TA works really? After many years of use now ask myself this question more often. I want to discuss with you an idea, but first I'll be glad to hear your opinions. To do this i upload a very simple chart. Plz make very simple analysis.
Last edited by alchemist74; May 20th, 2011 at 03:07 AM.
Why technical analysis works? If enough investors follow the same trend line and a sufficient number of investors focus on the same levels of support, then there will be a reaction to the market in reaching these levels. In conclusion we can say that technical analysis works because the large number of investors who apply the same measures drive their expectations come true.
The chart above is the "UK average download speed" .... why we can apply the principles of TA/PA here too? Anyone who wants can find lots of graphics NOT related to financial markets and to impy the TA principles. This leads to the conclusion that technical analysis is halfway between psychology and statistics .... behavior of the group and probabilities. Group behavior is very good described in psychology, so I care very much of analysis of probabilities.
If the market is only 2 sides - Long and Short then the chances of any event is 50:50. This is not a bad result. Here intervenes and money management. I would like to discuss these 2 issues here:
1 - trades based on pure statistical models and
2 - money management
50:50 is very good result in trading if you have a good MM (money management). The system I use is still based on traditional TA and my MM allows me to be at zero in only 20% correct transactions.
So what is your opinion on the TA, the statistical probabilities and MM?
Technical Analysis works because of crowding. Pattern develop because traders sit on the sidelines and watch what other traders are doing, before they join.
Our brain is shaped for pattern recognition, so we try to visualize the price action, draw trendlines, support and resistance zones. If many traders us the same tools for visualizing price action, this is called technical analysis. It exclusively relies on self-fulfilling prophecy.
Traders using technical analysis are feedback traders, and as long as they follow the same or similar fads, the crowding behaviour can be exploited.