for those not interested in the bulk of this thread, i think the quoted post above provides the best summar i've read.

very nice post.

Barron

This is (another thing) I've been interested in and stuggling with recently. Looking for observed relationships between markets or between prices and price derivatives (such as the MACD you mentioned).

A lot of these ideas have been extensively written about in various texts (such as the probability of a reaction after a price derivative's divergence from the price or a particular candlestick formation, or the likely behaviour of Asian markets given the overnight action on the NYSE).

I'm worse at statistics than I am at poker, but apparently statistically significant events need not have a rational explanation to a technical analysist. If the action is tradeable then it can be profitable.

Can you give a specific example of statistically significant behaviour of price that you were able to exploit and trade? I think many exist, but since the markets are so complex, I suspect that the robustness of many of these observations will degrade over time which may suggest curve-fitting.

Yeah, buy when they're crying, sell when they're yelling.

In all seriousness, erase everything you have read or the base system that comes installed with your software and put a 5 year old in front of a chart and ask "where is it going now and why?"

You would be amazed at the money people are leaving on the table while in search of overly complex strategies and .. if you are the thinking type .. the seemingly infinite amount of explorable paths the most very very basic concepts provide.

If you read the "Market Wizards"-series of books by Jack Schwager, he interviews the most successul traders of the 80´s and 90´s. When asked about their strategies, about 70% of them contribute their success to TA. I take that as a proof that TA works very well, if you know how to use it.

But as someone pointed out, it may be hard to day-trade with a $80 billion account since you would move every market except forex.

This thread makes me very skeptical about TA. Also, many have mentioned that TA is more exciting than FA, but I'd find it a lot more interesting doing FA and really getting an understanding of how companies work and trying to predict future events. TA is definitely more of a thrill, but as Desert said, we all have poker if we want some short term excitement.

I think some of those folkes (inc. "The New Market Wizards" interviewees) are now busto.

You can use TA and develop a strategy with amazing back-testing results. The problem is, it probably won't give such amazing results going forward.

I find it ironic you call TA a coin toss. FA is based on what you estimate to be the intrinsic value of a security. Evidence has shown that even if you have solid fundamental information, its a coin toss whether the market will take in that information and put it into the stock price. The market only reflects supply/demand values. It does not need to reflect the true value of the security. One could argue that eventually, a security always returns to its true value; that may be true, but how long does that take? securities stay wrongly priced for YEARS. Profiting from FA is easy. Beating the market, making above average returns from FA, now thats a coinflip.

SF

FA is is definately a skill set that not many posess. Not only do you have to have the ability to find under valued scurities but you have to have the psychological ability to hang on through thick and thin which may be a long time. So, I totally agree with you. Beating the market is not easy no matter which method you use. Its just that for a taxable account taxes and transactions cost are considerably less for long term investing then for short term trading.

Actually your example proves that FA provides market beating returns. If you can buy a stock below IV, and know it's price will eventually converge to IV, you will earn the market return plus the discount you paid over the time it takes for convergence.

It's because efficient market theory tells us stocks should be price to provide similar returns, intrinsic value should equal market price and that price should yield expected market returns going forward. When you find a mispriced stock it's at a discount to IV, by the time price converges with IV it will actually reach IV2, IV of several years from now earning back the discount plus the market returns of those years.

Now this is all general, it doesnt guarantee returns with any single pick due to variance. My Iphone makes it difficult to edit long posts so let me continue....

You do realize that in an effort to counter my argument you simply reiterated it?

The real challenges of value investing are

1) IV is always an estimate or even an estimated range and its accuracy depends upon the predictibilty of the investment and your skill and experience.
2) You need to buy at a substantial discount to that IV estimate, your margin of safety, to protect against mistakes.

The biggest problem most attempted practitioners have is a lack of fortitude, patience and ignorance of there own limitations. If you think you can buy at a 10% discount because your IV estimates are always within 5%, you are guilty of hubris and will pay dearly. You need to have the patience to wait, even when awash in cash, for those 50% discounts. And when you find one, you have to have the fortitude to commit a big part of your portfolio to it.

Buffett demonstrates awareness of his own limitations when he refuses to look at a stocks price before he estimates its value, he doesnt want to influence his analysis. That is probably a weakness of mine, I sometimes find a set of assumptions that justify buying at todays price to see if I'm comfortable with them, i.e. XYZ is a buy if I believe its merger is at least 85% likely. Thats backwards, I should make my best estimate of the merger happening and the figure what price makes sense.

