While the made-up character is similar, Astrology is far richer in concepts, orchestration and story telling.
Technical analysis is the ultimate dumbification of market structure and dynamics, which in itself is a major dumbification of the formal economy, which in itself is a major simplification of the stuff-that-matters(TM).
The objective of technical analysis is to get as many low-information actors as possible to transact with as low-cost as possible technology (I would totally not be surprised if current "technical analysis" verbiage is 100% automated).
The entire idea behind technical analysis is that it's a self-fulfilling prophecy. The more people believe in a certain rule, the more that rule turns out to be true.
It might work that way with astrology too, but it's not so clear.
Astrology would be a self-fulfilling prophecy if enough people took it seriously.
For example if everyone agreed on that Gemini means good at science and Leo is good at art, the whole education system would be designed around this belief and it would hugely impact how children think of their own potential.
There is a good example of this in Ancient Rome. By around the time of Augustus Romans were fervent believers in astrology. One of the most notable cases of astrology becoming a self-fulfilling prophecy has to do with the death of the emperor Domitian.
An astrologer named Asclation had earlier predicted that Domitian would die on September 18, 96 AD, and Domitian's enemies used this as a sort of nucleation point to organize his assassination. So although the date was made up, it had the effect of focusing the efforts of the assassins on a particular date, and they were successful in assassinating him on September 18.
The full story that survives probably has some embellishments, but is entertaining. As the day approached Domitian became increasingly nervous. On September 17, he called Asclation before him and asked him if he stood by his prediction. Asclation said he did. Domitian then asked Asclation how Ascaltion himself was to die. Asclation responded that the stars said that he would die by being torn apart by dogs. Domitian then had an idea, and condemned him to death by burning.
Asclation was immediately led to a public square, tied to a stake, and a bonfire was built underneath him. Not long after being lit, however, it suddenly began raining and the downpour quenched the flames. In the wet mess, Asclation's stake tipped over and a pack of dogs found him and devoured him.
This development naturally did not put Domitian's mind at ease. The next day he became a nervous wreck. Around noon, he asked an attendant what time it was. The attendant, who was part of the conspiracy, lied and said that it was an hour later. Seeing that the danger had passed, Domitian relaxed and decided to take a bath. As he was about to go out, an official rushed in and asked for his signature on some documents. The official appeared to have an injury to his arm, but this official was also in on the conspiracy, and his sling concealed a dagger. When he got close to the emperor he stabbed him to death.
Chinese "sign years" are a good example where it seems not to shake out. There's a 12-year cycle between repeating signs, but it doesn't seem that every 12 years you get whole cohorts of specifically intelligent/kind/diligent/cunning/lazy/science-loving/humanities-oriented/whatever children in a given school year, which will nearly universally be composed of only two star signs (Chinese New Year falling about halfway into the school year). It's even more obvious on the 60-year "element-animal" cycle that the world doesn't go 3 generations between people having "fire dragon" or "earth horse" characteristics.
It'd be hard to hide such statistical effects on an yearly interval, whereas the Western zodiac hides its predictive failures by not having signs that are commonly stratified into different groups.
> you ask some parents about santa clause. they say we are athiests, but we pretend to believe in santa clause to make our child happy. then you ask the child about santa clause, and they say i pretend to believe to make my parents happy.
I think it descends from a line about labor in the USSR: "We pretend to work, and they pretend to pay us." Tony Judt in "Thinking the Twentieth Century" had a line about Moscow needing its satellite states to avoid loudly or conspicuously disagreeing with party ideology even if in practice they were able to diverge. "You pretend to believe and we'll pretend to believe you."
At higher levels of simulacra, the statements people make are less about reality, and more about what they want people to believe they believe about reality.
If the Santa Clause is null and void in your belief system, other Clauses, including the Presents Clause, remain in force to the fullest extent possible.
Instead of intruducing "Presents Clause", I think you can extend the "Santa Claus" concept to have several layers of meaning. Presents is one of those layers, but there is also tradition, coziness, familiarity, excitement and playfulness.
While some kids may become very vocal about it when they suddenly stop believing in Santa Claus as a literal being, they children (and adults) can continue enjoying him for as long as they're not embarrased by it.
Having a small child in the family believing (or pretending to believe) can be a way for everyone else to enjoy him. And some families continue to have him even when nobody believes.
The same is sometimes true about religions. People can continue to value them even if they stop believing in the literal Sky-Father.
