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The Ultimate Fallacy in Technical Analysis

  • #41
  • Edited 1:37pm Feb 14, 2008 10:07am | Edited 1:37pm
Quoting blueruby
What is the momentum number telling you that you can't see by looking?

Furthermore, what is sacred about the 14th bar back? What does that tell you about what the market is doing right now? Market characteristic can change in 2 or 3 bars.
Everyone I think is missing my point.. I am not trying to say you have to know the math behind each indicator you use or be able to decipher the computer code that tells the indicator how to function..

All I am saying is to often traders will throw dozens of indicators up onto their charts and not even know what they are telling them. Just because more often than not when the RSI crosses above the 50 mark price continues to go higher doesn't mean that is a logical indication of price movements. You have to look back tons and tons of data to make sure its not just an anomaly, and then ask yourself....

WHY?

...is ...it ...logical?

figure out what that represents

for example.. the RPM meter in your car.. when you step on the gas the needle rotates clockwise..

well,

if this were an indicator I would say:
"what does this mean"
1. RPM = rotations per minute (of the car's crankshaft)
2. as the numbers increase so does the car's speed

soooooo

then I would say:
"does this make sense logically?"
and my answer would be, yes!
if there are more rotations of the car's crankshaft over a given period of time then the wheels must naturally spin faster, and the car will move accordingly.

I do agree with you blue, using indicators are not my style, but they do have a purpose for some people and I can not argue they make trading less subjective, which is extremely helpful for people who are new to the game or lack discipline.

But if you use indicators in your trading plan, ask yourself if the indicators used in your strategy are
1. Robust
2. Logical
3. Do not rely on to many parameters
  • #42
  • Feb 14, 2008 10:17am Feb 14, 2008 10:17am
Hi Super,

sorry to be picky but rpm refers to the rotations per minute of the crankshaft (not the axle)....since if you're not "in gear" you can still rev it up.

More to the point: your argument that people who choose to use indicators should know the works behind it is very valid.

regards
daytrading
Enter Signature
  • #43
  • Feb 14, 2008 10:54am Feb 14, 2008 10:54am
In other words, indicators are prone to giving false signals sometimes and good signal at others. Knowing how one or more indicators will behave in various situations is critical before a trader accepts the buy or sell signal. For example, two moving average lines crossing isn't by itself a very dependable signal. Other market conditions/factors should be examined before taking the indicators signal at face value. Again as an example, when market sentiment approaches neutral, moving averages will cross more often as the price action moves from a trend to a range.

I think you've described here one of the main reasons why so many new traders get frustrated and lose confidence early on, superdesign. I speak from having experienced that not so long ago.
  • #44
  • Feb 14, 2008 1:42pm Feb 14, 2008 1:42pm
Quoting Micro-MiniMe
In other words, indicators are prone to giving false signals sometimes and good signal at others. Knowing how one or more indicators will behave in various situations is critical before a trader accepts the buy or sell signal. For example, two moving average lines crossing isn't by itself a very dependable signal. Other market conditions/factors should be examined before taking the indicators signal at face value. Again as an example, when market sentiment approaches neutral, moving averages will cross more often as the price action moves from a trend to a range.

I think you've described here one of the main reasons why so many new traders get frustrated and lose confidence early on, superdesign. I speak from having experienced that not so long ago.
Yes, I call that the newbie cycle..

one of the reasons most people are doomed to fail at trading is they never stick consistently to one set of trading rules or plan. They, like you said, lose confidence in how they are trading because they experience a few losses. Now, if they had done the research and made sure their plan was perfectly valid in terms of the principals backing their entries and exits, then they would be able to stick with their rules even through some tough draw downs. Instead of, and this is what happens most of the time, moving onto another system or set of rules, in constant search of.. dare I say it.. ok here it goes.... "the holy grail"

That is why there are thousands of technical systems out there... and most of them are virtually identical..
  • #45
  • Feb 14, 2008 1:43pm Feb 14, 2008 1:43pm
Quoting daytrading
Hi Super,

sorry to be picky but rpm refers to the rotations per minute of the crankshaft (not the axle)....since if you're not "in gear" you can still rev it up.

