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The Ultimate Fallacy in Technical Analysis

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  • Post #1
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  • First Post: Feb 11, 2008 9:45am Feb 11, 2008 9:45am
  •  superdezign
  • | Joined Feb 2007 | Status: Silly broker, pips are for kids | 455 Posts
In this day, It is simple for a trader to open up a chart and throw all sorts of indicators on it, curve fit it by changing parameters, and have a technical system that appears pretty solid. Its exciting to look back over the chart and see all the winning trades the system produced in the past few months and become anxious to see how the system will continue to perform.

All of which is fine, if everything seems logical. A lot of traders find themselves trading a system which is based off of a combination of the MACD, RSI, moving averages, or a combination of a few others. What bothers me about this is people will add these to their charts not even knowing how they function. If the principals behind why something works are unknown, how can anyone be sure that the squiggly lines they call an indicator makes any logical sense at all?

More time should be spent on finding out how indicators tick before actually using them. If not, trading becomes nothing more than gambling with a very temporary edge. I have spent months sometimes trying to make sense out of varying degrees of price action, making sure every bit of what I am going to implement into my trading plan makes perfect sense.
  • Post #2
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  • Feb 11, 2008 10:59am Feb 11, 2008 10:59am
  •  blueruby
  • Joined Feb 2007 | Status: Stock Broker, October 1987 | 1,299 Posts
Once you really understand how they work, you will decide just to look at price. Here's some info:

http://www.forexfactory.com/showthread.php?t=31692

I don't use them.

You might rename your thread, "the ultimate fallacy of indicators" since tech analysis includes support/resistance and trendlines.
 
 
  • Post #3
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  • Feb 11, 2008 1:22pm Feb 11, 2008 1:22pm
  •  Leugimp
  • | Joined Dec 2006 | Status: Member | 1,385 Posts
Quoting blueruby
Disliked
Once you really understand how they work, you will decide just to look at price. Here's some info:

http://www.forexfactory.com/showthread.php?t=31692

I don't use them.

You might rename your thread, "the ultimate fallacy of indicators" since tech analysis includes support/resistance and trendlines.
Ignored
I dont agree. Knowing what makes up an indicator and what "limits" this makeup creates allows you to use it in ways that would be rather difficult to do with just price. One cannot precisely measure speed and acceleration in a visual fashion just by looking at time and displacement. If that is important to you I would suggest learning the math that would allow you to measure such properties. Not to say that you cant trade without it, but lets not evaluate its usefullness by the words of those that find them useless.

What makes trendlines any more valid, after all, they are just another set of indicators projected into the future to give support and resistance lines.(Slope drawn off of high or low points). In fact, if you wanted to use a trendline, why not calculate first the median line, which would hold more point sets than upper or lower trendlines, and then estimate a sin curve that better estimates the price action, creating estimates for upper and lower boundries. What about trendlines in other momentum indicators, showing upper and lower boundaries for speed and acceleration and high probability turning points. Im not giving suggestions here, but how can you possibly contribute to the usefulness of something that you dont personnaly find any use in. How can you speak of just price action support and resistance and trendlines without volume. What is a head and shoulders neckline but a trendline with awkward swings around it. Without true volume info, how probable is your setup. Like I said, I dont use price alone, that doesn't mean that there are others that cannot, I commend you, but for the others that need more to look at then just price and candlestick formations, you need to know what your indicators can be telling you within the current context and what limits these indicators may also have.
Man who scratches ass should not bite fingernails
 
 
  • Post #4
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  • Feb 11, 2008 1:29pm Feb 11, 2008 1:29pm
  •  bunton
  • | Joined Aug 2007 | Status: Member | 1,196 Posts
Quoting Leugimp
Disliked
I dont agree. Knowing what makes up an indicator and what "limits" this makeup creates allows you to use it in ways that would be rather difficult to do with just price. One cannot precisely measure speed and acceleration in a visual fashion just by looking at time and displacement. If that is important to you I would suggest learning the math that would allow you to measure such properties. Not to say that you cant trade without it, but lets not evaluate its usefullness by the words of those that find them useless.

