Big statement, especially from a trader who uses TA as a tool but its true. Technical analysis is rubbish as a predicting tool. Especially if you are new to markets. Technical analysis will not give you an edge in predicting where the markets is going. What it does do is confirm your biases. Its a tool for confirmation bias.
Now if you have five to ten years of experience of how your fellow traders act given certain previous events that's an advantage. If you have built up a huge database of implicit knowledge that's something that will work in your favour. BUT if you are new, all it will do is have you acting on prior price action in the false belief that what just happened will be repeated to some degree in the future. Classic example is this sorry thread on Aussie Stock Forums of head and shoulder patterns. The calls are running at a disastrous 6 correct out of 26. What works is not so called classic patterns from some dudes who found them 80 years ago in a different market over a different time frame. Or some overbought/oversold indicator. What works is recalling the right pattern at the right time. Using a squiggly line at the bottom of your charts will not help if you dont have the large mental database to know when the pattern you are looking at is likely to be wrong.
A good example is the arse whipping the bears are taking at the moment. Have a look through any forum and for the last month the most common type of comment you hear is,
"the market has moved 1 way the last XXX, looks overbought here and is due for a bull back, have a look at the RSI/stochastic/MACD"
Really?? What about this,
Yes that chart is upside down! Its the XAO from Jan 08 record breaking move. That's why this game is so farggin hard. You have to act on something. On some bias that enables you to take risk on an uncertain outcome. People use TA for that. Where they fail to approach it correctly is they think that TA has some sort of predicting qualities. NOPE. It just gives you an "if- then" type of problem solving tool. Where traders get a real edge from TA is that through experience your biases towards outcomes become a little more accurate. Instead of taking cues from that squiggly line at the bottom of your charts your subconscious deals with what weight you will give that info.
To that end here is a recent example. For the last 3 weeks I have been pointing out to any punter that cares to listen on ASF that its clear that global funds are in a risk seeking mode.That overbought indicators are not going to serve you any good when funds are flowing. That a straight up play is not out of the question. If one took the time to study how markets moved forward, especially indices, you would see that 3 to 5 days is all that is needed to work off any oversold/bought states. Indies push and pull, consolidate and retrace to various 50% levels then take off again. Whether thats forwards to new territory or back to where they have just came.
In the current market any overbought state you feel the market is in will be worked off with a simple 3 - 5 day consolidation. Not when your RSI rolls over.
You gave away a huge tip there. TA is so far removed from the true goings on and is intentionally used to ambush. Traders are lucky that you are sharing this info and should pay attention. Most people who truly know how the game is played, do not teach. Definitely not publicly.
Posted by: James | August 04, 2009 at 09:35 PM
Great Blog T/H. Looks like we'll have a break up and out of another 4 day consolidation tomorrow.
JohnnyG
Posted by: John | August 09, 2009 at 04:01 PM