Technical Analysis? 5 Reasons To be Sceptical about Charting
The cult of technical analysis and day trading seems to grow and grow. The Web is crawling with technical analysis (TA). Tax changes have created a boom in spread betting, and hundreds of courses have sprung up to teach traders to read short term 'technical' chart set ups. All of this - coupled with the ongoing use of the terminology by market commentators and practitioners - may make you wonder whether technical trading rules are profitable and whether an investor not using them is missing out.
The short answer is no, not really, at least not in developed markets like the US or the UK. This isn't to say that there couldn't be some technical indicator that might work consistently in some market. But if there is, it seems to have escaped the attention of any rigorous academic study on the topic that we've come across, especially for stocks. Furthermore, most of the popular TA indicators appear not to be predictive and should probably be disregarded.
So what is Technical Analysis?
Technical analysis is the forecasting of market prices by means of analysis of data and charts generated by the process of trading. Its origins can apparently be traced to the seminal articles published by Charles H. Dow in the Wall Street Journal between 1900 and 1902. Technicians believe that certain chart formations and patterns will indicate market psychology about either an individual stock or the market as a whole at key turning points. This is based on three key assumptions:
- Market action discounts everything - A fundamental principle is that a market's price already reflects all relevant information (including external drivers such as economic, fundamental and news events), so you just need to know the history of a security's trading pattern to predict its future pattern.
- Prices move in trends - Technical analysts believe that prices trend directionally, i.e., up, down, sideways or some combination.
- History tends to repeat itself - Technical analysts believe that price action also tends to repeat itself because investors collectively tend toward patterned behaviour. Because investors collectively repeat the behaviour of the investors that preceded them, technicians believe that recognisable (and predictable) price patterns will develop on a chart.
With those assumptions under their belt, technicians use charts search for archetypal price chart patterns (e.g. the well-known head and shoulders or double top/bottom reversal patterns) and look for forms such as lines of support, resistance, channels, and more obscure formations such as cup and handle patterns. The idea is to try to find and profit from these patterns. Technical analysts also use market indicators, including up and down volume, and advance/decline data to assess whether an asset is trending, and if it is, the probability of its continuation.
Reason 1: Technical Analysis is a Moving Target
One of the issues we have with technical analysis is its subjective nature. Practitioners tend to define and use it according to their own beliefs. Different technical analysts can make contradictory predictions from the same data. The presence of certain shapes in historical price charts is often in the eye of the beholder. Coupled with that, the range of indicators is almost limitless and methods vary greatly.
This makes it difficult to refute technical analysis because once one indicator has been shown not to be predictive, it's always possible for the technician to argue that, in current market circumstances, you should be looking at an entirely different indicator. As Karl Popper said, for a theory to be scientific, it must be falsifiable (i.e. it must make consistent predictions) and the vagueness around the meaning of the term 'technical analysis' isn't helpful in this respect. This also creates scope for "revisionism", selectively highlighting successes while ignoring failures. As Laszlo Biryani has noted:
"I would read in the newsletters "As we've been suggesting, the market has done X, Y, Z and I would go back and review the past newsletters and say, “I don't see where you were suggesting this in the last four, five, or six newsletters". They would be very vague in their commentary... A month or two later, after this or that company had risen, they would suggest that those were the exact companies they were recommending".
Reason 2: Empirical evidence for TA is negligible
Much of the faith in technical analysis hinges on anecdotal experience, not long-term statistical evidence, unlike value investing or other quantitative/fundamental methodologies we discuss on this site. Most of the statistical work done by academics to determine whether the chart patterns are actually predictive has been inconclusive. Indeed, a recent study by finance professors at Massey University in New Zealand examined 49 developed and emerging markets to see if TA added value. They looked at more than 5,000 technical trading rules across four rule families :
- Filter Rules - These rules involve opening long (short) positions after price increases (decreases) by x% and closing these positions when price decreases (increases) by x% from a subsequent high (low).
- Moving Average Rules - These rules generate buy (sell) signals when the price or a short moving average moves above (below) a long moving average.
