Technical Analysis Fallacy

I whave been thinnking lately about the technical analysis in general. I mean thinking about the very foundation of the technical analysis the Dow Theory. For those who are not really familiar with the Dow theory I suggest the Wikipedia link.

I write this because I had some very deep doubts about the Dow theory in general.

I think that the Dow theory is a particular case of market behaviour and not the general way the markets will have to behave in the future.

Here I would like to add two screen shots on the daily chart of the EUR/USD.

Here I will only include two tenets of the theory:

I use exerts from the Wikipedia article with some minor comments.



1. The market has three movements

(1) The "main movement", this is the primary movement or major trend and it may last from less than a year to several years. The main movement can be bullish (we can say we have a bull market) or bearish (bear market).

(2) The "medium swing", is a secondary reaction or intermediate reaction (that means a counter trend movement or opposite of the main trend movement) may last from ten days to three months and generally retraces from 33% to 66% of the primary price change since the previous medium swing or start of the main movement.

(3) The "short swing" or minor movement it varies with opinion from hours to a month or more. Those three movements may be simultaneous, for instance, a daily minor movement in a bearish secondary reaction in a bullish primary movement.

In the modern talk we can say we have self similarity as nested elements. However at the time of Dow this vocabulary did not exist.

2. Market trends have three phases

Dow Theory asserts that major market trends are composed of three phases: an accumulation phase, a public participation phase, and a distribution phase. The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority demanding (absorbing) stock that the market at large is supplying (releasing). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).

Look at the chart and in whic chart that holds true:

For the rest of the article ...

Is anyone wondering the risks involved in working with a brokerage when euro starts to tumble? As OTC, no counterparty assurances..Experience tells me they will try to protect number one, no professional behavior during crises... Will they be they hedged? Who are they going to hedge with?

Glabalization = everybody will make sure the euro survives. Russia, China and the US will all pitch in to keep euro afloat in fear of their own economies.

As for war, you won't see that in Europe for the next 100 years, people are too fat and lazy. I you start a war, they will go on strike!

I have been studying technical analysis and have shifted my beliefs in that direction. What you said made me think. It seems like forex is all about understand human sentiments. The graphs are just a representation of that...

piccolo is right for all the doom and gloom it is more expensive to let the euro break apart than to keep this charade.

to be honest even the piigs benefit from the euro it lets them partake in what otherwise would be out of their reach, the problem is the lack of fiscal union, and the fact that Germany's agenda is price stability and not losing their competitive edge, as far as the peripheries they are biting more than they can chew, wanting to live like rich countries without the production capacity

hey GEfx how are things buddy? i wish you and your family the best Christmas ever... and a great new year, may all your wishes come true.

you are one of the few people here in fx worth meeting along with niels, buma, pip traper, fti, imsjcn, dongsky, dopey, Aaronward,kang gun, gofer pips,tactical,goldman, mla,wulfgar,indianguyinny, sorry if i am missing anyone and nubcake, supremechaos, crucialpoint,

Hi Red, thanks for your kind words and thoughts. Merry Christmas and best wishes to you, too. Hope all is well with you and your family.

GEFX actually i dont think you know how much i learn from you

i have a lot of respect for you. when you post i listen, may not seem that way but i do, you are highly intelligent and even your discussions with conceptual were entertaining, i sincerely wish that 2012 brings you prosperity, and that all your wishes and dreams come true, i do mean it when i call you my buddy, if ever you need anything........count on me

Thanks a lot Redlion. I really appreciate that very much. Let me know if I can do anything for you, too. Good trading my friend! 2012 should be interesting!

Piece, please. Or is here some bilionaire already? Because if not, A LOT OF WORK AHEAD GUYS. There is not time to waste with some who, how and so... Thats my oppinion, just your choice....

Yeah!

@Redlion

Yes you are right on not withstanding injustice but the way you approach to solve it is like dealing injustice with injustice when much good choices await to be executed from the fence.

Not judging you buddy.

Safe trading

Regards

yes cuthbert you are probably right, i let my ego get the best of me sometimes, no prob no offense taken, ill watch that............there are wiser ways

many of you, following fti methods are probably good at price action analysis, and recognizing prevalence in orders, changing market conditions, and have a good degree of intuition.

however i have been working with some Technical Analysis tools, such as time series analysis, and price dispersion and volatility. so far i have found a good degree of success with these ideas, especially and most importantly when understanding price movement. To me at least the dance is a three point process.

when understanding market mechanics here is something i wrote a while back. (i am kinda lazy to retype it lol)

dont know if you guys are familiar with Martin D Evan's publications on the Market micro structure, a research paper from Georgetown University.

and i tend to agree, with his model

St=(1-b)Σb1E(Ft+1)(Ωδ+) (i simplified the equation and its inaccurate in my part due to the fact that there are characters i do not know how to type so forgive my incorrectness in the algebraic equation)

however that makes no difference when explaining his idea

the market moves in average about 40% according to Fundamental analysis, due to the economic conditions, and the climate it creates in a broad spectrum broad term view however it is 60% approx moved by information.