My formulation makers fun of typical commercial license agreements.
I can see how Santa Claus can live as a fairy tale, with small kids playing with the idea of the entire thing being somehow real, the same way as Goldilocks or Bambi. This is indeed cute, unless taken too seriously.
It's quite a bit harder with religions: they are not a once-a-year pleasantry, but are things that shape your entire view of the world and the way of life. A faintest idea that they are but a cute tale is literally a destruction of a worldview, a catastrophe instead of a mild disappointment. Knowing, say, Christianity or Islam as a cute tale only works for people who never were believers.
> Knowing, say, Christianity or Islam as a cute tale only works for people who never were believers.
Belief comes at many levels of intensity. People with low intensity beliefs can drift away without experiencing a world view collapse.
There are certainly people of most religious backgrounds that continue to practice and enjoy many of the religious traditions and practices even generations after they stop believing in the supernatural parts.
It's definitely not the entire idea. It plays a part, but that's just human psychology. The same reason that round numbers tend to act as support and resistance. These rules are not mystical; they are provable. There are a lot of metrics in Technical Analysis, and most of them I know nothing about. Technical Analysis doesn't claim to know the future (only the liars and fools), but embraces efficient market theory, which is about the present.
There is a well-worn joke in the economics profession that involves two economists – one young and one old – walking down the street together:
The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”
Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now.”
> “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now.”
I don't remember too much from my finance courses in business school but one comment from the professor always stayed with me. He said that if there was any succesful pattern to trading, there are firms on wall street which can afford many orders of magnitude more brain power and compute power than you, so they will zero in on it pretty quick if it works. As soon as they do, it doesn't work anymore. Proof: Otherwise they would all be making infinite profit.
Makes sense. This means any trading algorithm that can be programmed is pretty much obsolete (if it ever was any good) by the time it's working.
You're proving the point of jjav. Jim Simons was an advanced mathmatician able to employ novel ideas to generate an alpha. Institutions with access to top level mathematicians and massive compute resources are still doing that.
But such algorithms only work as long as they're kept secret. As soon as the algorithm is made public, every large institution will incorporate them into their trading robots, meaning the information will become priced in to the market value instantly.
There are really only five ways to beat the market:
1) Insider information. (Illegal)
2) Extensive market research, where you understand the companies better than the market does. (Requires A LOT of work)
3) Direct contribution to the company's success (you need to have the talent of a Elon Musk, Mark Zuckerberg or Bill Gates).
4) Mathematical/computational superiority (you need to be at the level of Jim Simons or have the capital to hire such people)
5) Luck.
Mainstream technical analysis is not on the list.
That being said, I'm sure the current AI revolution is leaving some doors open to massive profits to some clever person able to create a model that predicts patterns better than most other algo trading robots.
Replace the twenty dollar with the tens of millions at minimum if basic technical analysis (ie. dead cat bounce level stuff) is leveragable and yeah I think you have a pretty close approximation to reality: more likely you are hallucinating than you found $20 million on the street.
But it’s hard to do that when something disproves its own validity so utterly.
If someone has a strategy to predict any amount of value from the market, it would be automated immediately (we’re mostly programmers here so that part’s kind of our bag), and so doing abstract that value away to a machine housed at JP Morgan or Citigroup.
tldr; It’s astrology for finance bros.
At least the crypto hype has died down again for another while. They perfected the above during Covid.
It's kind of like "agile", "big data" or "AI" for tech managers.
While actual finance people use algo trading all the time (meaning technical analysis using secret algorithms), naîve technical analysis is mostly a sales or influencing tool. (Unless the "finance bro" is truely deluded)
The same goes for tech managers. While some actually create agile teams using big data to create useful AI, plenty more just use the terms to inflate their own careers.
The article there looks at ONE use of technical analysis which is a moving average crossover. The nicest houses I know are owned by traders who know how to use technical analysis. it is very interesting that such an uniformed opinion is the top rated comment on YC tho.
I’ve always loved technical analysis discourse because it’s the starkest example of how to actually make money in financial markets, and that’s to actively cultivate information asymmetry among other market participants. If technical analysis were a successful strategy, it would, like most other techniques that can actually generate sustainable alpha, be a closely guarded secret. But it’s not. It’s something people shout about from the rooftops trying to get rubes to follow the bait. It’s the same kind of play as wallstreetbets, where you’re tying to increase the amount of stupid, predictable money in your corner of the market.