My biggest strength is fortitude, I'm willing to make big bets when odds are great. But my results have been poor this year because I lacked patience, I jumped into opportunities I really liked without getting a big margin of safety. Guess what? They are all trading at a big margins of safety now and I am fully invested! Lessons learned that hopefully make me a better investor going forward.

please link this evidence. i'd love to dig into it.

odds against succes are imo longer than a coinflip. you have to be in the top top % to really do well with either FA or TA imo (well = mkt beating consistently).

i worked at a top multistrategy solely fundamental (though insanely highly quantitative) fund and they had an information ratio of 1.0 for over 15 years.

Barron

No they are not, but let´s assume they are. Even then, it still provs that TA worked out for them while building their fortune. Market conditions maybe changed and they did not react to that, or they used to high leverage and went broke, like a lot of the very best poker pros has done. That still does not make them losing players, and it still makes the market wizards winning traders by using TA.

And if TA did work for in the 80´s and 90´s, it sure as hell works nowadays too.

Here is the locigal explanation why TA work:

Lets says the MSFT stock (Microsoft) trades for $100 for a long period of time. People buy and sell, so there are two camps out there, those who sold, and those who bought. Then the price falls to $80, and all the sellers are glad they got out at $100 and are reluctant to buy MSFT again. The buyers on the other hand, are paying very close attention to the market and decide that MSF is such a solid company, that they will not sell now at a loss. They decide to put it away and try to forget it.

Now some time later, MSFT price has picked up and is approaching $100. The people that has been in for the ride down to $80 is now paying very close attention again, and are on average a bit more inclined to sell at $100, since people really like to get out at break even when they can. The former sellers at $100 however, are not more inclined to buy back when MSFT is trading at $100 again, because they feel they almost got burned last time, and selling was the right move then, so buying is definately the wrong move now.

And wham, there you have it! It's a slight differentiation in buy vs sell pressure now, and $100 has become a resistance level for MSFT. Every time is reaches $100 in the future, it will experience a little added selling pressure that will stack the odds against that stock going up.

This is exactly why prices has a tendency to bounce at the same levels many time.

There are actually logical explanations for all technical patterns like trends, breakouts, fibonacci levels and ranges as well, but they are bit more complex then resistance.

how do you explain when something "blows through" a resistance level?

Barron

Enough new demand has been generated for the stock so that the Specialists and MMs can absorb the overhead supply at 100 without their inventories taking a serious hit.

how do you know beforehand that will happen?

Barron

Just put yourself in the position of the sellers and buyers, and you will figure it out.

What happens is that lets say MSFT reach $100 again and the added selling pressure puts the price back to $80. Then eventually the price reach $100 again and the sellers are still glad they sold for $100 since it seems that MSFT are "not worth" more then $100. The buyers at $100 are glad to be break even and some sell and some dont. But then all of a sudden, MSFT starts to reach $102, $104, $108 and then the sellers at $100 instantly realizes "Holy crap, I should never have sold that darn fine stock MSFT" since they now would have had a win. They seriously consider buying the stock back, despite the higher price, and many do. That leads to added buying pressue.

Also the old buyers at $100 (both times) are finally seeing some profit after a long time of red figures, and they are reluctant to sell now ("I knew I was right to hold on to this baby!"). That adds to the lack of selling pressure.

So this is a situation where pretty heavy price movements can occur in short time, often referred to "blow outs" as you said yourself.

Same thing when a stock price reach ATH (all time high). Then there is not a single stock owner who has a loss. Every single share owner is seeing a profit, and since there is noone to sell to get break even, you very often see a price rush when an old ATH is passed. Look for yourself.

how do you know when this will happen beforehand?

Barron

Someone just sold MSFT at a profit/or is just breaking even at a given price..... IMO the only new "GUARANTEED" new buyers are players who SHORTED the stock at $100...and are now scrambling to cover causing the stock to climb higher .....even if its just a technical rally and NOT based on new positive fundamentals

Anyone that did SELL...and is now justifying re-entering at a much higher price level,should seriously reconsider "the trading" vs. the "buy and hold stratagy"

Stephen

I don´t quite understand what you mean. I just tried to explain why often a stock trades in a range $80-$100 and then "explodes" to $115.

Given the above scenario, I know it is an increased chance of MSF making a price jump once it trades at $101, because of the mental states of the buyers and seller.

So one technique to capitalize in this market imperfection would be selling MSFT short at $97 with a stop-and-reverse order placed at $101. Target levels would be $85 for the short order, and maybe $112 for the long position if that is executed.

Did I misunderstand your question?

You don't, but you may have to make several attempts to catch a possible move. The trick is to ensure your many losses when wrong are small enough to not offset the few times you are right.

Building positions that have been tested to robustly provide high risk/reward trades doesn't involve any prediction or prior knowledge to a future price movement.

As Kimchi said, you don't, but, volume can be a clue. If the stock rises on light volume, there's a chance that the specialist has conserved enough of his inventory to break through that resistance point.

John Arnold for one. Youngest on the Forbes list, was a trader for Enron and now has his own hedge fund.