Technical analysis brain fart

Had a bit of a brain-fart over the weekend but still like this idea/way of thinking about the whole subject, so I decided to post it… Would be interested in people’s views on this perspective…

So what is technical analysis? My (very humble) opinion is that it’s like creating a map of what’s going on with a particular instrument. Why do you need a map? To get where you want to go. You need to be able to decide, based on the map you superimpose over the chart whether to accept or decline a particular trade based on risk.

It’s worth remembering again that at each given moment no-one has any faintest idea what might happen to the market next. It’s the mass decision impact movement of literally millions of other people deciding to buy or sell.

They can’t see what everyone else is doing either and are fiercely considering only their own position and unique circumstances… (selfish lizard brains running around in survival mode – lol)

You’re trying to create a probability map of the random movement of thousands of people. However, in large groups people aren’t random – in fact they are sometimes predictable or at least they will probabilistically move en mass in a certain direction. With this last point in mind we at least have a chance to move the odds of spread-betting successfully in our own favour.

How do we do this? Fierce observation of what’s actually happening without being attached to any particular opinion about a stock or share or particular market direction. An awareness of the likely probability of something recurring coupled with a risk managed approach and finally some sort of confirmation that essentially a large part of the market is in synch with your assessment. (i.e. an entry trigger)

Now, these ‘maps’ can of course get fiendishly involved… and I’ve been completely guilty of trying to read too much into a particular indicator or set of numbers. Sadly this hasn’t helped me in the past at all. You tend to start seeing the map swim before your eyes, no decisions get made and everything becomes loud and complicated. The data begins to conform to a particular bias or random piece of news you happened to see by accident.

Since you can’t predict price I suspect many people are asking the wrong question. They ask themselves “Where is the price going to go?” and the answer is no-one knows. Well, if no-one knows the chances of you or I being consistently right are quite slim!

Maybe we should instead be asking “Where is the price right now?”

To know where something is right now you have to place it in the correct relationship to other things. “Where is the price right now in relation to other points on my map?”

What are the other things that will help me figure out where I am? Levels, trends, previous highs/lows, size of bars etc. These will all have a certain ‘weight’ that affects the price right now. The decisions made by the millions of traders to get the price of an instrument to where it is now essentially creates it’s current position.

[It should be possible one day to create a statistical model that visually defines from previous probability data where the price should go next based on the influences of previous objects on the map and their effects based on probability numbers]

Look at this a different way. All the decisions you or I have made in our lives got us to where we are today. We can’t see the future however. It’s completely un-knowable and so the position of a stock or currency pair in the market in the empty space to the right of the graph is (and always will be) a mystery. However, based on the history of our own decisions (like previous price movements) and the influences of past external events we can get a ‘feel’ for how our own and other people’s future’s might turn out. If anyone has seen the film ‘The Adjustment Bureau’ then you’ll have an idea what this map could look like ;)

As a complete aside it’s possibly easier to ‘predict’ what will happen to people who’ve had more extreme pasts. Maybe this is why looking for extremes on a chart is similar in that when this does happen the likely hood of being right is higher? Possibly getting a bit too metaphysical now! ;)

Anyway, once we’ve got a pretty good idea of where price is in relation to the objects/points/levels/trends we think are significant then we at least have a fighting chance of making good (risk managed) decisions when the price gets near to a point it was at before.

Stop trying to figure out where the price is going to go next. YOU DO NOT HAVE THIS INFORMATION. All you have is where price has been and (if you’re looking properly) what happened at significant points earlier along the journey.

At point (a) something happened and price dropped hard. The reasons could be manifold and we don’t care about them anyway. If price get’s back to (a) is it going to drop again? Who knows? Who cares? All we need to make sure of is that we’re around when it happens, have a risk managed strategy to take advantage of this potentially high probability event and there’s some sort of short term confirmation that indeed, the same behaviour is happening again. Now all we have to do is manage our exit properly!

The right question is actually more likely to be, “What are the significant points on the map I’m seeing and how do they compare to and influence each other?” More on how I’m actually using this to appear later :)

6 thoughts on “Technical analysis brain fart

  1. Nico

    Hi Robert,

    I just thought I would share some sites that I have found recently to be quite informative for market analysis.

    http://www.etfdigest.com/davesdaily/
    http://www.zerohedge.com/ – a small note of wonder on this site, this week they posted that the EU was denying agreement on bailout to Greece and Euro, along with other markets dropped about 30 points in a second – I am not sure if the market moved and then this was posted as a joke, or vice versa or if there was another origin for this quote. Anyway prices quickly came back. Post was http://www.zerohedge.com/article/eu-commission-denies-agreement-new-greek-aid-plan and was also on twitter
    http://www.keenonthemarket.com/
    http://www.google.com/finance/historical?q=INDEXSP:.INX

    Reply
  2. Nico

    Also just a thought on market correlations:

    I think it is interesting how initially high oil prices where bad for the market, now oil price drops lead to drop in indices – though of course it may be they are just both acting on other market news. And also these correlations may exist for a while but then changes – so how to adapt and realise when these changes occur!?! Also off course is the correlation with strong / weak dollar and the indicies.

    And second thing is that it is interesting how the market just seem to focus on one thing at a time – so last month it was all about Euro crisis (and it ignored economic data) and now Euro crisis is sorted out (or at least delayed as most people seem to say), the market now focuses back economic data. And then there is an end to QE2 in the background.

    Ben Bernake talks next week. Worth watching live It will be interesting to see what he says or does not say.

    One more website for economic data http://econoday.com/ Can also download it for iphone. Can get trial subscriptions.

    Reply
    1. robertsweetman Post author

      Hi Nico

      Thanks for the comment – really appreciate your input.

      I guess my own position on correlations (at the moment) is that, along with other things, if I have to start rationalising the possible outcomes of things I really don’t understand then I simply get lost/confused and I freeze up.

      I agree that markets seem to have a pretty singular focus though! Certainly the end of QE2 seems to be the ‘next big news thing’ but maybe because it sells papers (lol) and Joe Public can ‘sort of’ understand it. The market ‘might’ react with a strengthened dollar (i.e. USA no longer burying it’s head in the sand) but who really knows which way it’ll go? Maybe the forthcoming halting og QE2 is already factored in?

      If I’m in a trade and the news/stats/NFP takes me wildly into profit then HUZZAH! and if it goes against you then I’d hope to have a stop in place so it doesn’t kill me ;) This happened in my favour on Friday – sweet!

      Reply
  3. Nico

    I just saw one of your first posts about sources of information. Thanks, I will check them.

    Also I saw your point about not listening to news and newsletters etc. I agree to a point (esp about newsletters which often are just a way to earn money) though I do think news is important since well, it does move the markets! Economic data or changes in policy are all very critical.

    As a novice it is interesting hearing some others opinions. For example of the impact of window dressing at the end of the month was a new one to me and is explained in the link I posted, check 31st May Archives.

    Reply
  4. robertsweetman Post author

    I hugely respect anyone that’s prepared to wade through the sheer volume of news and opinion about to make trading decisions. My experience so far tells me that only a few things really move markets. US Non-farm payrolls data on the first Friday of the month. News from China about manufacturing output and announcements about the Eurozone. However, with all these it’s a crap shoot as to what will actually happen when the news hits.

    Take EURUSD on Friday. US jobs data was crap and significantly under what was forecast. In the initial stage the euro actually lost against the dollar, before climbing back up slightly. Massively difficult to predict or trade in…

    Personally my only interest in news is whether I think I can get a trade to break even before some announcement has the capacity to screw me over ;)

    Reply
  5. Pingback: EPIC Failure… the post-mortem « robertsweetman

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