The Ultimate Fallacy in Technical Analysis

I used to throw every indicator on the chart and play with all the gee wiz systems from Stocks and Commodities.

After doing James Inside Bar trading group for a few months all I use now is MAs, Stochastics and the odd candle pattern. I have found it is all I need.

I am not against indicators but completely agree that you have to understand exactly how the indicators you are using work. People often end up with multiple indicators on a chart all showing a similar thing.

Interesting. However, that is to suggest that something cant/wont work/happen/indicate if not logical, which is wrong from the start. Or did I read this wrong? It wasnt necessarily logical that oil went to $150, or that all of a sudden people are treating credit like it doesnt exist, yet it still happens. It also is suggesting, although be it in a subtle way, that if you dont understand something you cant find use with it. Well, no, you dont say CANT, but you say "should not" which indicates "CANT".

If I was a betting person I would say that at least a third of the people on this forum couldnt even make their own charts to begin with, therefore they shouldnt even look at one ... by your logic.

No meaning to degrade, I just think that there is too much simplicity to your statements. I know how very few things I use daily actually work, if an indicator happened to be one of them (it isnt) I would care just as little about that as the others. If someone can just open MT4 and throw an SAR indicator on the chart and somehow manipulate a practice of trading around that then more power to them. I dont care if someone understands something or not, people see absolutely nothing or could see everything in something they have no understanding of.

I watched a movie a while back, a foreign film in which I didnt understand a word. Nevertheless, I creatively constructed my own theories of words being said based on the actions and emotions of what I was witnessing. I think someone looking at a graph/indicator they dont understand what is actually being said can still read into what is actually there.

Indicators constitute Hume's problem ( http://www.princeton.edu/~grosen/puc...induction.html ) and that's why its so hard to give up on these eye candies.

Microwaves, toaster and televisions. 99% of the population shouldn't be using these things either... not to mention computers!

geeze. Just because you can read an indicator and know how it functions makes you a trader? Nuts!. You have 2 and only 2 moves in forex. Bid or ask and click the button.That's all it takes to be a trader - nothing more ...nothing less. Oopee I know how an indicator is constructed! that and a buck will get you a cup of coffee! Indicators only tell you where the market has been. Buy on the pain and sell on the pleasure. - thats the motto!. ! Ive been trading 4x for three years and I could not give you one iota of where price is headed in the next tic. There are so many patterns in forex..your head would spin. People, who tell you they can read elliot wave consistently are full of it!. 1-3-5-abc or 1-3-5 abc abc or 135 abc abc abc or flat or zigzag or double zigzag or ..? 5th wave failure... rubbish!. Its just one big massive fear and greed spectacle. Support and resistance? he he.. monday morning quarterback. ! Fib's ? Pick one out of a dozen common ones and chose your poison!. . Navigate the turns my friends ! If you don't know forex will teach you very, very quickly.

There is too much aggressively and frustration in this threat. No good with techs? Hahahaha.
I thought this was a discussion about technical analysis but this is just about complains. Tell mommy that techs are very complicated.

actually i have spent alot of time looking at the wrong way, i spent 100s of hours reading things that i simply couldnt find any logic in, alot of indicators, tools, in fact, i even developed an EA that i though its just so close to be perfect (divergence, QQE, self-optimizing, self-calculated average bars and so on), but it just refuses to stay away of traps, fibs, trendlines, and alot more of technical tools seems alittle bit non-logical, for, it is fact that fibs does work sometimes but thats not because of the magical ratio that fib is based on, the only thing fibs can tell you is how strong the trend is, and yes, there's no proof, one thing to be sure of, mathematics can NEVER predict human behaviors, if its able to do so then computer programmer would have made perfect robots.

the tools that i just cannot dismiss are, RSI/CCi (for divergence) COMBAINED with volume, and the very basic trendline..

the listed above combained together forms almost the best strategy for there's a logical reason for each signal they provide..

I'm pretty good with Gann analysis, but I didn't become a good trader until I learned about reading order flow and size. I used to identify a Gann angle support cluster, put in a buy order and my stop. After learning to read order flow, I realized that the chart points are just areas of interest. If size is at the angle then it will hold. If size is under the angle then it will go through it. If size is above it then the market won't even trade it.

If one can take the time to watch on a short-term chart and time & sales tape how a bottom or top is formed then I think you'll realize that buying exactly on Gann angles or Fib prices is not that important. Often the market goes through then regains these levels. I never passively bid anymore. I only take offers but I must have a lean. I must have someone to sell into if I am wrong.

