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Are Fibonacci retracements and projections useful?
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Are Fibonacci retracements and projections useful?

  #381 (permalink)
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Fat Tails View Post
"People work the same way nature does on a molecular level." I do not want to be impolite. This sounds more like a religous belief than a scientific statement (which is the polite version for nonsense).

I probably phrased that differently than what I was trying to get across.

http://tripzine.com/pit/signal_theory_poster.pdf

you may have to Ctrl + that image to enlarge it to read the text.


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  #382 (permalink)
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from Dr Brett Steenbarger in 2007

I'm sure there are highly profitable pros somewhere who trade wave patterns, moving averages, chart formations, and the like. In several years of working hands on with such traders, however, I have yet to meet one who uses these methods. The pros do, on the other hand, care very much about who is in the markets and why markets are moving. The principles provide a framework for making sense of market behavior, which then can be used to filter the setups provided by charts, cycles, and the like. The really good traders understand markets; they don't just predict them.

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  #383 (permalink)
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Down the rabbit hole we go


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http://www.followingthetrend.com/2014/05/why-technical-analysis-is-shunned-by-professionals/


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  #384 (permalink)
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Fat Tails View Post

Other than in two-dimensional spiral growth processes, it is pretty difficult to observe Fibonacci numbers in nature. It seems that the Fibonacci spiral is just an optimum solution for a specific type of geometrical problem, which includes optimal resource allocation for plants or coquilles.

However, Fibonacci numbers have one common property with market fractals, which is the property of self-similarity. For fractals - in a larger mathematical sense, but including market fractals - this has been described by Benoit Mandelbrot. For Fibonacci number is it the basic equation 1 + phi = 1 / phi = phi /(1 - phi). The meaning of this property is that:

Thanks for your post and your reasonable tone. The discussion becomes a lot more fun and interesting when people stop shouting at/attacking each other and emotion is cast aside to the extent it can be, as evidenced in the whole last page of posts.

The Fibonacci numbers do appear in more then flowers. As an example, here's a quick quote from the simple but dependable How Stuff Works:

"Take a good look at yourself in the mirror. You'll notice that most of your body parts follow the numbers one, two, three and five. You have one nose, two eyes, three segments to each limb and five fingers on each hand. The proportions and measurements of the human body can also be divided up in terms of the golden ratio. DNA molecules follow this sequence, measuring 34 angstroms long and 21 angstroms wide for each full cycle of the double helix [source: Jovonovic]..."

Maybe @Itchymoku's quote about working on a molecular level wasn't so off...

There are other examples elsewhere...

Do I think these numbers are magic? As I've said many times, no. The sequence simply represents a very efficient method of fractal formation. This can become relevant if you believe the market is fractal.

Also, don't underestimate geometry, it may lie at the heart of everything

https://www.quantamagazine.org/20130917-a-jewel-at-the-heart-of-quantum-physics/


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  #385 (permalink)
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Why technical analysis is shunned by professionals | Following the Trend

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  #386 (permalink)
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the importance of who is driving price in any market is key to understanding current market structure. this may come as a surprise to many, but retail orders from mere mortals like us, have very little to do with market structure, and have very little impact on price. even a profound understanding of fundamentals and value combined with an extensive technical background may not be an effective answer. that is because in the short-term, flow trumps fundamentals for longer than the average leveraged speculator can tolerate. and now more than ever, price- insensitive flows from mechanical selling often dominate the market.

so who are the players who dominate the market, and what are their respective strategies?
  • option hedges from insurance industry
  • volatility targeting strategies from hedge funds
  • trend following/momentum strategies from managed futures/CTAs
  • risk parity strategies from hedge funds
  • smart beta strategies
  • leveraged ETFs

while the trading strategies for the above market participants may vary, their strategies for risk management share the common element of negative gamma. as i mentioned before when you hedge out a portfolio's gamma exposure, you sell on the way down and buy on the way up for risk management purposes. the above players come into the market at the same time, in the same way, both when they get in the market and when they get out, and the result is that the market's herd behavior has become institutionalized. the other result is that the market becomes insensitive to price and does not respect levels commonly believed to represent support and resistance.

that being said, the current market structure offers tremendous opportunities for out-sized gains. and taking a contrarian approach to the market borders on useless. if you look at the trades of successful so-called contrarians, they are not contrarians at all. they are people who sacrifice the big move for the small move, or successfully anticipate new trends, but enter early and exit early. they may make some money, some of the time; but its always a relatively small amount , and they never catch the real move. in other words, mean-reversion traders are essentially picking up pennies in front of the steam roller.

the really good traders figure out what game is working and play that game. they don't cling to labels like mean-reversion, break-out, or scalper. it's clear what game is working right now. so you can either play that game or you can keep spinning your wheels, or you can stop playing.


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  #387 (permalink)
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Quoting 
I'm sure there are highly profitable pros somewhere who trade wave patterns, moving averages, chart formations, and the like. In several years of working hands on with such traders, however, I have yet to meet one who uses these methods. The pros do, on the other hand, care very much about who is in the markets and why markets are moving.

So his observation is: traders requiring professional psychological care don't use technical analysis tools ?

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trendwaves View Post
So his observation is: traders requiring professional psychological care don't use technical analysis tools ?

read tiger's post!

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  #389 (permalink)
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tigertrader View Post
the importance of who is driving price in any market is key to understanding current market structure. this may come as a surprise to many, but retail orders from mere mortals like us, have very little to do with market structure, and have very little impact on price.


Thanks for this post. Very informative. You did mention my biggest concern about using correlations, at least on the short to very short term:

tigertrader View Post
...even a profound understanding of fundamentals and value combined with an extensive technical background may not be an effective answer. that is because in the short-term, flow trumps fundamentals for longer than the average leveraged speculator can tolerate...

I assume your answer is on the short to very short-term, watch the order flow as well...

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  #390 (permalink)
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srgtroy View Post
Thanks for this post. Very informative. You did mention my biggest concern about using correlations, at least on the short to very short term:


I assume your answer is on the short to very short-term, watch the order flow as well...

there's actually 4 different scenarios with respect to performance of a long/short pair in various correlation and volatility regimes...
  • high correlation/low volatility
  • high correlation/ high volatility
  • low correlation/high volatility
  • low correlation/low volatility
the best performing scenario would be a long/short pair in a low correlation/high volatility environment, and the worse performing would be a long only in a high correlation/high volatility scenario. high levels of correlation can create a serious challenge for long-short traders. while a long-short portfolio may yield up to twice as much as a long-only portfolio in a low-correlation environment, its performance may converge towards zero as correlation reaches extreme levels. to illustrate this, we consider a long-short portfolio consisting of two stocks (a pairtrade). a pairs trader decides to purchase a stock that he believes will outperform, and sells another that he expects to under perform.

if the volatility environment is such that stocks move by 3% per week, we would expect a long-short pair to yield 6% (each stock moving 3% in opposite directions). similarly, in a low-correlation, high-volatility environment where each stock may move by 6%, a long/short pair would return 12%. in a high-correlation environment, regardless of the volatility level, a long-short portfolio would return close to zero as the performance of the long position would be offset by the performance of the short position.

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