- Channel Break-outs - These rules involve opening long (short) positions when the closing price moves above (below) a channel. A channel (sometimes referred to as a trading range) can be said to occur when the high over the previous n days is within x percent of the low over the previous n days, not including the current price.
- Support and Resistance Rules - These “Trading Range Break” rules involve opening a long (short) position when the closing price breaches the maximum (minimum) price over the previous n periods.
The result? Using statistical methods to adjust for data snooping bias, the authors found:
"no evidence that the profits to the technical trading rules we consider are greater than those that might be expected due to random data variation."
The paper looked at whether technical trading rules add more value in less developed (or efficient) markets. The authors found that technical analysis may work better in emerging markets than developed markets, but it was "not a strong result."
Reason 3: What evidence there is probably data-mining
While very early academic studies did show limited evidence for technical analysis, and the odd study now pops up here and there, as Sullivan et al point out, this may be survivorship bias in action. After all, over time, investors must have experimented with technical trading rules drawn from a very wide universe – in principle, thousands of parameterizations of a variety of types of rules. As time progresses, the rules that happened to perform well historically receive more attention and are considered ‘serious contenders’ by the investment community, while unsuccessful trading rules are more likely to be forgotten. After a long sample period, only a small set of trading rules may be left for consideration, and these rules’ historical track record will be cited as evidence of their merits.
"If enough trading rules are considered over time, some rules are bound by pure luck, even in a very large sample, to produce superior performance even if they do not genuinely possess predictive power over asset returns. Of course, inference based solely on the subset of surviving trading rules may be misleading in this context since it does not account for the full set of initial trading rules, most of which are likely to have under-performed"
Reason 4: A Technician is not a Quant
It is true that certain technical trading rules share a resemblance to momentum trading strategies, and academics have found some good evidence for momentum as a predictor. Does that mean there's secondary evidence for technical analysis? Not really, the momentum effect is best explained by the findings of behavioural finance, none of which involves the other assumptions relied on by technical analysts. You may be able to make money from certain types of momentum investing, but this is a far cry from saying that it's generally possible to outperform based on the kind of naive short-term technical trading packages being advertised on the Web.
The fact that someone is trading using trendlines and a few mathematical formulae doesn’t mean that they are trading using a quantitative strategy. A quant is someone who applies an empirically-tested and rules-based approach to exploit perceived market inefficiencies (e.g. by exploiting various systematic biases present in human behaviour, such as herding and overconfidence). Some technical indicators like MACD and Bollinger Bands do resemble statistical measures used by quants today (mean and standard deviation) and may even involve some statistical modelling. However, technicians mostly trade the market using relatively discretionary strategies and the techniques used are on a completely different plane of sophistication.
Reason 5: The Hedge Funds are all over short-term trading
For the most part, technical analysis is a short- to very short- term trading strategy. Most technical traders won't like to admit it, but the best PhDs in the world have been hired by the most sophisticated institutions to squeeze every pound they can out of short term price discrepancies in the market. Over the last 20 years, hedge funds and investment bank trading desks have invested massively in high frequency algorithmic trading designed to prey on the weaker hands in the market.
It's hard to believe that individual investors can beat the City's finest, armed with a laptop and a 30 day course on technical analysis. Hedge funds have all of these trades and more completely covered with complex algorithms and artificial intelligence that are well beyond a private investor's ken. They are the ones taking the other side of the trade and, in doing so, are ensuring that the majority of short term traders go broke as those trades hit stops or margin calls.
The truth is that, while it is not the case that the market is always efficient, there are very few short term inefficiencies in the market, and that if you want to play that game, you are up against the best in the world. Would you tee up against Tiger Woods? Due to high frequency trading, the average length of time that a fund holds a stock before selling has fallen dramatically in recent years, and now stands at less than six months. The truth is that if you want to beat the market, you need to lengthen your investment timeframe and look beyond the immediate term that the hedge funds have so well covered (and that's where value investing comes in).
But wait - it's not all bad....
As the above hopefully demonstrates, trading purely on the basis of technical analysis seems unwise. However, despite inconsistencies in predictive value, technical analysis may be a useful tool as part of a broader strategy for managing holdings (e.g. to help you time any investments that are decided on other, hopefully fundamentally-focused, criteria).