More to the point: your argument that people who choose to use indicators should know the works behind it is very valid.

regards
daytrading
thank you DT,

I made the corrections...

as you can tell I know very very little about how cars work lol
  • #46
  • Edited 2:31pm Feb 14, 2008 1:58pm | Edited 2:31pm
Quoting daytrading
Blue,

Why would you want to have any indicators? It seems that you have solved the problem..."the mind....etc."

regards
daytrading
Is the answer to this question not glaringly obvious?

If I had the "miracle indicator", I'd not have to spend years educating my mind. It's a lot of work, time, and expense to study, trade, practice, learn, improve, buy courses, read, trade some more....
  • #47
  • Feb 14, 2008 2:36pm Feb 14, 2008 2:36pm
Quoting superdezign
for example.. the RPM meter in your car.. when you step on the gas the needle rotates clockwise..

well,

if this were an indicator I would say:
"what does this mean"
1. RPM = rotations per minute (of the car's crankshaft)
2. as the numbers increase so does the car's speed

soooooo

then I would say:
"does this make sense logically?"
and my answer would be, yes!
if there are more rotations of the car's crankshaft over a given period of time then the wheels must naturally spin faster, and the car will move accordingly.
I get your point, but am playing devil's advocate.

If my tachometer read backwards about half the time, I'd throw it out like I did the indicators, and would learn to judge engine speed by ear.

I guess that's my point. If you have to use your own discretion to decide when they're telling you the truth or not, then why do you need them?
  • #48
  • Feb 14, 2008 2:54pm Feb 14, 2008 2:54pm
Quoting blueruby
I get your point, but am playing devil's advocate.

If my tachometer read backwards about half the time, I'd throw it out like I did the indicators, and would learn to judge engine speed by ear.

I guess that's my point. If you have to use your own discretion to decide when they're telling you the truth or not, then why do you need them?
Ok forget I ever said the word "indicator"

and replace it with the word "entries" or "timing techniques"

this thread is about technical analysis as a whole, not just indicators

indicators were just the easiest to pick on
  • #49
  • Feb 14, 2008 5:15pm Feb 14, 2008 5:15pm
Quoting superdezign
Ok forget I ever said the word "indicator"

and replace it with the word "entries" or "timing techniques"

this thread is about technical analysis as a whole, not just indicators

indicators were just the easiest to pick on

Hmm, up until this post I thought I had an inkling of what the thread was about but maybe not. My impression was that you were advocating that people understand the math and logic behind their indicators because that would help in determining an underlying truth from what they're seeing.

For example, to use your car example again, suppose I use two "indicators," the speedometer and the tachometer. A "newbie" driver would know that whenever the tachometer was reading a high RPM, the speedometer also shows a high speed along the road. So to that person, increasing RPMS means increasing speed toward the destination and vice versa.

But what happens when the tach is showing 3500 RPM and the speedometer shows 0? The "newbie" driver will be stymied. The driver who is more knowledgeable about what these indicators mean will know that the tach is showing that the engine is turning fine, but the speedometer shows that the wheels are not. They will then say "Gadzooks! I'm stuck in the frapping snow!"

The difference between the two drivers is that one just looks at the numbers on the dials and notices that they usually move in tandem. The other knows that one dial is attached to the engine and the other to the wheels. Thus the second person is able to figure out the problem while the first is stymied.

Or am I the one that's stymied?


OR, are you simply saying that any "indicator" whether it be technical, fundamental, statistical or whatever must have a logical basis?

So for example, a change in interest rates leads to a logical progression of events which causes prices to move in a certain way, while using the Superbowl winner as an indicator doesn't have any causal mechanism.

An example in charting would be a resistance level drawn at a price reversal point. This price level is one at which both longs and shorts remember buying or selling. So as price approaches this point again you have a bunch of sad people on the verge of being happy and a bunch of happy people on the verge of being sad. So everyone has a twitchy order finger at this price, giving the resistance line its logical validity. Compare that to a Fib extension line which is just kind of hanging out there in space. There is no logical causal mechanism (except for self fulfilling prophecy) for price to bounce at that point.