What makes trendlines any more valid, after all, they are just another set of indicators projected into the future to give support and resistance lines.(Slope drawn off of high or low points). In fact, if you wanted to use a trendline, why not calculate first the median line, which would hold more point sets than upper or lower trendlines, and then estimate a sin curve that better estimates the price action, creating estimates for upper and lower boundries. What about trendlines in other momentum indicators, showing upper and lower boundaries for speed and acceleration and high probability turning points. Im not giving suggestions here, but how can you possibly contribute to the usefulness of something that you dont personnaly find any use in. How can you speak of just price action support and resistance and trendlines without volume. What is a head and shoulders neckline but a trendline with awkward swings around it. Without true volume info, how probable is your setup. Like I said, I dont use price alone, that doesn't mean that there are others that cannot, I commend you, but for the others that need more to look at then just price and candlestick formations, you need to know what your indicators can be telling you within the current context and what limits these indicators may also have.
Ignored
Throw up a chart here with your indicators turned on and explain what you mean. I'm visually oriented and like the kid in school I need to see picture to understand.
Check Mate GAME OVER
 
 
  • Post #5
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  • Feb 11, 2008 1:30pm Feb 11, 2008 1:30pm
  •  Leugimp
  • | Joined Dec 2006 | Status: Member | 1,385 Posts
Im not at my workstation at the moment, but will do so later tonight.
Man who scratches ass should not bite fingernails
 
 
  • Post #6
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  • Feb 11, 2008 2:13pm Feb 11, 2008 2:13pm
  •  im7i4z
  • | Commercial Member | Joined Mar 2006 | 233 Posts
Ditto.
 
 
  • Post #7
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  • Feb 11, 2008 2:42pm Feb 11, 2008 2:42pm
  •  superdezign
  • | Joined Feb 2007 | Status: Silly broker, pips are for kids | 455 Posts
There are plenty of people who use indicators successfully. That is undebatable. Indicators would simply not exist if they had no value.

The problem is that people do not truly understand for what purpose an indicator (whether is be bollinger bands or RSI) exist. The person who originally created the indicator is really the only one who knows the logical basis of its functions.
 
 
  • Post #8
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  • Feb 11, 2008 2:56pm Feb 11, 2008 2:56pm
  •  merlin
  • Joined Mar 2004 | Status: Magic Man | 3,220 Posts
Quoting superdezign
Disliked
More time should be spent on finding out how indicators tick before actually using them.
Ignored
i agree with you here, thats why i think it is essential that traders know how to program. by understanding and rewriting the code for an indicator you get a clear picture of the logic. this is the reason i am such a fan of the adx, because i have studied the math intensly and made a couple alterations of my own.
Relax and be happy.
 
 
  • Post #9
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  • Feb 11, 2008 3:15pm Feb 11, 2008 3:15pm
  •  fsiltd
  • | Joined Dec 2006 | Status: Fudōshin | 739 Posts
Quoting merlin
Disliked
i agree with you here, thats why i think it is essential that traders know how to program. by understanding and rewriting the code for an indicator you get a clear picture of the logic. this is the reason i am such a fan of the adx, because i have studied the math intensly and made a couple alterations of my own.
Ignored
I'm an adx fan too. One of the few I use. I'd love to see the alterations a wizard can pull on that.
One question though, did adx not evolve into what it is today?
From additions to the DMI? Or have I got that backwards?

As for the rest of this thread, the title is a little confusing. Or is The Ultimate Fallacy yet to be revealed?
Carpe Divitiae
 
 
  • Post #10
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  • Feb 11, 2008 4:31pm Feb 11, 2008 4:31pm
  •  superdezign
  • | Joined Feb 2007 | Status: Silly broker, pips are for kids | 455 Posts
Quoting fsiltd
Disliked
I'm an adx fan too. One of the few I use. I'd love to see the alterations a wizard can pull on that.
One question though, did adx not evolve into what it is today?
From additions to the DMI? Or have I got that backwards?

As for the rest of this thread, the title is a little confusing. Or is The Ultimate Fallacy yet to be revealed?
Ignored
The ultimate fallacy in technical analysis is that people do not understand how their indicators work, and if you can not figure out the logic behind what the indicator is telling you, it should not be used.
 
 
  • Post #11
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  • Edited 4:52pm Feb 11, 2008 4:41pm | Edited 4:52pm
  •  fsiltd
  • | Joined Dec 2006 | Status: Fudōshin | 739 Posts
Quoting superdezign
Disliked
The ultimate fallacy in technical analysis is that people do not understand how their indicators work, and if you can not figure out the logic behind what the indicator is telling you, it should not be used.
Ignored
Fair enough.
And I do agree.