I think it’s more down to adverse selection… while some really smart people might be making decent returns via technical analysis or whatever, they’ll never disclose their strategies since someone else could frontrun them. Instead, the only strategies we get exposed to are the ones that don’t work, since the best way to make money on a strategy that doesn’t work is to find someone to sell it to. Like - it’s clearly possible to make money trading, because a very small amount of people seem to be able to do so somewhat reliably. But if someone is trying to sell you a trading course, they’re almost certainly more of a scam artist than a genius trading savant.
Not at all. Fundamentally, trading is a positive sum game.
Actual market research directs resources to the most productive companies, helping them grow more quickly and generate positive aggregate value.
Essentially, it's a way to add intelligence and information to the companies that represent the market, to make them more profitable. Specifically, it allows newcomers to grow more quickly if they're more efficent than legacy companies, meaning it's more difficult for the legacy companies to create moats.
Without trading, we might still have IBM at the top of the tech industry, with a massively inefficent organization, low worker salaries and enough market power to keep the competition away, since without a market, startups would need to cover ALL investments using organic profits.
But that's mostly true for medium-long term trading. Short term trading is mostly about speed and finding information or clues faster than anyone else. That part probably generates less net value than it consumes.
"The market" is just a set of order books. I don't find it weird that technical analysis work some times in some markets.
Fully systematic traders exist and make money. Efficient Markets Theory says they shouldn't, but they do anyway. EMH is probably written under stricter/ideal conditions though.
If one wants to take a systematic/technical analysis approach though, I would look at the entire universe of stocks, whereas use a fundamental approach in individual stocks.
> Fully systematic traders exist and make money. Efficient Markets Theory says they shouldn't, but they do anyway.
The post you are responding to already answered this question.
Here is the answer: "it would, like most other techniques that can actually generate sustainable alpha, be a closely guarded secret"
So, to answer the question, the important stuff in the trading strategies that you mentioned, include information asymmetry. Those systemic traders have hidden information, and hidden strategies that they use, and they don't just given everyone open source access to their code.
They make money because growth. Any strategy that is not based on information asymmetry or unique clever use of information makes less than the market on average.
There's plenty of trade secrets in TA as well though. A lot of it comes out because eventually it's beneficial to have fundamentals understood by a larger population so that there's a pool of people to develop the internal tools. Only some of the fundamental TA is common knowledge.
This is the correct answer. Selling "advice" and managing portfolios is by far the easiest legal way to make money on the markets.
There was a newsworthy situation in the UK a couple of years ago where a star manager crashed and burned. He locked his trading account, with everyone's money still in it, and continued charging fees.
I always found it strange. You get to charge money win or lose. And then take percentage winnings... No wonder low fee index funds made so much sense...
Back when there were 20 hedge funds, all managed by geniuses, it was rational to pay for uncorrelated outperformance. Now there are 6000 hedge funds, but there aren't 6000 geniuses.
>The nicest houses I know are owned by traders who know how to use technical analysis.
If you have a large group of people who take risks while trading, and they form strategies indistinguishable from flipping a coin (like technical analysis), then at the end of the day you're going to have a lot of ex-traders who failed to make money and a few that look like rock stars - because taking large risks and being lucky is a "good" way to make money fast. It's the very definition of survivorship bias.
WSB goes to options. So you multiply wins, possibly losses or end up with nothing on your yolo bets as your options expire worthless... Like a casino...
To be fair, the fact that [some traders own nice houses] doesn't imply [technical analysis is a good method]. It's possible that the profit from this sort of trading is essentially random, and there are a few people that get a large profit from that random distribution. I've frequently heard this sort of argument, but I don't have the expertise to determine whether it's true.
The people I know with the nicest houses are doctors and lawyers. I don't think either of us have a large enough samples size. Those who do take a large enough sample will see technical analysis is just a rain dance.
I don’t know about the nice houses, but technical analysis has one thing in common with astrology: one can make a living selling the ideas to other people.
How do we even know how these traders make their money? Maybe they make their money through commissions, i.e. trading other people's money, who maybe believe in technical analysis. Or maybe they make their money through arbitrage or market making. Just because someone "knows" technical analysis doesn't mean they make any money doing it.
> nicest houses I know are owned by traders who know how to use technical analysis
On the sell side, sure--you know when they'll under or overpay. Anyone buying retail flow should be running these models.