The fact is that many (misguided) market participants use technical analysis to drive their investment decisions. These collective actions result in tangible changes in asset values, so they need to be understood even by less mis-guided investors. A fundamental investor need not agree that a stock should be moving but it's worth understand why a stock is nevertheless moving. As Birinyi, a research and money-management firm, noted in a research note:
"Technical approaches can and should be a useful adjunct to every investor’s -- amateur and professional -- arsenal, if and only if used properly and with understanding... Technicals detail and hopefully illuminate, but do not predict.”
In particular, one area where technicals may be useful is on the sell-side. We discussed recently William O'Neill's stock selling rules and noted that very few of them involves changes in the fundamentals of a stock. His interesting explanation of this is that many big investors get out of a stock before trouble appears and if the institutional money is selling up in volume, individual investors don't stand much of a chance. So while it's very important to buy with heavy emphasis on fundamentals, he argues that this is not the right thing to focus on when selling:
"Many stocks peak when earnings are up 100% and analysts are projecting continued growth and higher price targets. Therefore, you must frequently sell based on unusual market action (price and volume movement)".
Good investing is about managing your losses too, and here TA can be a useful tool to determine where best to place a stop-loss (given the number of TA practitioners out there that are likely to be anchoring around certain price points).
For these reasons, we'll be reviewing a number of key technical indicators (like MACD or the Golden Cross) in subsequent articles, along with the limited evidence we've found (so far) as to their predictive value.
We'd love to know of your experiences, positive and negative, with trading/investing using TA in the comment below. What are we missing?
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43 comments
I wrote a whole book on TA, published by Bloomberg Financial in 2010, Technical Analysis Tools: Creating a Profitable Trading System. However, I would not recommend using technicals alone without combining those with my proprietary timing system, which gives one a significant statistical edge.
I began trading oats futures in the summer of 1983 when there was a drought, just using 3 day moving averages of the closing price. I turned $3,000 into $12,000 in ten weeks with no losing trades. Then when the drought ended, there were no more buy and sell signals generated. The market fundamentals were the drought that kicked that market into a high level of volatility.
I have been looking at Ichimoku charts recently, I have found quite a few with 5 greens that often the share price falls and the ones with 5 reds seems to be a buying signal, whether brexit has caused this I'm not sure as I have only been using them recently. Combining them with 52 week highs I will look into more.
Phil did you buy KUD as it went over 20 CHF?
The Ichimoku Charts give a variety of signals and depending on your trading approach you can select options that suit you.
For example there are two moving averages: the Tenkan Sen (fast MA) and Kijun Sen (slow MA). You can use the crossover of these as buy/sell signals BUT I'd suggest that is very noisy and would result in frequent trades, which is not what I'm after. There is also a strength associated with some signals so again with the MA crossover if the fast MA crosses above the slow MA and that crossover occurs above the Kumo cloud it is considered to be a Strong Bullish signal which makes sense as the current price action is above the recent consolidation and the latest prices are rising above historical prices.
I might also mix styles ... so I'll buy with 5 bullish signals with the current price breaking recent new highs but I'll sell if there is a concerted break below the Kumo (which is usually my notional stop price).
OR if a stock has had a really strong run and the Stock Rank has really deteriorated and the stock is just running on price momentum I'll shift my notional stop loss up the slow MA (Kijun Sen). This enables me to take profits as close to the top as possible.
As yet I haven't bought KUD as I've been away on hols but I have about four or five stocks that look good and I'll try to pick them up in the week.
btw Herbie I wrote some software that d/l'ed uk stock histories and scanned them for 5 bullish signals and used that list as the basis for further investigation. I quickly learnt that it was easier to filter with stockopedia filters first and then look at the Ichimoku signals
Phil,
Thanks very much for all that information, I will look into it some more.
