Technical Analysis alone will not give you an edge

There are some great posts in this thread from both sides of the argument.

The problem in my opinion with trading patterns in efficient markets is that the minute you trade the pattern (or interact with it), the pattern changes due to participation. If there was a repeating pattern that unfolded over time in a predictable way which you could trade with certainty, then it is game over for an efficient market as all participants that traded that pattern would be wealthy beyond their dreams in short order. So for an efficient market, unpredictability is an essential pre-requisite to at least feed the surviving population.

When you are trading at the right edge, you are guessing how the form will unfold. While in hindsight many forms appear to occur with repetetive frequency, the same could be said about any pattern found in non-predictive data. So what is a form bearing arbitrage versus an illusory form of no value to a trader?

As soon as a trader or more specifically a subset of traders looking for the same pattern interacts with an emerging pattern in this market, the pattern changes form and disappears. This is the challenge of the financial markets which is more like quantum physics whose outcome is dependent on the way you interact with a quantum system than say classical physics where observers experiment with an external system and observe how the outcome rigidly follows the system laws.

In financial markets, the moment you try to take advantage of an emerging pattern it changes form and the more you try to take advantage of it, the more quickly the pattern changes......Taking this one step further, the more that participants in the market try to take advantage of predicting patterns, you actually quickly get no pattern and just all 'noise'(holding no coherent pattern of meaning for a particular class of participant).

An efficient market is one in which arbitrage is distributed efficiently and quickly to its participants and can be treated as the way 'arbitrage' fully dissipates throughout the system. When talking in terms of 'information', an efficient market quickly incorporates information into price. The more market participants that interact with a market, the more efficient it becomes. Of course not all markets are efficient such as quasi markets comprising fewer participants which are established by some predatory players (eg. some brokers) to rig the game in their favour, but for the mature highly liquid markets, efficiency is the nature of the system.

What this means at a deep fundamental level is that by each participant having a particular viewpoint on the value of price, as soon as they interact with the system by placing a trade, that information contained in that viewpoint is passed by the participant into the market and immediately reflected in the price. It may be a bad or good decision by the participant which says nothing about 'efficiency' in terms of price value being attributed to rational decisions....... but there is no disputing that the price on participation fully reflects the information state arising from that decision to trade whether it is the cat that walks across the keyboard triggerring a trade, or an institution unloading risk. The minute you interact with it at a chosen price, the information surrounding that decision is fully reflected in the price itself.

When you attempt to predict or forecast price, you are actually helping markets to become more efficient by incorporating information into that price. For example you hold a view that an upcoming news event will be a bullish announcement relative to what price is doing now and the result of how you interpret your view on price then becomes reflected in price once you take the trade decision. As soon as the information is passed into the market, the info is recorded in the price and the prior form quickly alters. As a result, the prior information held by the participant is no longer valid as it has been fully transferred into the market.

So in a nutshell, a fundamental feature of an efficient market is that it holds very little predictive power as price patterns are just an ephemeral form used at the time of entry or exit. Immediately following an interaction by a participant, a new ephemeral form takes its place holding additional information that provides clues for other participants. The ability for that pattern to extend for a sufficient time in the future in a predictive manner is actually what we are talking about here in our discussion on predictable versus unpedictable outcomes and once a participant has made their decision about entry or exit, that is the only time they interact with the market.

The ongoing nature of form between the original entry and the final exit is up to other participants to create and not one in which you participate so you actually have no control over the outcome and are at the mercy of other participants that interact with it. Your ability to profit from your trade is totally dependent on other later participants having the same but delayed viewpoint as you and the durability of the pattern. That is what I refer to when speaking about the predictability of this market. It is dependent on the way all participants interact with the market that determines whether or not an individual participant profits or not. Given the vast array of participants and their competing objectives, it is impossible to mind read all of them.

So in the absence of being able to mind read, the most objective way to treat this dillema for me is through statistics as it takes an overall measure of the information content contained in the actual system from what has 'actually' happened from a sufficient sample size that is representative of the population of participants who have participated in determining where price currently lies. It does not attempt to take an opinion of prevailing view or motivation resulting from thoughts as opposed to action but (in a gross context) provides a record of the way the system has unfolded through information accumulated by participant interactions. It is trading a tendency supported by statistical evidence from past behaviour as opposed to a pattern or form or subjective repetetive nature. The assumption of course with statistical measures is that the tendency can be extended by extrapolation as a measure of what to most likely expect for the future on the bahaviour of participants. I actually view statistics as an extension of TA as many TA tools are of a statistical nature. What I am not into however is any method of trading that cannot demonstrate validity through the scientific method.

