Thursday, July 16, 2009
The Head and Shoulders Pattern
The venerable head and shoulders pattern, when studied using rigorous statistical methodology stripped of hindsight and other biases, has been demonstrated to work no better than a random signal. This is difficult for many TA practitioners to accept, since it is chapter one verse one in every TA tome ever written. It is a fact nonetheless.
This does not mean the H&S never works; even random signals work a large proportion of the time.
But the H&S will live on, since it is human nature to want to believe in it. If the H&S had worked like it was supposed to, everyone would be praising its virtues. But if it doesn't work, then the pattern is simply redefined into something else. This is not meant to be a criticism, just an observation about trading psychology.
This does not mean the H&S never works; even random signals work a large proportion of the time.
But the H&S will live on, since it is human nature to want to believe in it. If the H&S had worked like it was supposed to, everyone would be praising its virtues. But if it doesn't work, then the pattern is simply redefined into something else. This is not meant to be a criticism, just an observation about trading psychology.
Wednesday, July 15, 2009
Bear Market Rallies
Bear market rallies are built solidly on fear across the spectrum of market participants. Fear on the part of the bulls that they will miss the next cyclical move up, and fear on the part of the bears that their position will be left permanently behind.
Both fears are wrong, of course, but that is what makes it a bear market rally rather than a structural turn.
And since fear is the most primal and powerful of the evolutionary human emotions, these moves are particularly intense.
Up until a few months ago, this bear market was immature, lacking the defining feature of all such markets: the seemingly unrelenting, prolonged countertrend move. She has now matured, but there are some mid-life crises left in this life cycle.
Both fears are wrong, of course, but that is what makes it a bear market rally rather than a structural turn.
And since fear is the most primal and powerful of the evolutionary human emotions, these moves are particularly intense.
Up until a few months ago, this bear market was immature, lacking the defining feature of all such markets: the seemingly unrelenting, prolonged countertrend move. She has now matured, but there are some mid-life crises left in this life cycle.
Tuesday, July 14, 2009
Three Basic Facts about Subjective Technical Analysis
1) No single TA pattern, method, or algorithm (or combination of such) has ever been demonstrated, using rigorous statistical methodology stripped of biases, to work any better than a random signal in elucidating market or security direction. And this includes the famous head-and-shoulders pattern. In other words, subjective technical analysis is largely an optical illusion, akin to alchemy or palm-reading.
2) All of the well-known TA patterns show up consistently in charts made by a random chart generator.
3) In a frequently repeated experiment with consistent results, experienced chartists and TA practitioners are routinely unable to distinguish the charts of real securities from those made by a random chart generator.
Happy trading!
Matt
2) All of the well-known TA patterns show up consistently in charts made by a random chart generator.
3) In a frequently repeated experiment with consistent results, experienced chartists and TA practitioners are routinely unable to distinguish the charts of real securities from those made by a random chart generator.
Happy trading!
Matt
