Technical Analysis Fallacy

Apologies
-no mentor, or course, or literiture can give anyone the holy grail to the secrets of success in trading in the markets.
-"and no one, sells the goose that lays golden eggs, probably the eggs, but never the goose"
Nevertheless, I will humbly attempt.

Since the late 70s and into the millinium.
Many "engineers" have made public, their inventions of reading probabilities into Technical Indicators. Many Technical Analysis Gurus came to the forefront to sell their research findings. To name a few,
The Grand daddy being Charles Dow and his Dow theory which later lead to the creation of the Dow Jones Indexes.
Rene Descarte who introduced the Spiral studies.
Leonardo Da vincci who fostered the fabonacci principles,
W.D. Gann, who introduced Cyclic Studies of Squaring time and price.
R.N.Elliot, who introduced the Elliot Wave Studies
W.Wilders.Who introduced the mathematics of calculating overbought and oversold markets by his introduction of the DI+,DI-, ADX lines and the Relative Strength Index.
The Stocastics, MACDs, ……………………………...etc

If one was to impliment all these studies onto their charts. What you will see is a beautiful piece of art, displaying very impressive hog wash, that do nothing but dazzle the uninitiated. If anything else it 'll confuse you even more.

Then you have the charting specialist who have introduced many ways to chart eg,
Linear Charts, HiLoClose Bar Charts, Japanese candlestick charts, Point & Figuring, John Hill's Bar Chart congestion & reversal patterns, reverse point waves, pivots, fractuals, ………..etc

Today, we find lots of originally and mutated techniques and methodologies available to the Chartist or Technicians.

What many fail to realise, is that all these studies, basically are statistical tables plotted in graphic form to present a "picture" to assist traders in their decision process. The maxim being, that a picture tells a thousand words.

"It is not theirs (the charts) to reason why,
But to signal Sell or Buy,
For the traders to do or die,
Hoping that the signal does not lie,

I would, from my many years of studies, go so far as to say, that they all work, some more than others but they all do serve a purpose. (to give traders, the "guts" to do or die)
If I may borrow from the quotes of Sir Winston Chirchill.
"That you can lie to some people all the time, all people some of the time, but not to all people, all the time."
Similarly, theses studies can work in some market conditions all the time, all market conditions some of the time, but not all market conditions all of the time."

Think about what I've just quoted very carefully.

The problem with some people and some professional Technical Analyst today ( being a certified Technical Analyst myself ) is that they use the Technical studies as if, it were the "Holy Grail" of trading & their pathway to the millions.

How far that is from the truth.
Any person with a good brain on their shoulders, will ultimate come to the realisation that these are just tools. Tools that are built on historical and lagging databases. Moreover the rigidity of the parameters used in the studies imposes rigid responses to changing market conditions. Have we forgotten that the market is a live beast that learns and adapts to trader behaviours? Many have forgotten that the market is the sum total of the behaviour of the participants engaged in the market place. These tools are used for measuring the markets health, not so unlike the thermometer to a doctor, or the measuring tape to a carpenter, just a tool.

Then how is it possible that these studies themselves can be considered the "Holy Grail"?
It may be due to ignorance (being new and uniniatiated), lazyness, or just plain stubborness ( a little knowledge is a dangerous thing). Of course it is not nice for me, to tell you about those who have "a little knowledge", trying to scam those who know less than them. That's another story.
Some do so, because of a very new disease discovered recently, the sickness of "the chance".
If you use the Technical studies as your "Holy Grail", I have only one word for you, GAMBLER.

I put it to you, that, to consider your Technical Studies to be more than what they are is a "fallacy" in trading the markets, not so unlike martingale gamblers' fallacy. It can lead you to a very dark place.

What many traders do not know, or may fail to recognise, is that your success in taming the markets, is comprised of a mix of ingredients. Not so unlike in baking cakes.
I suggest three very important ingredients. One is " Market Structure ", the other is "YOU", then Capitalisation. Of course there are many more components, for the moment these seems of dominant importance, in my humble opinion.

I hope you will think about what I've said very carefully.
I shall try to push these doors ajar for you slowly to show you the light at the end of the tunnel (please hope its no on-coming train), God willing.

regards

I could not agree more with your post.

We are all humans and such need reasons to do things. For us to take any action we would need a reason to do so. That's i believe the first thing that the Technical Analysis does for the trader, it gives him a reason to buy/sell. We all want to believe that everything happens for a reason. In real life that is true to a certain extent. The markets however quite often differ from what we know as being true in real life. There are many reasons for the prices to drop/rise and to assume that the reason is a couple of squiggly lines or a fib number is foolish and naive. The indicators may provide the trader with some help in making the trading decisions but in no event are the signals provided by those indicators responsible for the outcome of the trade, simply because they can not influence the outcome. If one is trading based on TA there should be a set of rules/indicators that one uses in the same manner all the time. In no event will those indicators provide perfect signals and to try and tweak them until they do is a waste of time. One should take the indicators for what they are and try to exploit the little edge that they provide the trader with. We all want consistent profits yet most fail to be consistent in their approach, because they want their indicators to give them perfect signals.

