I wanted to bring up the ongoing conflict among two schools of thought – fundamental analysis and technical analysis.
A common question that needs to be answered is “Does technical analysis work“? As a discretionary technical trader with 8 years under my belt, I feel that it is my responsibility and obligation to defend technical analysis as a legitimate and effective approach to profitable trading. I use technical analysis every day, demonstrate it’s effectiveness, have the returns to prove it, and I will champion this form of analysis till the day I die. As “The Chart Addict” nothing less should be expected.
This article is for all of the non-believers, bashers, those holding myths about TA, those that don’t truly understand TA, and for the unfortunate ones – those that lost money and blamed it on TA. The truth is, I could really care less what you think about TA because it works for ME. Perhaps it doesn’t work for you, and that’s perfectly fine. We all trade the markets in different ways, and it’s important to use what works for you. If something simply does not “fit” with you, then you should explore other options. This goes for both TA and FA (fundamental analysis).
Technically Speaking
Technical analysis, in it’s most simplest form, analyzes supply and demand through price and volume action. TA is designed to help you identify the most probable future action based on price history. Note that I did not say that TA is used for predictions the way most people would think. There are jokes that using TA is “voodoo”, “similar to using a crystal ball”, “black magic”, “hogwash”, “hocus pocus”, and whatever else you may have heard. The people that think like this truly do not understand what TA is and how it is properly used. I encourage you to open your mind and explore this realm. For those that have been following me for 1-2 years, you know that I champion TA as my most favored trading analysis.
We are NOT trying to find out the value of a company, and in most cases, we don’t care. We don’t sit here reading 50 page reports day and night. Most technical traders have short-term horizons (day/swing) and technical analysis, in my opinion, has the upper hand for these shorter time frames. Furthermore, there are enough technical analysts that have consistently demonstrated the value of this art.
Proven Success with Technical Analysis
Since I made my Covestor account on March 17, 2009, I still command a return north of +300%. Am I lucky? You have to be really dumb if you think that. In fact, returns for my last 4 years all exceed +100%. How is that luck?
The Stocktwits community is full of tens of thousands of traders, but there are quite a few that I will personally recommend to you. Time and again, these folks have demonstrated exceptional and consistent skill from the proper use of TA: Brian Shannon, Anne-Marie, TheEquilibrium, DowntownTrader, ZMoose12, Steven Place, Kunal, ldrogen, Stewie, John Welsh, Trader Florida, Tickerville, SMB Capital, Zortrades, Misstrade, Gtotoy, and many, many others. The list is too long, but the point I’m trying to make is “how can technical analysis be rubbish if there are SO MANY successful technical traders”?
Still have something to say? Before you say anything, first prove your returns and then we’ll talk or GTFO.
Arguments
So, you still don’t believe that TA works. Maybe it’s because you subscribe to only one school of thought. Or, maybe you buy an academic’s theory of efficient market hypothesis. For those that don’t know, efficient market theory states that the current price is right and past information is already reflected in the price of a stock, therefore analysis is useless.
There are three sub-arguments with this theory. There is the weak, semi-strong, and the strong forms of efficiencies. The weak form states that any analysis into the history of price movement is useless. The semi-strong form states that fundamental analysis is also nearly useless. The strong form states that all information is already reflected into a stock and neither schools of analysis will help you.
Here’s another “argument”: “Charts are just full of stupid squiggly lines that have no meaning”. Seriously? Each price bar is important. They show you the open, close, high, and low. Put these bars on a chart, and you have a pictorial representation of all market participants. As a technical trader, I am more concerned about how other market participants are behaving and their reactions. A good example of this is with earnings releases. A company could report stellar earnings, but the stock could gap down. Also, a stock could report a huge loss, but gap up. In some cases, a stock barely moves. The chart shows me what other traders are thinking, and that has huge value in itself.
How about “throwing darts on a dartboard”? This is false. Expert technicians sort through hundreds of charts to assemble only a few that are worth playing. Only charts with the best setups make the cut. How is this throwing darts? Are we lucky? Sometimes, but we don’t rely on luck. We rely on concrete data presented on the charts (price, volume, MAs, support, resistance, channels, gaps, etc). Remember? Charts are created by the collective participation in the market or stock. There is significant value in analyzing the psychology behind their behaviors.
There are many arguments, and if you have one to PROVE that technical analysis doesn’t work, then leave a comment and explain your thoughts. Key word is PROVE.
Reading the Charts
A problem with technical analysis comes in the way people interpret charts. Two people can look at a chart but have different opinions. How is this possible? We are human, we have biases, and we all have different opinions. The key is to look at a chart for what it is. I’ve seen people draw phantom trend lines that don’t exist, probably because they have a position in the stock. Manipulating a chart so that it favors you is the wrong approach to analyzing charts (and you are also lying to yourself).
