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.
But if you assume enough rich people do technical analysis and pattern day trading you can earn money by doing what's essentially technical analysis, but with different patterns - ones designed to capitalize on the old patterns used by the rich.
Keep in mind, I'm not saying technical analysis works. I don't think it does, but that's without seriously examining the evidence. I'm just saying that the diminishing profit argument doesn't work. At least not as presented.
if this were the case, it seems likely that others with deeper pockets than you, perhaps other high frequency traders, would rapidly exhaust those profit opportunities
Having said that, “let’s take difference to EMA” is pretty the one-size-fits-all solution, and there are no shortage of firms looking at minute to hour long trades to gobble up anything human TA practitioners would ever try to trade.
This just further emphasizes the point that retail investors relying on TA are having their lunch eaten. HFTs are picking the minute opportunities because that's all that exists. If there were longer-term strategies that were reliably profitable, do you think they simply ignore them?
> If there were long term strategies that were reliably profitable, do you think they would simply ignore them?
Yes? Mid frequency trading (say holding period of 5 minutes to ~1 hour) is a totally different class of quantitative trading, from the features you use to how you build portfolios (if at all) to how you execute on forecasts. At least one top-of-the-game hft firm (that already relied on forecasts instead of speed) got burned on their first attempt to enter mid frequency.
Put differently: "A bunch of smart people who have proven to be able to reliably extract profits from microsecond trades tried their hand at exploiting patterns on longer timescales and were unable to. Even though I have less money, information, access to markets, and am just one person, I believe I can succeed where they failed."
Now, perhaps each new generation of patterns would have diminishing returns over the previous generation. My intuition is that this almost certainly true. But either an argument or evidence has to exist for it and I'm not aware of any.
correct, exactly what I'm saying, any opportunities, including those derived from other opportunities being seized, would themselves be seized by such deep pockets and HFT firms
> ...or day-traders.
unfortunately I doubt it, due to the above
If those with deeper pockets had reliably exploitable trading strategies, other teams with equally deep pockets would be exploiting them. You need to simultaneously believe that widely known and understood patterns exist which are profitable to exploit but also that nobody with large sums of money and a financial incentive to profit is interested in taking that easy money.
The opportunity is there for the average person to take, but it needs sufficient skill / training, like any other skill. I can't "prove it" to you, but I already proved it to myself and many people in the trading community did.
You don't need any sophisticated tools or huge amounts of money. It's bloody difficult though, not just for the technical reasons (there are many strategies but most go beyond a MA crossover, even though I'm not denying even that can produce alpha -- I don't know or care), but mostly for psychological reasons. And psychology is what's behind many of the patterns you see in the markets.
Every year there are people who beat the indexes and there are people who perform worse than the indexes. Every successive year some proportion of the winners stay winners and some become losers. The interesting thing to note is that—if you look at the statistics—winning one year has almost no bearing on whether or not you win the next year.
Still, there are participants who flipped that weighted coin year after year and caught heads five years in a row. It doesn't mean they have a successful strategy. It just means that if you flip a 45/55 coin five years in a row, two out of one hundred people will get a string of heads.
I've personally witnessed all of my day-trading friends go through this (I almost said "learn this lesson" but I'm not sure they have). For a while they beat the index and they're convinced their strategy is sound. One day something unexpected happens and they're suddenly in the hole. Often this is compounded by having an enormous tax bill on "gains" that no longer exist, necessitating selling off holdings that are deep in the red, making it even harder to get back to positive.
Do some individuals exist who can reliably beat the markets? Sure. They just are exceedingly likely to not be you, and none of them are offering their services to you.
You're right in that most of the time, the directional probability of the market is close to 50% for a 1:1 trade.
There are instances where the directional probability is significantly above 50% to make a trade have a positive EV (if it's not 1:1, the baseline is not 50%, and there are similarly moments where the directional probability for a different risk-reward is above its baseline for some direction). Different strategies tailor to different RRs, but you can absolutely find those entries.
However, as you said it's easy to get caught up in the illusion of profitability for a given market condition. For example, in a strong bull market like the post COVID stimulus, you could trade to the long side in a large timeframe and just win money because of the anomaly of such a protracted spike in the daily charts.
That's not a sustainable strategy though which explains what happened to your friends. A price action system that takes into account markets structure works in every environment, be it ranging, surging or a bear market.
Learning price action TA takes time to learn though, it's a skill like when we learned to code till the time we got paid for it. And trading, in general, goes against how our brain works. Psychology is the great barrier to profitability once you have a strategy. It explains the high failure rate. it being a hard skill is why there's so few people doing it, But it's not because it needs a very high IQ or Rafa Nadal's strength of mind. Most people could get there, but it takes a lot of effort, and theres so much deception and scamming around it, it's easier to pretend it's impossible based on the amount of people that fail.
There is a UAP disclosure hearing in the US House tomorrow:
https://www.theguardian.com/world/2023/jul/21/ufos-congress-...
