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  1. Default Why does Technical Analysis work?

    I know that Technical Analysis works in the sense that it can give reasonably reliable indications that a stock is more likely to move up than down (or vice versa). In other words, systems with relatively high win loss ratio (say 60% to 90%?).

    This is distinct from TA approaches that rely more heavily on stop-loss/money management aspects to make a system profitable. In other words, systems with a lower win-loss ratio (say 40% to 60%).

    So my question is, why/how does TA reveal opportunities that have a relatively high probability of producing a profit?

  2. Default

    Stop Losses and Money Management are not part of TA

    They can be used and are used by people who select with fundamental analysis or FA+TA

  3. Default

    TA works for the same reason that Pavlov's dog got fed when he (the dog) learned to ring the bell

    He (the dog) got fed when he learned a particular action was related to a particular reward

    Books have been published giving the probability of a future reward in the form of a price rise following various patterns on charts

    If enough rewards result from trades based on the repetitive recognition of chart patterns it is reasonable to accept their predictive value ... otherwise it is not reasonable to rely on charts alone

    [As we have discussed before I make no distinction between "probability" and "predictability". They are one and the same and I infer no greater probability to a prediction than I do to a probability. They are interchangeable terms with identical meaning]

    In short if a reward follows often enough from a given chart pattern ... why not repeat the ringing of the bell i.e. the entry into the stock?

    With Best Wishes

  4. Default

    That is a most interesting question

    I have been trying to recall which of the patterns were found to be the most reliable (an expensive book which I do not own by Bulkowski has provided data)

    As I recall one of the most reliable (after eliminating a small number of false breakouts) is the move out of a rectangular consolidation

    What is said to be depicted in the pattern as it forms is a contest of wills between bulls driving the price up and bears driving the the price down, creating a ranging consolidation pattern within upper and lower limits which neither are prepared to breach, perhaps because of fear of the other group

    When a decisive move away from the consolidation occurs many others perceive that the war of wills has been decided and the inactive observers then become active participants in the resulting price trend

    A similar battle of wills can be seen in ascending and descending triangles

    I suppose the deeper question is what motivates anyone to buy anything and what networks if any operate between players during periods of consolidation and breakout

    It would be interesting to catalogue every secret thought of every market participant and their tolerance to price falls and rises

    I suspect that even if we could wire the brains of all participants to a central computer we might still have difficulty in monitoring the resulting behaviour patterns or even describing them

    Some scientists at the Santa Fe Institute were given the task of analysing the causes of major events, from avalanches to weather events to economic collapses to political collapses such as the end of Apartheid and the Iron Curtain

    They then received funding to model the entire world financial system ... and from there I believe the project moved in house to one of the larger investment institutions



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