Charts do not lie. They show what has happened already, and it’s all real. How many analysts do you know of are guilty of sticking their personal opinions in their reports? Countless. Funny thing is, many stocks with multiple firm coverage often have conflicting opinions amongst each other. What and who are you supposed to believe? The answer is to believe in only yourself. Use technical analysis as a way to make your decisions without emotions.
Charts don’t move the markets, but people do. People can say anything, but what is reflected in each price bar represents what people do. People’s actions form the chart. Your trades, big or small, help create the chart. So then, does it make sense to bash charts when your trades are reflected in them?
Entries and Exits
If you still have doubts about TA, please tell me how you enter and exit your trades. How accurate and consistent are you? Do you sometimes have to “wait for things to work out”? Technical analysis, among the two schools of thought, has the advantage of lower-risk timing. Keep in mind that technical analysis is highly favored by short-term traders, thus accurate entries and exits are more important to us. Generally, the longer the time frame, the more important the fundamentals. It all comes down to the individual and his/her methodology and style.
If you are a pure fundamental analyst and you are attacking technical analysis = “apples to oranges”.
Follow the Big Money
Most institutions either do not use TA or do not make it a priority. Does this mean that TA is insignificant? No! Expert technicians can follow the footsteps that are created by institutions. A good example is playing momentum breakouts on high volume – prior to the breakout.
Co-existence
Many traders favor a hybrid approach of implementing both fundamental and technical analysis. I believe that this is a very powerful method of trading and it is highly recommended.
In conclusion
There is no wrong method, as long as it works for you. For me, technical analysis is my foundation and it has worked for me all these years. I would not be writing this article if I believed TA and charts were worthless.
Use what gives YOU the best advantage.
—
-John Lee aka “The Chart Addict”
Twitter @WeeklyTA
Chart.ly: http://chart.ly/user/WeeklyTA
StocktwitsTV: “Charts Gone Wild” Tuesdays /10PM EST
good post – i assume in response to the over-caffeinated overlord.
Good response. You did a fine job defending your technique. All you have to do is compare annual returns over the past 5 years. Both ways work!
I see no reason to defend TA. The more people fail to realize it works, the better it will work for those who use it.
I had a meeting awhile back with a couple of the top strategists from Oppenheimer and Wachovia, and they agreed that technical analysis was the way to trade. One agreed with me that financial news could often be predicted using TA.
Folks like Dimitris Tsokakis and John Ehlers (who builds black box systems based on TA) made me realize long ago that TA was the way to trade the markets. The fact that it is even possible to build a black box system that is regularly profitable means that the market is in fact beatable and TA is the tool to beat it. There is no way to refute this since it has already been done by people such as Ehlers.
Trying to refute what has already been shown to be reality is a sign of delusion. Delusional traders aren’t worth arguing with, IMO.
fight! fight! fight! fight!
My opinions on this matter aside, I just wanted to mention that for future arguments/debates/essays statements regarding your performance and/or the performance of other members of your group (in this case TA users) is useless unless you can prove it is statistically significant. For example when you mention the thousands of people on stock twits and then list out a few notable inidivduals, that tells us nothing. Bear in mind probabilitiy, if there are tens if not thousands of TA users some are bound to significantly out perform the market (such as yourself) just by shear luck. Now dont get me wrong I am not saying your performance is luck based, just that selected a handful of TA users and stating there perfomance as being superior is only evidence of TA’s efficacy IF you can prove that the performancy is not based on luck. The only way to do that would be to take a representitive sample of the TA population and compare their performance to the FA population. Then you can start to draw conclusion based on real-life performance. Of course the other method of proof would be to conceptually prove why TA works, and I think you would have a very hard time going about proving that. While it is very easy to prove why FA works from a conceptual none example based stance.
That’s like saying you must prove that Kobe Bryant’s game winning jumpers are a result of hard work as opposed to luck because the majority of other NBA players don’t do so. Obviously, asking for such proof would be absurd, because it is clear to anyone who watches him consistently that it is certainly not luck. No need for comparative statistics.
There’s no need to prove it. It’s an art and a skill.
To prove Kobe’s performance is a product of hard work and not luck (we will ignore the other elements/attributes that play into this and assume it is binomial) all one would have to do is find a means of quantifying “hard work”, whether through hours training during on and off season etc. measure it for a representative sample of the NBA and compare that sample to Kobe while at the same time noting through other quantitative means the fact that Kobe is indeed a superior player. Once you compare these two, in the event you see a correllation, and since one can logically explain why such a relationship between hard work and performance can exist, you can conclude on causation.
My point was that if one uses examples as anything more than anecdotal evidence than that person must ensure that they are utilizing and concluding from these examples by the proper means. It is called logical argumentative structure, none-sensical phrases such as “no need to prove it. It’s an art and a skill” just indicate that if you need to changes tracks if you want to make well reasoned arguments. And yes, the moment Chart Addict makes a post in a manner and format befitting an essay/argument he is engaging in an implicit contract that he IS trying to prove his thesis and therefore should be inclined to engage in proper logical argumentation
Yes… and Kobe Bryant is known for being the hardest worker in the league. Likewise, Chart Addict is known for analyzing thousands of charts nightly and only playing the best.