Are you shorting Tech on the idea that w/e we have now is inferior to theirs?
Do you go long on War on the idea that we'll start fighting them?
--
Perhaps more difficult, what do you trade if Aliens aren't real?
If they aren’t, I dunno? Business as usual cause its already priced in.
Not very realistic, but interesting nonetheless.
Regarding the case for lowtech interstellar travellers: I can accept the idea that there is some symple physics trick to make a jump drive that we haven't discovered, fair enough. Just as in the story, there would also had to be a similar undiscovered trick for antigravity, since otherwise they have no way of getting to orbit.
Can you however build a ship that can resist vacuum and provide life support with 16th century tech? I guess perhaps your species might be able to live in vacuum, needs only a bit of heat and doesn't need to breathe gasses?
- - -
Anyway, I’d like to recommend another book. High Crusade by Poul Anderson[0]. In the first chapter pacifist aliens land in 13th century England and get immediately massacred by the locals. Now the king has a starship.
More importantly, it's backed by genuine human intent to buy whatever the coin says. There is information in that too.
This is very far from the zero information situation that you were trying to set up, lol.
The goal of technical analysis is to find pools of supply and demand at different price points, much like a clustering algorithm. It is reductive by its very nature but it's still a useful approximation because big interpretable clusters can absolutely drive price action and it's helpful to have a model for that. On a good day, you might get the biggest 2 or 3 clusters correct to within 10% and miss several others totaling 1000000x the size and importance of a hypothetical bozo trading based on a coin flip, and this highly imperfect outcome would still be enormously valuable and worth pursuing.
It's like politicians assembling a platform by considering the sizes and interests of voting blocs. This strategy was always going to be a reductive, imperfect, noisy mess but that doesn't make it irrational or useless.
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.
Is this true? For example, is using AI models that take into price history, current and historical events, insider and/or institutional trading, analyst opinions -- would that not be considered technical analysis? I know this is just a matter of semantics, but curious as to what is considered TA nowadays.
Technical analysis is specifically the stupid line drawings you see on stock charts that try to predict trend lines from the motion of the previous lines
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."
Successful 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.
Experts predict crop failures, big money acts on those predictions and moves securities price and volume, which technical analysts examine.
Therefore, the experts prediction is input for technical analysis.
If I know for a fact that a company is about to collapse and I establish a short position, will anybody notice? It depends on a lot of factors, but I could make an assload of money on puts without nudging the market.
Technical analysis is all about answering the question: are you able to filter who know something vs those that don't merely by looking at a buy signal? The answer: no, not really. Insiders acted well in advance of the SVB issues being made public, and there are lot of other examples of people making guaranteed bets that weren't obvious in the technicals. The noise is just too much.
By the time the signal is clear, the market has "priced" it in, and now you're just trying to predict the random actions of the know-nothing crowd.
Technicals are always after-the-fact. Since enough people with deep knowledge have to have already moved on that information in order for the market to have reacted to it.
It's much like trying to predict a fire by watching a crowd running away and hit the fire alarm. You didn't predict the fire and you can't have predicted the fire. Maybe you could have noticed one person booking it for the exit and follow along, but you still didn't know what was happening and were going on blind faith.
Assuming you are the only person who knows for sure that this company will collapse, technical analysis is the wrong tool to use and all other strategies, experts, big money players will also fail.
Assuming you aren't the only person who knows for sure that this company will collapse the price will reflect this knowledge.
>It's much like trying to predict a fire by watching a crowd running away and hit the fire alarm. You didn't predict the fire and you can't have predicted the fire. Maybe you could have noticed one person booking it for the exit and follow along, but you still didn't know what was happening and were going on blind faith.
It's nothing like that at all, and reasoning with analogy is pointless because the discussion becomes about the analogy not the issue at hand. But I will try. If people running away is people selling stock, it doesn't matter if there is a fire or not. Selling stock impacts price regardless of if the event is real or not. And as you know, having been in a building where the fire alarm was activated, people don't rush to the exists. Some small number leave right away. The vast majority won't enter the building. The remaining people look to others and as more leave the momentum builds until the mass moves out.
And once the fire department arrives and gives the ok they will go back in. But since we are talking about stocks, not all buyers won't be waiting for that. They'll have put their money elsewhere, money may go back into the stock slowly. Obviously this won't work on the top 3 most popular stocks in a raging bull market that everyone is paying attention to. In that case, people will be waiting to jump back in.
Also, the situation is very dynamic with an unknown and very large number of variables, even with something as seemingly simple as a crop failure. Such as such as a countries deciding to ban exports to secure food security, lack of access to fertilizer due to sanctions against major fertilizer producers in wheat producing countries, the politics of national and local water rights.
All these factors have parties with inside information acting on them (see members of congress trading stocks) which no player with big pockets will have access to but is all reflected in the price.
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.
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.
... 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.
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.