So I've given two possibilities for my understanding of your point. If neither one is true then I'm still clueless.
  • #50
  • Feb 14, 2008 8:01pm Feb 14, 2008 8:01pm
Quoting capitalist88
OR, are you simply saying that any "indicator" whether it be technical, fundamental, statistical or whatever must have a logical basis?

So for example, a change in interest rates leads to a logical progression of events which causes prices to move in a certain way, while using the Superbowl winner as an indicator doesn't have any causal mechanism.

An example in charting would be a resistance level drawn at a price reversal point. This price level is one at which both longs and shorts remember buying or selling. So as price approaches this point again you have a bunch of sad people on the verge of being happy and a bunch of happy people on the verge of being sad. So everyone has a twitchy order finger at this price, giving the resistance line its logical validity. Compare that to a Fib extension line which is just kind of hanging out there in space. There is no logical causal mechanism (except for self fulfilling prophecy) for price to bounce at that point.
EXACTLY!
most people do not take enough time to figure out why their strategies, or even IF their strategies have any logic behind them whatsoever.

that ladies and gentlemen, is my point exactly..
thank you capitalist88
  • #51
  • Feb 14, 2008 8:42pm Feb 14, 2008 8:42pm
Quoting superdezign
EXACTLY!
most people do not take enough time to figure out why their strategies, or even IF their strategies have any logic behind them whatsoever.

that ladies and gentlemen, is my point exactly..
thank you capitalist88
  • #52
  • Feb 14, 2008 10:53pm Feb 14, 2008 10:53pm
and how would you guys define this
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  • #53
  • Feb 14, 2008 11:08pm Feb 14, 2008 11:08pm
I can not..

thats why I do not use any of that..

I spent the past year making logical sense of every piece of my strategy

its what I believe in and I am sticking to it.

Quoting forexlion
and how would you guys define this
  • #54
  • Feb 15, 2008 1:29am Feb 15, 2008 1:29am
If an indicator is based upon a mathematical formula such as a fib, and historical charts show price reacting at or at least very close to that level a very high percentage of the time, 75% of the time during the last year for example, would you concider this indicator usefull as part of a system?

What I'm getting at is this. Just because a recent high or low has occured only indicates that either a large number of traders OR a few traders with large positions caused price to reverse. Is it logical to read the minds and motives of other traders without a means of knowing for sure what their intensions are and what actually caused the high or low to happen, or are we fooling ourselves into thinking we can read such cause and effect? Is not history repeating itself, as in the example with a fib, just as logical or even more so in this case?
  • #55
  • Edited 6:23am Feb 15, 2008 4:45am | Edited 6:23am
Quoting superdezign
Ok forget I ever said the word "indicator"

and replace it with the word "entries" or "timing techniques"

this thread is about technical analysis as a whole, not just indicators

indicators were just the easiest to pick on
OK, now I think that's a timely topic -- who else has been spun like a top this week?

One of my rules is to let a candle close, usually it serves me well. Sometimes I have a lapse and go in early, and almost always regret it. I've finally gotten to where I don't jump in. And, I don't chase price, once the move starts, I sit on my hands. Too many times I've gone in right at the reversal / retrace.

So, this week, I've missed every move by waiting and not jumping in. I've had my finger on the button several times, and cancelled, only to watch it go within seconds or minutes, and ultimately hit my would-be target. On trades where I followed my rules, they didn't turn out. And, on a couple where I went in anyway, I got burned on those too.

Maybe I shouldn't be upset, I stuck to my rules, but, they've let me down this week. And, I kept my losses manageable, that's good. Discipline has been good, but the bottom line sucks this week.

So, on topic, if you have a system that has worked, don't change the rules too often. Look at what makes sense and stick with that, knowing there will be times when it won't work.

I believe that after I've evolved as a trader for a few more years, I will adapt more quickly to changing markets, and my rule set will have expanded to include a wider set of market behaviors. After all, there is a finite number of market characteristics.
  • #56
  • Feb 15, 2008 6:17am Feb 15, 2008 6:17am
Quoting forexlion
and how would you guys define this
I'll have a go. :

The MA (whichever one you're using), and Slope Direction Line/Hull MA are a "reflection" of what prices have just done. In the past.
However recent that "past" may have been. 1hour, 4hours, 1bar even.
Nerver the less, The Past.