"Reason 2: Empirical evidence for TA is negligible"
Hmmmm ................. so what does the author make of this papar?
http://cs229.stanford.edu/proj2013/TakeuchiLee-ApplyingDeepLearningToEnhanceMomentumTradingStrategiesInStocks.pdf
It has raised the curiosity of Anthony Garner (a very sceptical chap), and me too
https://anthonyfjgarner.net/articles/
Disclosure : II do not trust TA
Three thoughts
0
There are some real long-lasting patterns in the market that can be used by anyone and are widely known
(a) Seasonality
(b) Momentum
(c) Defensives
So, saying 'all TA is bunk' is a little unfair
1
Just as 55% of verbal communication is non-verbal (body language etc), I think there is more to TA than staring ata chart.
I have a feeling those who use TA successfully choose a list stocks to watch from a universe and then looking at the chart see a pattern in some of them - a sub-list and then select the 'highest probability trades' from that sub-list.
I think that they may have used a chart pattern to justify a decision they have already made.
This may come across as negative, but if it makes you money, you don't need to be concerned.
2
I read the paper and thought 'wow'
Then I noticed that the training period was 65-89 and test period was 90-09 and then thought
(a) it looks like the training period was a period before HFT and other AI algorithms really hit the market
(b) it looks like the testing period was a period before HFT and other AI algorithms really hit the market
Not to say this is anything other than v.v. impressive but just like the people who developed the original turtle rules made money until those rules were arbritaged away by the market, I suspect the same patterns found would not work so well 2010-15.
I think that possibly there is a difference between the approaches you are all describing in your replies here and some of the TA stuff thats out there in the world which the article is saying doesn't really work.
I would say there is a difference between those who look at MACD and japanese thingimy clouds and moving averages and who look at the chart in some way during their stock selection or selling process and the people you can find on the bulliten boards who are making their decisions based on the fact that if you squint and look hard enough, part of the chart in the bottom corner looks a bit like a christmas tree and so its obviously a buy!
I wouldn't argue with any of your responses to this article, they are all sensible use of charts in my opinion.
I probably wouldn't listen very long to someone telling me that I should consider buying a stock because part of a chart looks like a magpie or is similar to part of a chart 3 years ago when the stock then did well afterwards.
I think thats what the article is bebunking isn't it?
Needle Bat is right. Keep it simple. I flick, at speed, through charts looking for breakouts, trends, new lower highs, rsi/macd divergence and patterns. These are added to watch, timing, final buy etc portfolios.
Previously, I would then use PE ratios to narrow them down but now I check Stock Ranks, usually value and quality (realising that the data upon which these figures are based could be quite old) as I prefer to judge momentum by myself. So from the PE point of view, I've have had my toe in the fundamental waters for quite a few years.
To avoid being myopic I would recommend to everyone interested in charts to look at 5-10yr charts on log scale to get the BIG picture and to see where the stock is now relative to the past. This can be eye opening. Never buy on news without looking at this and realising where the share price is.
You will see the past trends VERY clearly. Depending on your software, swipe the chart for, say, two weeks or so of data around the start and end of trends. With this couple of weeks chart, LOOK at what happened to the indicators at that time... just use MACD, RSI, 20/50MA and maybe Stoch, OBV and momentum.... This is VERY educational and once you see what happens at the beginning of trends, try and spot similar activities occuring CURRENTLY.
SOMETIMES keep it REALLY simple just look at long term charts with NO indicators..... like the Stockopedia mini chart arrays on 10yrs...very illuminating and doesn't overload the brain.
Treat trading volume with great suspicion.....there'a all sort of funny goings on which are sometimes totally disconnected with price movement....again, you will see this irrationality in the long term charts. Avoid illiquid small caps whose Market Makers will make more money from their large Buy/Sell differences (Spreads) than you probably will!
Be patient but nervous enough to pull the sell trigger when you have to.
Just a few thoughts.
they keep is simple. think its basically 2 moving averages, Relative strength and volume ( average over 3 month and daily)
Thank you Noodle Hat. I will take a closer look.
Currently I only use Fundamental Analysis, which includes all the Stockranks . But I am prepared to consider the idea that a little Technical Analysis might also be beneficial. Maybe this might work along the lines of:
FA helps me decide what to buy
TA helps me decide when to buy
What do you think? If I was to use TA like that, then which one indicator would be the best to use?
This is the general jist of Weinstein and Mark Minervini. Screen first for high quality, growing stocks. Then use TA to time the buy, breakout on volume.
