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The Ultimate Fallacy in Technical Analysis

  • Post #1
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  • First Post: Feb 11, 2008 9:45am Feb 11, 2008 9:45am
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.
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.
Quoting blueruby
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.
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
Quoting Leugimp
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.
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
Im not at my workstation at the moment, but will do so later tonight.
Man who scratches ass should not bite fingernails
Ditto.
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.
Quoting superdezign
More time should be spent on finding out how indicators tick before actually using them.
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.
Quoting merlin
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.
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
Quoting fsiltd
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?
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
  • Quote
  • Edited 4:52pm Feb 11, 2008 4:41pm | Edited 4:52pm
Quoting superdezign
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.
Fair enough.
And I do agree.

Thinking about it. It's more a FACT than a fallacy, no?
Carpe Divitiae
Quoting fsiltd
Fair enough.
And I do agree.

Thinking about it. It's more a FACT than a fallacy, no?
No, facts are indisputable.
Quote
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
Quoting fsiltd
Well, that to me, is an indisputable fact.
its merely my opinion
fair enough.
Maybe "people" is a bit of a generalisation.

I still second the motion / opinion though.
Carpe Divitiae
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.
Quoting Gwan
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.
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?...
Quote
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
Quoting fsiltd
*cough* Micro$oft Winblows *cough*


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

vista is awful....
Quoting superdezign
im right there with you..

vista is awful....
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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