I also find my exit first then my entry. Too much emphasis is put on the entry then the stop. I won't trade unless I have an exit identified. Forex is difficult for traders who don't have access to order flow or time & sales info. This is what creates the volatility. If you never know how far the large buyer is below your order, often times you will expose yourself to a lot of risk because the market will go down until a big buyer stops it. Not the Gann angle, not the Fib level, a "big fat freakin' buy order".

Think about what you are allowed to see in the Forex markets and the stock markets. Forex trades like stocks used to trade when the specialist controlled everything. There were big jumps from price to price. Also think about what institutions and hedge funds are doing. They are trying to hide their orders. No one is hiding a price or a technical indicator. You can find any trading tool you want but you don't always know where the big buyer or seller is.

So my conclusion is to continue to use Technical Analysis to find areas of interest then wait for the size to show up. Forex takes a little more time since size isn't that readily available. I have no complaints about the game. Little by little more things are being revealed to help level the playing field. However a couple of things hold true, losses happen, but big losses are unforgivable. Trade for singles. Big wins just happen. The big money is not made catching the big move like technical analysis wants you to believe. Big money or a living is made by doing the small stuff and increasing your trading size. I learned by working with floor traders. They bought and sold all day for one tick. Once they learned to scratch and make a tick with a one lot, they increased their size. I try to do the same thing. Peace out gentleman and have a great day.

You are wrong. You absolutely do not need to know how indicators such as MACD, moving averages etc work, or understand them to be able to use them successfully in your trading. What you need to understand however is how each indicator works in relation to the chart you are trading, which indicators are producing the break outs, and how to use them to stay in and exit trades at the right time. Trading is simple, it just takes a very long time to deposit all the information you need into your memory bank to be able to use it profitably. So don't try and blind people coming into trading with science, because there is no science in it. Any idiot can become a successful trader, provided they have the right attitude and approach to it, but the truth is, most do not.

so essentially, most of us aren't stupid enough to be profitable? strangely enough i'm sure there is great truth to this.

I hadn't meant it quite like that, but yes, I suppose there is a degree of truth in it. Many of us seem to be very good at making things far more complicated than they need be, when for trading, the exact opposite is required.

Hi all. Go easy on me as I'm new to these boards (lurked for a while though).

Just something to throw into the mix really. I'm a full time trader and have been for a while now. Not professionally trained, never worked behind a real dealing desk or anything like that. But I do turn a profit and of course have spent each day trying different indicators and the like as I guess most do or have done at some point.

Over the last year however, I have been 'working' with a professional trader who has become a close friend. He left the trading desks a few years ago to pursue an area known as behavioural finance. He saw this as being the next big area in finance and from what I see he may be right.

At present, as well as trading, he coaches traders for a number of big institutions in the city (London) and his approach seems to be growing in popularity.

I not trying to name drop here but since I've been spending time with him my results have improved... massively!

The point of this post? Well I think his approach is in its infancy, but to some degree it flies in the face of technical analysis. That is not to say he doesn't make use of some indicators but a lot of this trading is based on a psychological reading of the markets.

It could of course be argued that this approach is just suited to the present markets and every dog has its day but I am becoming increasingly convinced.

From my perspective I see a number of so called analysts on big websites frantically rewriting their analysis day in and day out as the markets fail to move in line with their projections. This includes Elliot Wave, Gann, Fibonacci etc etc. To me technical analysis has become increasingly a method of not predicting market moves but a nice story to describe how markets have moved.

I'll give you an example. Look at the USDJPY. All the time I read that indicators are signalling the market is going to break to new lows or its set to rally to the 80's. Using a breakout indicator you would have been sat around for the last few months expecting the market to breakout out of the ranges it has been making.

But the truth is that these breakouts have failed and these moves have simply not happened. In fact the approach would be to trade exactly the opposite to what most indicators would be telling you to do. Essentially you make a profit from... the market not really doing anything.

OK so there have been the odd days where intervention has hit but with tight stops you ride those days out and are still in a far better position than positioning each day what an array of indicators are telling you... that never happens.

Given the volatility and news events in the markets at present even the EURUSD has done very little. In fact most of the action has just been bouncing around in a 1000 pip range. As a longer term view I personally think this is how the market will continue. Just to range about but with much increased volatility going forwards.

