different things mixed together.
If you want to use math and statistics to get an edge in the market then become a quant trader. People who aren't smart enough for that but want to feel smart get into "technical analysis".
Yet, similarly to brownian motion, the thousands of events that cooccur more or less cancel each other out in the grand scheme of things.
This feels like you're attacking a strawman version of technical analysis. The claim isn't that you can predict future price movements with perfect accuracy, it's that you can predict it well enough that you can make some money from it. None of our economic models can predict a meteor hitting the earth either. Does that mean we should conclude that all of them "cannot work"?
So all that’s left is the unpredictable bits, and those are what you’re at the mercy of. And the unpredictable bits are happening constantly.
It boils down to "the market is probabilistic and you can't know for sure it won't get impacted by things" but if TA gives you even a couple % edge (with black swans averaging out in both directions) it would have been worth it.
There is a UAP disclosure hearing in the US House tomorrow:
https://www.theguardian.com/world/2023/jul/21/ufos-congress-...
I don't employ any technical analysis in trading, nor am I a strong advocate, but technical analysis is more about reactionary psychology than about predicting the future. In the most micro sense, the market is dictated by single individuals buying and selling stock, and in the broadest sense, it's a statistical result of millions, or billions of unknowns. Those are two totally different games.
I've used it for years and had very good success when I was actively trading (traded longer timeframes. Usually made weekly/monthly trades) to the point I was able to live off of it. The last couple of years I've taken off from trading to focus on developing my business, but will likely jump back once that launches and is in a good enough place, as it's both a time and emotional drain.
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... when you draw the figures use in technical analysis, the predictions will depend on the relative scales you choose for the x- and y-axis.
Case closed.
The steel-man position for technical analysis is that humans are herd animals, who tend to do things in similar, predictable ways. Such as, people who pick stocks like to sell and take profits after the stock reaches some nice, round number. When enough people do this, it can result in repeatable, predictable patterns in prices.
The massive caveat there is of course that while that might be true in the absence of outside stimuli, any news always trumps that. It doesn't matter how nice your patterns are, if it comes out that the company somehow did worse than expected, it's price is going to fall, and if it did better than expected, it's going to rise. Trading on technicals might be something that works if you are really fucking careful, but it seems to me like you are picking quarters in front of a steamroller, in a way. The actual reliable profits from technical analysis are always going to be small, and the risks of investing with no understanding of the fundamentals seems fraught.
Some things, like weather and major political issues are easily obtained bits of information and are high-impact events. Data like satellite imaging of fields are available at a price and will tell an awful lot about what best-case production figures will be like. Lastly, insider information is around too - asking companies what they planted, sales data on seeds/fertilizer, etc. If a disease is hitting one company, it's probably hitting a lot of them, especially true with live stock.
People do pay for this information, and they use it to trade futures. Which is how it eventually gets "priced in."
Forecasting is a huge factor in a successful agriculture business. Which is part of why a lot of niche industries tend towards vertical integration - it's much easier to forecast demand when you produce a lot of derivative products. Buy your own stuff; if you planted a surplus then create new products / markets, if there's a shortage, cut production on lower profit items.
For example, I'll listen to an earnings call or other investor presentation to determine if I even want to do business with some corporation. After I have committed to my decision to purchase based upon DD, I might look at how the market has historically treated their business up until today to develop an actual strategy for acquiring a position (or more of a position).
The most recent instance of this for me was AT&T and Verizon getting bad news raked over the coals last week. I already know I want to be in business with these organizations (already am), so I looked at how the market was reacting in near-real-time to the news and adjusted my cake-eating strategy accordingly.
Ultimately, the outlook you are working with is what will drive all of this. I don't ever sell stock. If I decide to buy something, I know I want to hold it for at least 3 years. Never selling and strategically buying seem to be a simple rule for not getting fucked over with how investors typically try to use these tools.
The least tortured analogy I can come up with is to compare pure TA investing strategies to poker. Is it gambling? Kinda yes. Is it also strategic? Maybe also yes. Really depends on the context and mindset of the participants going into it.
Spoilers: The math shows TA's bullshit.
[1] https://users.math.yale.edu/users/mandelbrot/web_pdfs/getabs...