1 interbank trading, risk offsetting, covering position, shoring up inventories, etc..... in a inter dealer (dealer meaning banks, market maker, brokers etc)
2 the individual orderflow is not centralized and does not IMEDIATELY OR IPSO FACTO impact the market, however in position managing of the inter dealer trading.

information used is their individual orderflow, and their in house books also sometimes force dealers to seek trade in currencies to satisfy their demand.

the market more or less moves in tandem due to fear of arbitrage so that keeps dealers honest.

and in effect does explain the trend and their intraday variations.

also if you are familiar with the random walk theory and the various experiments creating purely random charts that create formations, and interact well with current technical analysis tools that efficient market theorist put forth as argument that TA is moot. That in fact sheds light on the fact that it is more important to look at the market in the sense of prevalence of orderflow (not the Dark star orderlfow theory but the real orders executed) as opposed to put to much importance in individual variations.


there fore when trading i take the view of the market being NOT RANDOM BUT UNPREDICTABLE, my analysis are grounded in statistics but my money management ASSUMES THE MARKET IS PURELY RANDOM. i invite you to contribute to the discussion of these ideas.

but anyhow, the three point process of market movement is

ABC, A= Acceleration from point of inflection
B= loss of current impulse momentum
C= correction

the reason for this process, is order hitting the book and consuming liquidity, and according to the model put forth here in my previous post, the market always trades at its current value (hence not marrying or having rigid forecasts)

so looking at areas where the current movement stalls, that could be observed by wicks on the candles, small body candles = small displacement and momentum loss.

but i find it useful to not only look at price movement, but price levels, there are certain points, that other traders use as their model or their edge that we could all borrow as well. for example the 1.30 in the euro has been significant, the 1.40 seems to be important as well, and 1.50 is an extreme high price historically.


another thing i have found useful as far as analysis goes, is to treat price in terms of volatility and direction, and the theory of mean reversion, not exactly like time series analysis fore cast but to keep those ideas in the back of our heads when trading, Y=TCSI
Time, Cycles, Seasonality, Independent variable + standard deviations.

standard deviations, help us in spotting direction change or normal price variations. bollinger bands in most (at least all i have tested) take current period closing price into account therefore making the formula inaccurate.
as the squared sum is supposed to be divided by K - 1 but i digress.

couple that with uses of reference points with understanding of mathematical probabilities, for example, the monthly open can immediately indicate trend, the daily open your current bias as P(x=Σ)=1/2, price usually closes above or below open, and trading with that premise i have founded extremely useful.

now if you KNOW the statistical probabilities of the pair you are trading like, usual, range, usual high range, usual low range, current range in relationship to average range, and statistical % when X pips below market does price close usually above or below, etc.





lastly i have been doing Money management Testing

in my testing i am putting my money management ideas through the worst possible conditions to see if they hold up.

i am using random chart generators, to test our money management and i have found more often than not that averaging down exponentially increases our risk exposure and it is actually statistically proven to blow accounts at times with completely random price feed.

(i do accept that price is not random, but testing it in the worse possible scenario gives a better picture of risk assessment)

i have found that Jessie Livermore's approach to it i actually very safe.

trade less= less mathematical probability against you
enter at extreme points = pivotal points
and using a stop loss away from volatility by taking into account standard deviations and Average ranges with an initial position like fti (scout)

and letting it ride, while observing the market for changes, as well as his rule of NEVER AVERAGE DOWN
ALWAYS AVERAGE UP, i found this through money management, risk assessment testing to be very profitable.

if you enter a scout and you are wrong you increase your risk, and your commitment to a bad trade by averaging down.
conversely if you enter with a scout and the market is moving in your favor, now you have riks money obtained from the market to attempt to maximize profits, and your commitment to a potentially devastating trade decreases.

a well placed stop is actually more of a safety mechanism in a random market than naked exposure to risk.

i am sure my ideas might not be well received and more than one might disagree but i do encourage intelligent discussion and if i am wrong i will be thankfully proven wrong.

i am not trying to start fights here......sorry for my behavior earlier i thought calling some one a moron with out provocation was uncalled for and got me a little bent out of shape.

And you can't see this through simple eyes ?

to be honest the scientist in me, needs logic, not intuition nor ball park subjective information processing.

if you can do that, then my hats off to you.

to me A+B=C so then BC=A and to me, when trading because i take it as a business, it is important to have objective data.


so to your question, no, i chose not to use simple eyes.

like in medicine i can have an understanding of systems and symptoms
if an elderly patient has acute onset of confusion originating from a week or so ago, she has hematuria, and exhibits some burning sensation on urination, mood swings

my best bet would be a urinary tract infection, with treatment of broad spectrum antibiotic like cipro or a sulfa like septra, however a urinalysis with culture and sensitivity is a more prudent approach.

don't you think?

everyday that passes by i have more respect for this guy, and the media ignores him. He is the only HONEST politician and consistent.

thought i would share that with you guys (a little off topic)