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It is popular to say that technical analysis doesn't work. It is frequently used as a misnomer. "Technical analysis doesn't work, but our method is not technical analysis." Such attitudes are probably most common among the order flow and volume profile types of traders. But is order flow really all that different? You're looking for a pattern and then using those patterns to determine entries and exits. You keep track of the historical performance of these strategies and adjust accordingly. Is that not technical analysis? I'm not sure it matters if your technical analysis is done on price movement alone, or with volume and level 2. In the end you are trying to make a decision based purely on the information the market is giving you.
This is what I would call the broad definition of technical analysis. Forecasting the direction of prices based on data from the market itself. Anything else is basically fundamental analysis. As far as I can tell that's why the term was invented. To distinguish between trading on fundamentals vs trading on what other traders are doing. Saying "technical analysis doesn't work" with the broad definition basically means that trading doesn't work, and anybody trading is wasting their time.
But of course that's not what most people mean when they say technical analysis doesn't work. They're traders trading so they must believe in some sort of analysis, right? Perhaps they mean that classic head and shoulders formations do not work? That's what I always meant when I was referring to technical analysis. Perhaps they mean that moving averages don't work? But nobody is ever that specific so we can never really be sure. I can only assume that they mean to say their style of trading works, and what everyone else is doing doesn't work.
Color me wierd, but I am neither a fundamentals guy or a technical analysis guy. I am a probabilities guy and a news guy. I trade small (typically <5 contracts per side) and at any one time have several dozen option trades on, all with probabilities in the high 70's anyway. I am underlying agnostic for the most part. If the IV is up and they are coming into earnings, yeah, I'll trade that. I have a newsfeed that is telling me what is happening. Some binary event happens. I'll make a judgement about it and probably trade it. All we can do, really, is to find something that works for us. We have no idea what is going to happen when the futures markets open tomorrow. We might think we know, but no one knows. Who picked the market collapse from the virus? I know I didn't. We can never know tomorrow. FOR ME, I am convinced that trading the mathematical probabilities based on volatility, expected move, standard deviations, etc. is the safest and most profitable and my results prove that out.
I have a thread about moving average trading in Elite something here, with an earlier thread in Stocks and ETFs.
An article I wrote for SeekingAlpha a few days ago shows a moving average strategy which beats buy and hold for all major ETFs like SPY, QQQ, IWM, and the XLs for a period of 20 years.
Whoever (and that seems to be everybody) is saying moving averages don't "work" just didn't know how.
News is fundamental analysis. You are taking information from the world, and bringing it into the market by using it to inform your trading. Whereas something like standard deviation is technical analysis, because it is derived from information generated by the market itself.
At least that is my understanding of how the terms were originally intended to be used. With these definitions the focus is on the origin of the data. Did it come from the market itself or from outside of the market? The question "does technical analysis work" is then more precisely asked as "can you generate excess returns using information only from the market itself?"
Which is a fair debate, but one that strikes more at the heart of the issue, and maybe leaves some breathing room for nuance. The discussion then becomes "how do we actually generate edge from information?" "What are the advantages and disadvantages of different types of strategies?" "Why does some information generate edge, and some doesn't?" That's a discussion that I think is more likely to lead people to where they want to be.
My thesis is that charts are quite probably demonstrably worthless for anything other than glancing at.
This is because charts falsely show action on two dimensions. One of the dimensions is time which makes the construct dubious and weird. So maybe some smart people can figure out how to trade from them, but that is a real achievement to overcome the deficiencies of the model.
My stuff has worked for 20 years without messing with any parameters. Decisively beats buy and hold on all major etfs (except XLU) from 2000. I publish the results of what I do. Maybe everyone has even better stuff that they keep secret but somehow I doubt it.
Agree, charts give us only a bit of a clue. Maybe use for some eyeballing like short term volatility forecasting, drift, probabilities weighing where things look oversold or overbought. So you can use it for simple trading like buy low and sell high especially when you already have a bias based on fundementals or a load of experience.
Makets are efficient. Most of it is randomness. Charts are just the expression of lots of traders with all different trade horizons and reasons for being in the markets. You must make quite heroic assumptions to see this randomness as a pattern of some sort mass behaviour having a predictive value.
Pricedata is essential though for the hunt for price inefficiencies. Only difference is that this is done using all data and stripping the time dimension. Looking at distributions, skew of returns, etc.
Er but didn't you just say you were using a moving average?
Regardless, the question is where does the information that is used to generate the trade decision derived from? If it uses data generated from the market itself such as price, volume, or orders then it uses technical analysis to some degree. Whether you use a chart or not is irrelevant.