I think the quote & person is........

You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.
Abraham Lincoln


teb

Thanks TEB63, for the correction. You are right.
I got my Abra crossed with churchill.
I think I remember now,
His was about perpectual friends, enemies and interest.
Gosh, the horrors for getting old.

much obliged, friend

regards

fti,
I agree with you!
This will help the newbie to see the big picture, the behaviour of the forex market.
good post..

There are a lot of people who make a good living using them !!

BUT```systems only give you a better win % you still need good MM

but to say they don't work is wild!

the problem is people don't know it only helps its not the only thing

TEB

That's right.
I'm trading for two years now and till newbie
From my experience, for me to win this game (forex) my brain, my emotion, patient is the "KEY" not the system. Systems only give me signal or just a guidance. I don't have to accept all the signal that the indicators gave me.

my 2 cents.
anyway.. happy trading, hope the pips always be with you.

Thanks vv much for your support to my post.

Having said that, I must highlight a very critical point.
And that is, for us who practise "true to the masters" methodologies.
Indicators have no capacity to be predictive, by virtue that they are derivatives of historical database.
There have been intense arguements in many the "newbie" analyst circles that historical infomation can pridict the future supports and resistence level and lots of orders are placed at those "key" levels.
From my engagements in the markets as marketmaker, FX spot interbank, we actually capitalise on these "sitting duck levels" by sweeping for them, esp the stops zones. I will be discussing on this subject abit later when we come to it.

But for this moment, my point is that I find it rather disturbing that some traders are over crowding their minds with too much indicator reads and neglecting the "feel the trend aspect" of wihich most lag indicators were devised for. Their over dependence on predictive indicator reads, creates a very dangerous mindset for prudent trading.

There has also been a big growth of "Black Box " Systems being sold by so called analyst that promotes and sells the "fallacy" that technical analysis is mostly predictive in nature using certain "secret parameters". I 've seen during my time, that most of them fails over the long run, and it actually damages the outlook to technical studies.

I guess the question at hand is, How can historical data, predict the future? If it could , we'll have no more markets to trade. The fact that people building assumptions into past data and passing that, as mainstream technical analysis, just goes against the grains and foundation , that technical analysis was built upon.

W D Gann, using maths and Astrology could predict the future with accuracy, would you believe that. When he died, even his son John Gann disputed his father's ability to do so.
I'm just using this as an example, you must understand. He hower did use the swing charts , which are geared to trend following more than anything else. The unfortnate thing that he carried his methodology to his garave left us guessing his actual methdology.

There are actually true sciences and mathematics in the most traditional "technical analysis models" and as time passes, I find it distasteful that more and more superstition is creeping in. And more and more artistic engineering is created to mask the fact that the traditional TA models were never predictive at all.

I hope I have acticulated the case clearly.

regards





.

EXCELLENT post, fti!!

The more I come to know your style/method, the more I totally grasp what you are saying!! lol.

Just to let you know, after all you have shared with me, I went back to read your deleted posts several times, lol, and it's so amazing how clear and sound all your advice seems to me now (although at the time, I totally didn't understand what the heck you were talking about :, haha).

People, this man is a "PRO" trader in every sense of the word, please take heed of what he has to share. Challenge him when you have to, cuz only then can he also make you understand where he's coming from, and also it forces him to explain in the lingo that we all can understand better, lol.

I've seen this man in action, so trust me on this one ... he knows his stuff (he's one of the "big guys")!

Thnx for the thread, hoping to read more from you, especially on these three:



ps. I have recently read an opinion, that the market is not a living beast, in which we face each other, but a field, in which we face one monster - the union of the biggest banks. The author bases his reasoning on the fact that the internet made it possible for the banks to use a single platform where they know what each is doing and never go against each other. He says that only this union has enough power to move the currencies and change their directions, this is why sometimes we have fundamental news announcements (microeconomic), some important numbers, but the market goes the way it goes, against any logic, and the next day we all hear from analysts that the market had already played the move before, or the expectations were not that strong/weak, and so on. The truth is, he says, that this monster has its goals, and follows its own agenda. It'll buy the currencies which are sold heavily at its own expense only to raise the price on them later, and take our money, it goes into big minuses sometimes because it knows it'll end up positive. It always knows where the price will be at the end of the day, week, month. It does have one weakness though - the macroeconomic numbers, such as GDP, interest rates, inflation, unemployment, etc. Although it doesn't have to follow them right away, it will eventually follow, and it can be seen on weekly/monthly charts, but on smaller charts, it only tries to fool us (by us he means retail traders, investment banks, global corporations, exporters, importers, and so on).