Whoa guys, excellent discussion going on here ! Of the highest quality, most informative and revealing and I dare say the most important anyone serious in this business needs to read about to receive proper education on issues ' related to that confounding right edge of the charts whose candles(price) has yet to be printed. Every trader who wishes for himself the riches from this forex market requires upon himself and no other to push this frontier towards more 'predictability' of the unfolding future event, yet do not create an 'illusion of false predictability' that veils himself at the same time, many have tried, many more will try but who will attain this enlightenment?

Technical analysis alone will most definitely give you an edge, but it's what you do with that edge that matters.

sooooooo........... fundyy is profesoreee ... working for you ................

ta is ............. you are the data processor .........

nottin wrong with anyone of these ... just feelll comfortable with your selfff .......

thats the biggyyy .....

butt ... ta is a lil bit complex till you can make it more simple .....

The problem with most T.A. junkies is the assumption that it works because of entry precision. Those who can make it work have a skill for dealing with the exits, whereas the entry is more-or-less a dart thrown behind shaky rationale.

You couldn't have said that any more eloquently...........

hello there,

so you say that the charts i've posted should mean nothing to any currency trader because you believe that TA alone is useless and that a chart alone has no substance without understanding FA and that the fx market is being constantly controlled and manipulated by market makers and that once you understand the process by which this is done, then the direction of the market is quite predictable.

This seems like a very definite point of view, so this is the one true way on how the market moves and is what makes you profitable.
I have a question, what if there was another trader who had exactly the opposite views to you and was also consistently profitable, would you think that they must just be lucky?

The reason i ask is that the two best traders i know, both trade fx, same pairs, similar time frames but have conflicting views on the market and their reason for entries is about as diametrically opposed as you can get. genuinely true story. yet both are successful. now, i think the reason for this is that what they believe about the market is less important than their ability to actually trade. also if there was a predetermined flow to the market, the one true way that the market moves, this couldn't happen. if one was constantly winning, then the other would be losing. although, of course this would be entirely possible, maybe even expected, in a random market.

Now, bear with me here, but what if there aren't really a group of people who everyday were constantly manipulating and controlling the direction of the market. what if your ability to profit comes from your skill as a trader and your cast iron faith in your beliefs. however, when it comes to your beliefs, what if, the fx market didn't really care what thoughts were going on in your head and just continued on its merry random way.

just a thought.



so anyway, as you suggest 15 years of both international banking and international finance in order to be able to give me clarity and learn this secret, which i don't really fancy, i guess i'll just have to take your word for it.

one of my all time favourite traders is larry pesavento, larry has spent the best part of a decade researching the connection between the markets and the planetary cycles, he gets quite excited about it when he talks and it would appear there definitely seems to be some sort of connection. now i'm pretty sure this guy made more money last year than i will make in a lifetime, so maybe theres something in it.

but it does beg the question, which one of you is right.


or, is there a third way, in which the market takes its random walk and people impose their own beliefs and opinions on it in order to make sense of it.

moving away from trading a minute, i always felt that human beings always tend to try to find meaning in things where there is non, and in general the more random that thing is, the more myriad of different ways are used to explain it.

Finally, would it be possible for you to post a chart explaining how you see structure. i am genuinely interested. you say that your charts have structure and mine do not, could you post a chart and point out the differences.


Cheers

I would be a fool to post one of my charts here. I'd spend the next month explaining it and or defending it. However, if you'd like to build one, and if Red is ok with it, we can work on building one here. You will do most of the work, so, pick a pair that you trade and know a lot about. I'll post the chart. Please keep it something that will benefit any poor unsuspecting fool who stumbles into this discussion.

Good stuff

if i need to pick a pair that might benefit others i may as well go for the most popular. eur/usd it is then.

I'm all for scientific inquiry and open discussion... let me know how I can help

Okay. Not many in my group trade the E/$, but I have lots of notes on it because other Euro crosses are frequently traded. I'll pick a time to start: August 2015. From a fundamental perspective, what was the sentiment on the E/$ on August 8? What fundamental changes occurred during the month? At the end of the month, what is the overall sentiment (i.e., for the drivers of the pair)?

Buy a round or two of drinks!