Technical analysis just looks at the surface of the order book--the transaction layer. If you're integrating the book, you can see when the surface is misleading and profit from it. There are technical heuristics, e.g. dead cat bounces, round-number tendencies, et cetera which are based in reality, part flow of funds and part psychological. But technicians' sole reliance on stock charts necessitates blindness to those underlying conditions.
In summary, a stock's near-term price history can, on its own, provide information that predicts the next tick. It's just a known subset of a broader set of signals. That the delineation is known makes those relying on these strategies possible to arbitrage.
Actually it totally makes sense. Most people here are/will never be rich. It's the software equivalent of the business professor who talks a big game in class but has never made money or built a business.
> The nicest houses I know are owned by traders who know how to use technical analysis.
One interesting thing about the stock market is that it’s entirely possible to be successful in it, attributing that success to strategy X, yet to be completely wrong about that.
It’s actually not limited to the stock market – there’s tons of professionals out there that are completely unaware of why what they do works. This makes many people nervous, and they try to come up with a rationalization or mental model for it, and sometimes they get it completely wrong.
> The nicest houses I know are owned by traders who know how to use technical analysis.
By itself that doesn't mean anything, surely you realize?
What percentage of technical analysis traders own the million dollar houses?
You definitely can make huge amounts of money on short term trades if you get lucky. So occasionally a TA trader will become very rich and have a mansion.
But, do more than 50% of them strike it that rich? If not, it's just random.
It's like saying that powerball winners have mansions, therefore the best investment strategy is to buy powerball tickets.
Astrology has more of a culturally evolved or emerged nature. Of course, it's peddled by entrepreneurs who have an incentive to "make it up". Yet it's oddly coherent (with itself), at least from the POV of an uninterested person who encounters it a few times over decades.
Technical analysis is literally made up.
I think there's a gradient where technical analysis is in the far right and psychonalysis in the far left, with astrology in the middle. I can't discern it clearly on an empty stomach right now though.
"checkmate, atheists!" is an old meme. I think it might have originated from this video (but maybe it predates it): https://youtu.be/P47OC439x88
I've only ever seen it used sarcastically by atheists making fun of the kinds of arguments that religious folks make. It was a bigger thing during the heyday of new atheism, I don't see a lot of discourse on the topic these days.
Your going to have to define technical analysis for me. I'm questioning very heavily that we're talking about the same thing. You don't believe in trends?
In general the goal of trading is to know more than other traders.
High frequency trading is knowing about recent trades sooner than others. That's where the profit comes in.
I see a difference here to technical analysis. HFT clearly has a data edge over those who just look at historical trend lines.
I think it's reasonable to say this isn't technical analysis. It's not the historical analysis that gives the edge. It's the extra knowledge they have that gives the edge.
Technical analysis is very much rooted in purely the historical price. If you have a way to predict prices with more knowledge than just the historical price you're getting outside the realm of technical analysis and into the realm of plain regular analysis where you take as much knowledge as you possibly can about the stock and figure out the price based on that huge volume of knowledge.
This is why technical analysis is dumb. It assumes all the knowledge is in the price already and there's no way for some investors to know more than others outside the scope of that. HFT is in fact a great counter to that. Some people know incoming trades before the rest of the market. That extra knowledge allows for vast profits.
According to the efficient market hypothesis, information can only be valuable until there has been time for information to circulate through the market, and the market price to reflect that information. This seems to happen in under 15 minutes. That's why 20 minute delayed ticker prices are generally available for free.
HFT lives on happening so fast that the market price has not had time to catch up to the information that a trade is available. But it is a race against others in the same market. And an incredible amount of effort has gone into winning that race and making profits off of the increasingly narrow slice of time that markets are profitably inefficient for.
No, high frequency trading makes money via arbitraging across markets, market making, and some other strategies that make its actors come out ahead on average.
Technical analysis is largely astrology for stock markets for reasons many others here have already given, as far as I understand. (Note that it’s still possible to make money using a trading scheme based on astrology, namely if the market structure itself makes any participant come out ahead on average, and the scheme isn’t bad enough to outweigh that inherent advantage.)
Not a 100% AFAIK, there's some sentiment analysis on news as well and I suppose every other piece of machine-interpretable piece of information one can get their hands on. Along with human guidance still.
