Do the easy nature of visually seeing buy or sell signals on TA charts mean that Markets are predictable?
Any trader with enough experience can easily confirm that Technical Indicators do not always work.
Beginners keep wondering if they should use EMAs, RSI, MACDs, Stochastics, CCI, MFI etc. etc. But experience in the Market shows that the BUY signal given by say MACD (or any other indicator) can be correct 50% of the time. What that means is if we flip a coin and buy a stock it will be as good as using an Indicator.
So my real question is has anybody questioned the indicators they spent years mastering?
The way we backtest a trading system has anyone backtested the indicators to see which hold any grain of salt and which pass the simple test of being right more than 50% of times?
After all if the indicators had been mathematically produced there would be some proof of if they work.
So what’s the secret about indicators. How about if we design a backtest to test them all on different time frames and with different parameters?
Won’t we get at least some data on which ones work more than 50% of the time?
Appreciate your thoughts and more …
Technical analysis alone only gives you half the answer. This is why sooooo many computer softwares that depends only on technical analysis failed to produce anything close to a consistent result.
Technical analysis is deriving information about the past, present and future behavior of a stock through analysis of the only 2 publicly available information: Price and Volume.
These two pieces of information are presented in various different formats on a stock chart; bar chart, candlesticks etc etc so that one who is experienced with the chart type could tell at a glance what is happening and probably what is going to happen next.
On top of charts, technical indicators such as stochastics, moving averages, RSI etc etc etc are designed using various formulas surrounding the use of the stock price and volume in order to provide various other information on the stock behavior such as overbought, oversold condition, resistance and support levels etc.
The usage of all of the above in order to arrive at a trading or investment decision is what Technical Analysis is all about, just derivatives of only 2 pieces of information… how comprehensive can that be?
That’s why, technical analysis alone will not be sufficient to make consistently profitable investment decisions. This is because looking at any form of technical indicator in isolation never gives you the correct picture. All technical indicators must be interpreted within the framework of the overall business cycle and market cycle in a top down approach. A bullish signal means a very different thing when interpreted within the framework of an overall bearish environment or bullish environment. This is why fundamentals + technicals is the only way to go in order to arrive at the correctly conclusions.
And the answer is, they do and they don’t do.
listen to @shams_afnaan. man’s got brains.
Ok. I would love to answer this for you are asking all the right questions.
The bottomline is -
Technical Analysis works until it stops working.
And I can say it because I have done the necessary analysis. After leaving job, I bought 10 Years NIFTY data from DotEx and for 6 months I backtested every technical indicator in the book. If you set your target and stop loss in the ratio 1:1, I tell you it is so damn freaky that over a large set of data and test results, you won’t be able to move the needle even 1% on either side - it is always 50%. That implies pick any indicator and any point in time and there is only 50% chance that it will move as it says it is supposed to move which is as good as tossing a coin.
I was so disappointed at one point for I had burnt almost 2L of google computing power, 1L of NSE data and 6 months of time for nothing.
And I reached the same conclusion - TA is sheer waste of time. However, I do not wish to leave this on a disappointing note. What you can start from is something called Parameter Optimization. So thats your ray of hope. I have written a detailed post about it therein.
Fyi … the first strategy that started working for me, I called it “Point6” since it gave a 60% chance of success in backtesting. That is how freaky randomness is.
No. of blown accounts each trader have is directly proportional to their trust level on technical inficators. Higher trust means many more blown accounts. I have zero trust.
That’s really interesting study you did. Though the findings were disappointing I think they are very important indeed.
I was planning on embarking on the enterprise myself as I didn’t find much resources on the net on this subject. Then I thought why not check if anyone’s done it already
I would be going through your post and would really appreciate if you could answer some questions at a later date.
Thanks a lot for your time.
Also I thought looking at ALL the indicators also doesn’t give the correct picture. But then what picture does it give
That’s the question which keeps coming back to me.
BTW I do not look at Technical Analysis alone for investments.
Sure … But I would still recommend anyone to embark their own journey. For trading/investment is personal and it is important to understand things in an out and you do end up learning so many things in the process …
Use fundamental analysis for your investment and use technical analysis to find the best entry and exit points (if you’re planning to be a swing trader). If you find the fundamentals really strong, then hold it forever as the legendary investor Warren Buffet states his holding period is forever.
But that’s the catch as well isn’t it? Fundamentals give the past performance.
Sorry I am sounding very negative
I usually invest on themes such as using Smallcase and trade Nifty Options.
The Options is where I find TA to be of some use, especially on small time frames (1,5,15 mins).