So back to technical analysis. Just because your indicator is telling you the market should be doing something, my stance is that it probably won't. This then kinda links back to the idea that why laden your chart with indicators that you don't understand. But learn to read the markets a bit more (which I guess is down more to fundamentals) and then just use a basic indicator to help validate your entry.

why the f... it's imperative to know how the knife was made and from what? sure, this could be a interesting thing on discovery "how it's made" but if you don't know how it's made doesn't it cut the bread in the same way as it always had? i've looked at a lot of indicators on how they are made but in regards to trading that is complete and utter bullshit. finding an usage for them is the important part not how they are made.

The problem as I see it with this thesis, is that it does not include all forms of technical analysis, nor doe it make mention of all technical indicators.

Solution:

Build and design better technical indicators that do not conform to convention.

If you want your indicators to give you different results than what everybody else is getting, then you will have to find away to engineer your own technical indicators.

That's always been the answer, but how many traders actually take the time to create, design, engineer, develop, test, research, analyze, proof, and then implement their own indicator designs? Not many traders actually do that. It takes a massive amount of time, energy and effort and most of what you create won't be good enough to cut the mustard.

I'm talking about creating and developing indicators that never existed before and that only YOU have and use!

Talk about having an "edge." There's your edge! Use what nobody else is using, except you and what you have tested and verified to be accurate. Simple, really - but tons of hard work is involved in making it a reality.

How many technical indicator possibilities are there in the world? Answer: How many different sheets of music are there in the world?

Does Mahler sound like Prince?
Does Bach sound like Madonna?
Does Chopin sound like Elvis?
Does the San Francisco Symphony sound like ZZ Top?

So, why does MACD have to be like Indicator_Your_Name_Here.mq4?

Answer: It doesn't. So, your results don't have to be the same either.

The results you get are predicated (in most cases) on the research you are willing to do. There is a good reason why off the shelf indicators behave the way they do, LOL!

Indicators don't "produce break-outs" at all. Buying and selling pressures, supply/demand, and human behavior produce break-outs.

I'm "just saying".

Glad to join your discussion. I don't use indicators. Use only the k-line and trading volume. My teacher told me that most indicators are out of the nature of the market. So I do n’t use it

The price movement of the market represents the psychology of each trader. The machine cannot judge human nature. What kind of methods do we use when the market goes? No one can be wrong. Stop loss first. Trading rules first

I can make prices go up by press the up button on my keyboard.

Technical is a tool. To define your risk and reward. The market is much deeper then just taking every signal you get. I pass up many signals until i feel I have one that will work. The time of day is right for a move, the news flow is right, the volatility is right. No technical signal i found worlks 100%. Maybe they work 30% of the time. But if you have watched the market for years, drawing in levels by hand, doing the hard work... You should know which 30% are most likely to work, and be able to make some profit.
Its christmas week, London session has been slow.. Didn't get a signal for 4 days. Finally last night I saw something interesting. I knew I should take it.. And I made some pips.
Sometimes you must be willing not to trade, rather then force trades or guess. THis is hardest part about being a trader, is not trading.. If conditions don't look good, Shut down the charts... Learn guitar, Play games, Do something else.. Come back in a few hours.. See if it looks any better. If it still looks like crap, come back tommorrow!

Exactly, nowadays a lot of traders are free to add indicators, so they use them too much. That's true. To add indicators that's enough just to open a trading platform and add them, so people sometimes add to much indicators. The story of a typical beginner is quite common. One day a trader understands that the MetaTrader 4 platform (or any other trading platform) contains not only Moving Average, MACD and RSI indicators, which he already learned about during studying how to trade forex, but also that there are many technical indicators. Once novice enter the forum, newcoming trader falls into even greater shock - it turns out that there are also various modifications of these indicators, as well as customizable indicators. Some beginners are trying to follow the path of the least resistance. They are looking for an easy way to start trading using the arrow indicators. It is very important to understand the principle of operation of any technical indicator - the indicator is formed by price, not price indicator. Any indicator is an algorithm that uses historical data and visually interprets the calculation results. A trader makes a decision independently on the basis of the revealed regularities in the indicator. The indicator doesn't care by the figures - whether the Fed has increased the interest rate, whether the ECB has expanded the volumes of the asset purchase program, it will only show what the current price going for. Figuratively speaking, the indicator is a thermometer and it's up to trader to decide how to act on the market.