There are very good reasons to believe that. The earliest proponents of HFT may have made money by more efficiently using price information. But now there are so many of them that is no longer possible
It is crime.
The most useful model for understanding international high finance is "organized criminal networks"
Front running is when you take an order from a client and before executing it out your own order in first so you benefit from the bumpe or drop in stock price that the client would cause.
The key here is you have advanced knowledge of the order before it hits the market and you have a legal requirement to execute client orders before your own.
I believe it’s also been ruled to be front running if you get knowledge of the client order in advance of it being sent to the market by a third party.
But having a faster network and computer to allow you to react faster than others is not front running.
Take this is an extreme, if I watch a market ticket and react manually with in 20 minutes to news and you read about the news in the paper the next day, did I front run you by trading before you?
It’s the duty to execute a client order before your own and not tell others abouT the order before it hits the market that is the requirement for front running.
The biggest HFT firms are prop shops. They don't even have clients. There aren't any client orders for them to front run! You know not what of you speak.
This is the cheapest defense of HFT front running. Buying order flow and front running other people's clients is still front running. You see what people want, you get it faster and you sell it back to them after you buy it.
Yes, because it makes it very clear you have no idea of what you speak of, as you don't even know enough to use the correct terms for things.
Front running is to act on confidential information in the market to the detriment of the initiator of the information. Once something is no longer confidential, ie the customer order has been processed, and all the information is open, then there can no longer be any front running.
This is the same argument I've heard before. You give a narrow definition for front running and declare there is no front running by your specific and out dated definition that you set.
What's missing is you actually confronting the problem of people seeing orders and buying based on those orders before the original orders go through. What is your term for that? Playing a game of definitions is a diversion from actually talking about the problem.
What’s the big problem with calling other, problematic practices that are definitionally not front-running by another, less confusing name?
Imagine a public official caught taking bribes and calling that embezzlement, blackmail, or driving under the influence of alcohol. Makes about as much sense to me.
> the problem of people seeing orders and buying based on those orders before the original orders go through.
That would be frontrunning, and illegal, as far as I understand. I don’t think it matters if there’s two parties colliding to commit the same crime.
Are you maybe referring to payment for order flow, which also has its problems (but ironically on average yields price improvements over NBBO for retail traders!), but is not that?
What do you mean by "buying the order of somebody ahead of you"? Can you describe it in a bit more detail so we can see if there's an established name for that?
> people seeing orders and buying based on those orders before the original orders go through
This literally cannot happen unless someone is breaking a law. An order is not visible until after it has executed. What can happen is some actor want to get a better price for their order and thus split up the order into multiple orders that it tries to execute simultaneously. Then someone can act on one of those that process quicker before a second of those split up orders end up executed. And that is fine - propagating changes of price quickly between multiple separate market places is a good thing as it lowers the transaction overhead in general.
Are there other “bad” (for the general investing public) strategies out there? Sure! Should some of them be illegal, or be made unprofitable by coming up with fairer (for long-term investors) markets and market structures? Definitely!
But that doesn’t make them the same thing as front running. Why call “bad strategy/phenomenon X” “Y” and confuse everybody?
Glad to see this is the top comment. It frustrates me to no end to see people lapping up TA like it is remotely useful when we spent our first semester on finance at university essentially disproving TA signals. It was literally Finance 102.
Does that mean you spent time in university "disproving" e.g. mean regression? Or was it some unrealistically hardcore definition of TA like "any given indicator taken in isolation should lead to profits every time?"
If you expected to learn useful finance at a university, you already failed as soon as you applied. If anyone there knew what they were doing financially, they wouldnt be there, and especially not teaching Finance 102. In case you were not aware, nearly all professors hate teaching lower level classes, so they naturally get forced on the worst performing professors (the ones that are closest to getting fired).
Concluding that the entirety of TA can not be useful (the Null hypothesis is true for all input signals) just from seeing that a few strawman TA in finance 102 not work is beyond absurd.
If some version of TA worked, then as soon as enough traders adopt that version of TA, it would stop working.
That is not to say that no versions of TA will work. After all Long Term Capital made a fortune on reversion to the mean...right until they went bankrupt. (And then their portfolio went on to make a fortune again. Too bad they were insolvent.) But it will only continue to work if the trading strategy is not widely known, or comes with trading risks.