FWIW, both my own understanding, and the views of successful traders that I've been privileged enough to talk to, tend to agree with pretty much everything that you've said in this thread. In many cases, I believe that "randomness" is used merely as a euphemism for a lack of access to timely information, or simply a lack of knowledge.
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@nobody in particular:
I don't want to get into a prolonged debate with anybody, but I think it's very simple to demonstrate that markets are not a completely random walk. The fact that large price spikes coincide with high impact news announcements; the price stabilization/profit taking that tends to occur in the wake of a news spike; that traders tend to place their stops just outside swing points; that volatility frequently shrinks dramatically as the market awaits a big news announcement; that volatility otherwise follows fairly consistent patterns depending on the time of the day; that price frequently stalls, and reverses, at key S/D levels, which tells us that higher volumes of limit orders frequently cluster in predictable zones; that price invariably follows a repeating consolidation-breakout-move-consolidation-etc pattern, on all TFs; that longer term trends that coincide with obvious macroeconomic factors (most notably, divergent CB monetary policy between the two currencies in the pair); correlations that exist between risk-on/risk-off in other markets and forex safe haven flows; correlations between commodity prices and forex (e.g. WTI price vs CAD); consistently different ATRs for different pairs (compare GBPNZD with EURGBP, for example); different correlations between currencies (EUR/CHF correlation pattern is very different to EUR/USD, for example)...... and that's just off the top of my head. All of this convinces me that price movement is anything but random: if you were to use a RNG to create a "price chart", none of these behavioral characteristics would be evident, for obvious reasons. I'm not going to attempt to prove any of these points; doubters are welcome to disagree...... while I try to find additional ways to exploit some of them for myself.

One final point: non-randomness doesn't automatically mean that it's always possible for the retail trader to exploit it profitably. The spikes that occur the instant that red news is announced is one such example.

I think we can all agree that volume is not random because of the trading session, people sleep at night, bank and financial institutions are closed and so on, but that doesn't mean the up and down movements should necessarily be not random.
Thats the only difference between the random walk, the volume distribution during the day and the news spike due to lack of liquidity orders, but that doesn't change the question about validity of TA.
If we want to be more precise we could generate a random walk with predetermined volume range sessions, but it wont change anything anyway, so it is not necessary.

Thanks Hanover, and good trading!

Going to be busy today, refereeing a high school football playoff game and party after. I'll check back tomorrow.

ok, your asking a guy who can't remember what he had for tea last night what was sentiment for eur/usd on the 8th august.
off the top of my head, i seem to remember that was around the time of the whole greek fiasco, although i'm genuinely trying to remember whether i went on holiday at the beginning of august or the end of july.
so august 8th, complete guess, was that the referendum, if so i remember guessing that it would be a 'no' vote and i specifically remember the e/u rising as soon as the market opened on the sunday night.
but i have an inkling that this was all earlier in the summer, so as for the sentiment at the beginning and end of august i'll just say,
beginning was bearish
end was bullish

Normally, I would be the first person to defend the merits of a purely technical system. However, I think the average person here would benefit by taking the message of this thread to heart.

The game that you play is speculation and there are no guarantees or promises. No amount of analysis can solve uncertainty.

I agree with a lot of what you say here, but that's why i say that the fx market in particular is random walk with levy flight, i would never say 100% random, for example, nfp was out yesterday, using any random raw data to create candlesticks charts you never see a sudden spike in such dramatic fashion and you would never be able to predict exactly to the minute when this would happen. yet, we know every month to the exact minute that the chart (say, eu) will react in an extreme way, so as far as a random walk is concerned this movement is not random.

i also agree that volatility tends to drop before these announcements and that financial instruments are correlated (and also sometimes reversing completely),
but your average retail trader just wants to know whether the line on the chart will go up or down and can this be predicted for certain ahead of time.
I know for sure that the sun will rise in the east and set in the west and in my part of the world what time it will rise, but i don't believe this can be done with an fx chart.
I think you can have an assumption on where price will go (in fact i think its vital for any trader to have an assumption ahead of time where price may go), but it's just an assumption (or best guess) nonetheless. over thousands of hours of practice its possible that you will become more proficient in these assumptions being right through identifying certain patterns that occur within either random sets of data or real fx. as i've tried to show, random sets of data presented in a line chart also show repeatable patterns, infact the same patterns that occur in fx charts.
anyway, i don't believe that its possible to predict with absolute certainty which direction price will take on a chart or even that it is pre-determined, but this is just my opinion and i appreciate that you don't want to get bogged down in debate and i fully respect that all traders will have differing views and i'm willing to keep an open mind to be proved right or wrong either way.