Before the internet era, we had spreads of 30-40 pips on most popular pairs, but these pairs kept moving 400pips per day minimum, and it was much easier to guess the direction, just because there was no monster, and the game was more honest, whereas now, we have much smaller moves because it's well regulated by one big thing.

Also he says, this monster will not just meet its target in one move because it will hurt all the economies and its participants at once, but will do what it does slowly, allowing us to see the turn, some indication of it. So, knowing its weaknesses, and playing by its rules is the only way to make money, and the indicators do help.

This is not my own opinion, but I found it very interesting.

Hi all,

@Qu|cksilver,
Thanks Qu|cksilver for your PM and vouch, I hope my followed up post, have touched on some important points for you.

@leighsww, Thanks for your kind words. Like I said before size doesn't matter. (even naked)
How's your trading, Did the bus you caught get you where you wanted to go?
Dollars seems still soft, so time yourself well.
By the way, I hope your're still runing around the market naked. :-)

@ masterpiecefx

The truth is the market is actually a battlefield. And do not be mistaken that anyone can move it as they pleases. But don't be mistaken that the Banks are there to Screw traders up, Their role is as custodian and moderator(if you like to the activities) Marketmakers (Interbank, not those you may be familiar with) They are liquidity providers helping large corp orders get filled. esp when mkt thins out and orders at at different level staring at each other, So they move around with price shades to try to get the orders to match out. therby providing a service to the corp. community.
To transfer risk from party to party. They move together because they can actually "feel" each other from the way the prices are quoted. How its shading , whethers its tearing, where certain sector are scuttering because they have been hitted by giant corp. You would be suprised at how large some order get. Imagine a customer calling you for a price to deal for 500 million USD on 1 price. What would you do? And for info that's middium cust. Do you know what's the daily transacted volume?

Maybe if you will ponder on this questions ?
What is the market you are actually trading in?
Whos market is it? whos the owner?
Why does it move? What makes it move?
Have you heard of "open market operation"?

We are actually going into the Structure of the Markets.
If you have time, read this link carefully.

http://www.ny.frb.org/education/addpub/usfxm/
also wiki about "Bretton Woods Agreement"

For Indept understanding read this book, I think may be out of print. try library
"Paper Money" by Adam Smith, dell publishing Co copyright by George J W Goodman.1981


regards

LOL, yes my bus caught me some nice pips, thanks! I'm using both what I learned from you and feb, so I think the combo is working well.

I know I still have LOTS to learn yet from you though!

ACK, yes, of course I'm still running around naked. But, sheesh, tell the whole world why don't you!!

Having used/tested all the various indicators in the universe for 8 months, I actually can see much better/clearly the price action without them (those indicators were just too distracting and indeed just cluttering the mind)!

Although indicators certainly do have their share of successes, what we have to look at is are our successes consistent and more consecutive than our losses?

I could not say that this was true when using indicators to guide my trading. I was neither consistent nor were my wins consecutive for more than just a few trades in a row.

After seeing your winning trades being both consistent and consecutive (with no losses), I certainly want to achieve this caliber of trading, as well. I hope you will create a thread and share more about your method/style, so that everyone can benefit from you on this, as well.

Anyway, thank you for your generosity in sharing with us all that you are willing to. It is too bad that you had a rough time earlier on with people misunderstanding you, but at least now, you may gain the respect and attention that you so deserve!

After all you have been to me, I will totally vouch for your being an honorable, good-hearted and well-intentioned man!

fti, thank you for your quick reply, looking forward to reading more from you.

great post, and I'm interested in those who use market structure and price action as a platform to spring from.

fti your posts are extremely refreshing


and exactly how my mentor taught me to view the market. Great to see you posting around here, hope to hear more

Thanks

Mike

ACK!! ROTFL!!! I almost missed that!!!

ditto. Thank you fti. Hope to learn much here.

Hi All,
Please reread my last above post edited some additional info.
thanks every body for all the kind words.

@ leighsww
Please be very cautious, in the use of that stuff,
its a shape knife if wrongly used.
esp when naked.:-)
remember "stay with the trend , Its your only friend."

regards

PS: for ppl reading this, i hope you don't take the this the wrong way, she's not really naked, just a figure of speech discribing using charts with minimal or none technical indicators, like in bare charts.

Yes, I know what you mean. Don't worry, I am not a reckless person, so I will most definitely use it wisely. Thank you for your concern, as always

Hi All,
I'm back
the usd's coiling up for something, don't know what?
you guess


What's the norm protocol here, do I start another thread to continue about market structure, or do I just continue from here?


I'jll just continue from here.
probably another time, as the usd is really coiling up, something may happen.

regards