The fact that you think a finance degree is centered around trading stocks tells me all I need to know about you and your beliefs. And even on the topic of stocks/derivatives, are they teaching the wrong dividend discount model? Or the wrong black-scholes model? Did they get the equation wrong or something? Or are you just mad because they aren’t teaching TA?
And just wondering, using TA, how would you calculate how much to change an M&A offer in order to compensate for including a poison pill?
>>Technical analysis is the ultimate dumbification of market structure and dynamics, which in itself is a major dumbification of the formal economy, which in itself is a major simplification of the stuff-that-matters(TM).
So basically Python is ultimate dumbification of C, which in itself is a major dumbification of Assembly, which in itself is a major simplification of Gates/Transistors?
At some point we have to deal with abstractions in one way or the other or just continue to indulge in mental verbosity of the most extreme kind.
Abstractions could be leaky but they work for the most part. Which is good enough for most situations.
> Abstractions could be leaky but they work for the most part.
Your abstraction of abstractions is leaky and is not working.
Technical analysis is not an abstraction of market behavior. It the fetichization of linear 2d representations of historical price timeseries.
In your analogy it would be to look at pictures of chips, identify faces and other objects in the clusters of transistors and argue that is the interaction of these patterns that determines chip function.
Didn't Renaissance Technologies made all their money from technical analysis? Who cares if it is simplification of something, if your goal is to make money, not understand it.
TA means something very specific, its not a proxy for all quantitative analysis. Actors with privileged access to information and superior execution capabilities may from time to time "beat the market". The rest are noise traders that are just being systematically fleeced.
They’ve made their money through a combination of information asymmetry and gray-area or outright illegal practices (e.g. tax shenanigans). Their returns are literally unbelievable if they are operating within the bounds of regulations.
>Technical analysis is the ultimate dumbification of market structure and dynamics
Technical analysis is the macroeconomics (macroeconomics, the discipline taught in school etc) of the stock market! It’s like drawing aggregate demand and supply curves and imagining that they move around monolithically as they drive the economy. Tail wags the dog
Technical analysis is an insult to technology and should be rebranded to "untechnical analysis".
Technical people would do analysis with state-of-the-art tools, from LLMs applied on github repos to discover lurking security bugs likely to bring stocks crashing, to vision models applied to satellite images to analyze business activity.
A serious question now: if we take all the mainstream news articles (or headlines) for 20 years and correspond them to OHLC data with e.g. hour and day granularity timestamps, could some sort of AI make hourly or daily predictions?
If modern AI can generate average-human-like text and images, couldn’t it day trade as well?
Yes, the glut of websites with stock “analysis” or “news” is almost 100% automated based on a number of financial and technical measures of any given stock. They are, as you say, pretty much worthless.
Ah this is silly. Technical analysis hmis grounded in sone level of useful information and technique. But it is ultimately a game of informed guessing, so in that respect, its a bit like astrology
This feels unnaturally harsh and likely incorrect. You seem to be suggesting that statistical tools are useless at predicting trends in time-series data.
If the assertion is true that this is useless for the stock market, that would imply the assertion is equally true for macro-economics, and extending further, climate change.
We are collectively deciding how to spend trillions of dollars based on the outputs of these models. Should we not bother then?
> You seem to be suggesting that statistical tools are useless at predicting trends in time-series data.
TA doesn't use "statistical tools" in any actually meaningful or predictive way. It's digital phrenology. Data-driven tea leaf reading. Programmatic palmistry. It deserves only scorn.
Textbook TA uses a lot of voodoo which, itself, is helpful for understanding market psychology. The fact that maybe 20% of market participants give significance to a simple moving average calculated from a certain number of days or weeks-- useful explanatory information!
But the core proposition of TA is that a scientific approach to analyzing past price movements will at least hint at the future, sometimes. Not all the time. That's not controversial, and wouldn't be in any other discipline either. Whether it can be profitably exploited at a particular scale or by a particular person-- another question entirely.
The interesting thing about applying TA to live markets is ... its adversarial. A pattern becomes known, and that leads it to change. If it doesn't change, we can consider it based in fundamentals. For example, markets are more volatile, on average, in the Fall. Why? Well, it's got to be fundamental because everyone knows this pattern and yet it very often repeats. TA is helpful because we would not identify the fundamental mechanism without first observing the historical cycles of prices.
You have phrased your comment very carefully and I agree, sometimes there might be some value in looking at simple trends, if only for the reason that other market participants do the same.