Maybe I am being presumptuous but I think an assumption that most traders DON’T do this, and he consistently outperforms them, qualifies as causation.
Bought $JCP 27.39
Sold half $JCP 27.65
Sold 1/4 $JCP 27.75
Sold last 1/4 $JCP 27.85
Short $CSIQ 20.77, Bought $SLXP 25.14
cov $CSIQ 20.91
Sold half $SLXP 25.85
Bought $XNPT 6.94/95
Sold other 1/2 $SLXP 25.92
Bought more $XNPT 7.16
The premise that the efficient market reflects all relevant information in the current price in some ways supports the notion of TA. As a part-time trader (and probably even for full-time daytraders) it is impossible to ingest all relevant info on the markets or any particular stock — the price/volume of a ticker has more information contained within itself than I could ever gather on my own. Being able to exploit that is what TA is all about, IMHO.
Sold half $XNPT 6.99
Bought more $XNPT 7.17
Long DPTR…
10:45DPTR Delta Petroleum trading higher ($1.37 +$0.09)
We’re told that the strength in the shares is being attributed to a report in Dealreporter, which is evidently stating the company is in active discussions to be acquired. Though we cannot confirm the report or its contents, we’re told the article mentions Contentental Resources (CLR) and Bill Barret (BBG) as possible bidders.
Sold half $XNPT 7.27
Sold 1/4 $XNPT 7.271
I think it works, but don’t tell The FLY, he might lose it!
Bought $FSLR 117.58 – scalp
Sold final 1/4 $XNPT 7.20/21
Bought $SLXP 25.49
Bought $APOL 56.93
Sold $FSLR 117.50
Sold half $SLXP 25.76 +.27
Sold other 1/2 $SLXP 25.62 +.13
Bought $JCP 27.73
jcp 27.77
sold 27.71
Sold half $APOL 57.36 +.43
Sold other 1/2 $APOL 57.19 +.26
Bought $GLD 110.28
Sold half $JCP 27.86 +.13
Sold other 1/2 $JCP b/e
short fslr 117.25
doubled position at 117.15
covered half at 116.83
the rest at 116.39
short mmsi 14.54
cover 14.47
Sold $GLD 110.17 -0.11
vg 1.66
i like it!1!1
sold half at 1.69
rest at 1.68
Bought $VG 1.689
I am truly honored – thanks John!!
short csiq 21.04
cover 20.92
Sold $VG 1.6901, preserving gains from this morning
ill brb a few
DPTR imminent 2ndary breakout… volume coming back into the name the last few minutes
Bought $XNPT 7.40
SOMX BTFO
Sold half $XNPT 7.45 +.05
Sold 1/4 $XNPT 7.50 +.10
Sold final 1/4 $XNPT 7.55 +.15
shpgy setting up
short oih 124.25
The proof it works is the live posts of your trades if only ibc updated automatically.
Chartaddict what percent are your accounts up so far this year? Fly last said he was up 8% if I recall correctly?
almost 20
@ Chart Addict,
Do you think technical analysis could be successfully used for penny stocks? Or are these stocks too easily manipulated?
Thanks
yes, but only liquid ones
funny, some people think that I only day trade. I day, swing, and position trade constantly. short-sighted folks.
Well put John. For me TA is about moving probability in my favor and then letting the law of averages do the rest. How people can attack TA as a strategy when there are so many people who have become very rich using it I simply don’t understand. Here is a list I put together of the Top 7 Technical Analysts of all time and their secrets. Further proof that TA works – http://etfhq.com/blog/2010/02/17/top-technical-analysts/
Bought $PACR 4.54/56
Bought $BRK/B 79.34
out $BRK/B 79
Out $PACR 4.51
Bought $XNPT 9.36
Sold 1/4 $XNPT 9.62
Sold 1/4 $XNPT 9.51
Sold 1/4 $XNPT 9.73
Sold final 1/4 $XNPT 9.97/98
Bought $AIG 27.27
Sold half $AIG 27.81
Bought $SEED 9.48
Sold 1/4 $AIG 28.27
$SEED sold 9.42, final 1/4 $AIG sold 28.07
Bought $BRK/B 79.45
Bought $AIG 28.06, experimental
Sold $BRK/B 79.54
Added more $AIG 28.31
Sold all $AIG 28.49
short xnpt at 9.71
cover 9.75
short es 6.12,13
cover half at 6.02
rest at 6.04x
short SBUX 22.87 (I know I’m shorting into the 50day)
cover 22.92
Bought $AIG 28.7492/75
watch swks
watch is sit there and scratch itself
Sold $AIG 28.77
Bought $AIG 28.97/98
Bought $PACR 4.6999
Sold $PACR 4.7701
Sold $AIG 28.89/90