People fit the lines to much to their subjective opinion imho. (The HMA espeacially)

If you up the period/bar count that comprises it, we say, "oh they lag too much", if we down the period/bar count, we say "oh, they whipsaw too much"

From what I've read of your posts etc. forexlion.
I'm sure you'd trade just as well without them, no?
Carpe Divitiae
  • #57
  • Feb 15, 2008 6:24am Feb 15, 2008 6:24am
Quoting blueruby
Is the answer to this question not glaringly obvious?

If I had the "miracle indicator", I'd not have to spend years educating my mind. It's a lot of work, time, and expense to study, trade, practice, learn, improve, buy courses, read, trade some more....

Sorry, Blue -

I may have misread your post. I was under the impression that (like many others) you have come to the conclusion that price is the best indicator and hence, you trade without any fancy dots or lines on your charts.

If you are still looking though, good luck to you.

regards
daytrading
Enter Signature
  • #58
  • Feb 15, 2008 6:42am Feb 15, 2008 6:42am
great thread - finally there is a serious discussion on this topic. I really hope this thread gets some traffic and visibility because as we all know there is so much hype and BS being tossed around by both so-called technicians and fundamentalists it ultimately gives newer traders a very distorted view of trading reality.
  • #59
  • Edited 7:08am Feb 15, 2008 6:54am | Edited 7:08am
Quoting daytrading
Sorry, Blue -

I may have misread your post. I was under the impression that (like many others) you have come to the conclusion that price is the best indicator and hence, you trade without any fancy dots or lines on your charts.

If you are still looking though, good luck to you.

regards
daytrading
Your impression was right. I don't use them, period. I use S/R, Trendlines, price action, some candlestick patterns, chart patterns.

I've found that I am very easily biased. I suppose I'm fanatically optimistic, so if a guru or indicator says to do something, I have an impulse to do it (fear of missing out?)

It's so much easier and less stressful to let someone/something else do the thinking and take the responsibility, but that warm feeling ends shortly after entry! When the trade goes bad and I say, "why on earth did I take this trade? Oh, because that article on the USD fundamentals said it could go nowhere but down so I wanted to go short."

Once I look at an indicator, I am biased. Then I have to sort out what it's really telling me, by looking at price. So why not just look at price? The indicator is just one more added level of complexity, a distraction, and one level of freedom removed.

EDIT: I just happened to re-read this excellent article by Brett Steenbarger. It hits my point very well, regarding bias. http://www.forexfactory.com/showthread.php?t=43179
  • #60
  • Feb 15, 2008 8:19am Feb 15, 2008 8:19am
If you had done the research to prove to yourself that waiting for the bar to close before entering a trade not only gave you an added edge, but made sense logically to trade in such a way then you probably would have stuck to your plan this week and made a lot more money

its important that I emphasize, not only should your plan give you an edge but make logical sense as well.

Quoting blueruby
OK, now I think that's a timely topic -- who else has been spun like a top this week?

One of my rules is to let a candle close, usually it serves me well. Sometimes I have a lapse and go in early, and almost always regret it. I've finally gotten to where I don't jump in. And, I don't chase price, once the move starts, I sit on my hands. Too many times I've gone in right at the reversal / retrace.

So, this week, I've missed every move by waiting and not jumping in. I've had my finger on the button several times, and cancelled, only to watch it go within seconds or minutes, and ultimately hit my would-be target. On trades where I followed my rules, they didn't turn out. And, on a couple where I went in anyway, I got burned on those too.

Maybe I shouldn't be upset, I stuck to my rules, but, they've let me down this week. And, I kept my losses manageable, that's good. Discipline has been good, but the bottom line sucks this week.

So, on topic, if you have a system that has worked, don't change the rules too often. Look at what makes sense and stick with that, knowing there will be times when it won't work.

I believe that after I've evolved as a trader for a few more years, I will adapt more quickly to changing markets, and my rule set will have expanded to include a wider set of market behaviors. After all, there is a finite number of market characteristics.
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