> But the core proposition of TA is that a scientific approach to analyzing past price movements will at least hint at the future, sometimes. Not all the time.
Will those "hints" be correct more than 50% of the time, though? I mean, if TA did beat coin flips, you could exploit this consistently with a profit. That, however, would be news to me.
You seem to be confused between descriptive, predictive, and explanatory models.
TA is not predictive. It can't help you anticipate the future. If it was, you could make consistent profits by using it, and no one has. If it's right, it's just as often wrong, in which case it's no better than a coin toss or throwing bones or reading tea leaves.
It's not explanatory. It provides no hypotheses for why the market behaves in certain ways. If it did it might have some hope of being predictive, but alas, as I already mentioned, it's not. And thus it can't teach us anything about market behaviours or their underlying causes.
TA might reasonably be thought of as descriptive, in that it gives a (voodoo) framework for describing observed market behaviours. As you say, we might observe the market is more volatile in the fall. But because it offers no explanatory power, we have no way to know why, and since it has no predictive power, it can't tell us if next year will be the same as this year. You're simply expected to believe that, well, it's always been that way, so I'll assume the future will be the same as the past.
As a result, it's frankly not that useful or interesting.
Stock price movements are literally text book examples of unpredictable (or more specifically, random walk) time series in university time series courses. A proper statistics course teaches you that you can predict with great certainty that the mean of the fraction of heads over many coin flips converges to 1/2, while you cannot predict anything about the outcome of the next flip. A good statistics course will also teach you how both can be true. TA is like trying to use statistics to infer something about the outcome of the next coin flip.
The standard model is not a plain random walk, but a random walk with drift. (Actually a geometric random walk with drift, but thats besides the point.) The drift term for the broader US stock market is usually assumed around 8% (long term average gain based on around a century of data). That works out to around 0.022% a day, which is not what TA traders are looking for.
Doesn't "technical analysis" mean pretending that you can ignore that it is Tesla or NVIDIA and just believe that the time-series itself tells you what comes next. I.e. you believe that there is some "nature" of stock ticker data independent of the financials and business environment of the particular company.
If stock prices are so easy predict, why aren't you putting your money where your mouth is? :P Or are you? Then I'd love to hear about that obscene fortune you've made so far. :)
In all seriousness, though, there is an entire field of research whose results substantiate GP's point. This is not to say that you can't beat the market but the challenge lies in doing so consistently.
They may have missed it this time, but if you look at a recent stock market history, it was impossible to not make a fortune out of a pretty obvious portfolio. /s
> I can say with relatively strong confidence that Tesla is going to be worth more than $1 trillion in three years.
How relative is your strong confidence? If you feel this is inevitable, you can become essentially infinitely rich. Why not do it?
Of course so could others. And all your collective trades move the market. At which point it's no longer true. It can't be, not everyone can become infinitely rich.
Technical analysis is based on statistics the same way astrology is: that is to say, it incorporates some of the jargon and features shallow, surface-level incorporation and features. TA is worse because it affects more people.
While we should be sceptical of any and all "models" of reality, we can't lump them all together.
Macroeconomic models have had spectacular fails but are fundamentally a semi-honest attempt to understand how the economy evolves (Only "semi" because ideology can be quite limiting).
Climate change models have a strong physical component that is neither made-up nor manipulated, but may suffer from not capturing biosphere dynamics all its complexity. Thats why there is uncertainty range around scenarios.
Long term investment decisions are in any case never based on TA. That technique is really a made-up pseudoscience tailored to provide comfort and talking points to the widest possible trading audience.
Yes. Although you should never trade on TA alone, it should be a signal that you trade based on your risk analysis of the situation. TA of index etfs today is saying a buy or sell signal is imminent but risk is still weighted to the downside so I’m staying conservative until the market makes a decision.
That said back in 2018 there were no less than 3 cup and handle indicators on SPY at almost every timeframe. I yolo’d the biggest gain ever because the TA was saying heavy buy and the risk was very low (bought long dated ITM calls with a strict exit date)
While the made-up character is similar, Astrology is far richer in concepts, orchestration and story telling.
Technical analysis is the ultimate dumbification of market structure and dynamics, which in itself is a major dumbification of the formal economy, which in itself is a major simplification of the stuff-that-matters(TM).
The objective of technical analysis is to get as many low-information actors as possible to transact with as low-cost as possible technology (I would totally not be surprised if current "technical analysis" verbiage is 100% automated).