Thinking about it. It's more a FACT than a fallacy, no?
Carpe Divitiae
 
 
  • Post #12
  • Quote
  • Feb 11, 2008 5:01pm Feb 11, 2008 5:01pm
  •  superdezign
  • | Joined Feb 2007 | Status: Silly broker, pips are for kids | 455 Posts
Quoting fsiltd
Disliked
Fair enough.
And I do agree.

Thinking about it. It's more a FACT than a fallacy, no?
Ignored
No, facts are indisputable.
 
 
  • Post #13
  • Quote
  • Feb 11, 2008 5:03pm Feb 11, 2008 5:03pm
  •  fsiltd
  • | Joined Dec 2006 | Status: Fudōshin | 739 Posts
Quote
Disliked
people do not understand how their indicators work, and if you can not figure out the logic behind what the indicator is telling you, it should not be used.
Well, that to me, is an indisputable fact.
Carpe Divitiae
 
 
  • Post #14
  • Quote
  • Feb 11, 2008 5:07pm Feb 11, 2008 5:07pm
  •  superdezign
  • | Joined Feb 2007 | Status: Silly broker, pips are for kids | 455 Posts
Quoting fsiltd
Disliked
Well, that to me, is an indisputable fact.
Ignored
its merely my opinion
 
 
  • Post #15
  • Quote
  • Feb 11, 2008 5:08pm Feb 11, 2008 5:08pm
  •  fsiltd
  • | Joined Dec 2006 | Status: Fudōshin | 739 Posts
fair enough.
Maybe "people" is a bit of a generalisation.

I still second the motion / opinion though.
Carpe Divitiae
 
 
  • Post #16
  • Quote
  • Feb 11, 2008 10:04pm Feb 11, 2008 10:04pm
  •  Gwan
  • | Joined Feb 2007 | Status: Small is beautifull | 1,368 Posts
excuse me, but we are at user level, so as long we know how to use it, it is ok, just like computer or any complicated gaming machine, we don't really need to understand every component to use them.... we understand the interface, that's the manufacturer way to communicate their gadget to us.
 
 
  • Post #17
  • Quote
  • Feb 11, 2008 10:53pm Feb 11, 2008 10:53pm
  •  superdezign
  • | Joined Feb 2007 | Status: Silly broker, pips are for kids | 455 Posts
Quoting Gwan
Disliked
excuse me, but we are at user level, so as long we know how to use it, it is ok, just like computer or any complicated gaming machine, we don't really need to understand every component to use them.... we understand the interface, that's the manufacturer way to communicate their gadget to us.
Ignored
Gadgets do not constantly change and evolve. If the interface that the manufacturer set up so you could communicate with the gadget could stop working at any given moment wouldn't you want to understand the gadget at a more logical level to make sure you do not run into any serious issues in the future (such as losing money or experiencing a serious draw down), and to make sure that the gadget is actually worth using in the first place?...
 
 
  • Post #18
  • Quote
  • Feb 11, 2008 10:57pm Feb 11, 2008 10:57pm
  •  fsiltd
  • | Joined Dec 2006 | Status: Fudōshin | 739 Posts
Quote
Disliked
If the interface that the manufacturer set up so you could communicate with the gadget could stop working at any given moment
*cough* Micro$oft Winblows *cough*


I couldn't resist, sorry!
Carpe Divitiae
 
 
  • Post #19
  • Quote
  • Feb 11, 2008 11:24pm Feb 11, 2008 11:24pm
  •  superdezign
  • | Joined Feb 2007 | Status: Silly broker, pips are for kids | 455 Posts
Quoting fsiltd
Disliked
*cough* Micro$oft Winblows *cough*


I couldn't resist, sorry!
Ignored
im right there with you..

vista is awful....
 
 
  • Post #20
  • Quote
  • Feb 11, 2008 11:30pm Feb 11, 2008 11:30pm
  •  fsiltd
  • | Joined Dec 2006 | Status: Fudōshin | 739 Posts
Quoting superdezign
Disliked
im right there with you..

vista is awful....
Ignored
Yeah, way to cutsie for me.
I'm a console man myself.
Run linux at home. {well if truth be told, I have to dual-boot my laptop, as I have to run xp on it for the mrs. and kids}
2000-workstation at the office is as much MSFT as I can handle.
Carpe Divitiae
 
 
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