Hi Frankyboy -
Thanks for your helpful suggestions.
I may end up ignoring this type of shares, but only after I had a good search to see if there is any decent approach I can hang my hat on (I don't want to use the word method because it sounds too scientific and I sense there isn't a half-decent scientific approach to this).
Not ready to throw the towel in yet!
Hi Phil,
But still people seem to be determined to know everything about a company they invest in, to know when a CEO/CFO breaks winds and what that might mean. Kidding themselves that they know enough about the business to be sensible investors, not these fly by night traders.
That's my viewpoint too Phil! :) As I said, if Tesco could pull the wool over the eyes of the City 'experts' what chance has Joe Investor got to sensibly analyse fundamentals. Also, as with the Brexit decision, for example, the complexity and interactions within and without the company are quite beyond prediction or human judgement. No one can foresee the future, unless you're looking back from the Deep Future!
Another thought is to look back at the FTSE100 constituents of fifty, or more, years ago....you won't recognise half the names.....everything in life is transitory and unpredictable.... as they say, the only certainty is uncertainty!
I must admit to a modicum of envy with respect to your annual results Phil.... Excellent. Perhaps I would benefit from some counselling!
Imran, I also bought the same book as Phil, sample here https://www.harriman-house.com/samples/97808571926... years ago but haven't followed up by applying it, although I like the ideas..... there's just so many TA strategies out there it's best to concentrate on a couple of strategies as Phil does. Jeremy du Plessis, the author of that book, ran a well respected investment software company called Indexia which was later taken up by Updata....bit of history there.....and many popular software companies include point and figure charting options. Also, worth looking at YouTube for some background on these.
Finally, I also agree with Phil that it's a free world and there are both fundamental and TA strategies which can work BUT a combination of both is the best approach.... but it's all difficult!
Frank
I don't understand the black or white view of TA versus fundamentalists. It isn't a "either or" choice. A sensible investor will do both.
My own method is to identify a share through fundamental analysis first. If it passes my filters at this stage, then I look at the technical chart. I have set up my technical chart to show Keltner channels; 50, 100, 200 EMA lines and as indicators RSI, MACD, Fast Stochastics and Williams R. I have changed some of the parameters to suit my style.
So if a share passes muster on both counts, TA and fundamental analysis, then it is a buy. If the TA shows amber lights, then I park it and wait until the TA signals are right. Sometimes for months.
Last year, I was sitting in my conservatory and watched how a spider works. Once he has set up his web, the spider sits and waits at one corner keeping a low profile. Sometimes he sits all day patiently. But when he strikes it is usually to catch a large juicy fly tangled in his web, 5 times its size. Method and patience wins the day.
Hi Ramridge,
Exactly!
For me, my use of TA means that I don't have cash invested in a high quality company that is either trending south or consolidating.
I currently have about 20% cash and a list of about 10 high quality stocks that have passed my filters and I'm just waiting for them to break out.
"Come into my web" said the spider to the fly
Cheers
Phil
Hi Phil -
OK. Now here is my conundrum. How do I catch the shares that seem to defy gravity?
Examples, AO World, Asos in its early days, i.e. those which show a near 45 degrees constant rise over months/ years, and on fundamental grounds they are just laughed off.
TA and FA miss these completely.
I have been scratching my head over these for some time, but haven't come across any sensible approach, researched or otherwise.
I'm not worried about missing them.
As I said in another thread I rather find 10 double baggers than trying to chase a ten bagger.
Cheers
Phil
Hi Ramridge,
Try using a 50 MA, for example, or find a period that fits the bounce points of that particular trend. Try and buy when it pulls back to this MA. I often use lines of support but it's usually best to use log scales to make this work for longer periods. Look for RSI and MACD divergence.... but remember nothing is built in stone and what you need to try and do is get the 60-70% probability on your side.
Put trending shares into a dedicated watch portfolio and look at it every few days to spot the buying points.
Again I agree with PhilH and also Ed Croft's recent article on forum fun...IGNORE them.....rather spend that time honing your knowledge.
However, as with these comments/forums it does help to weather what can be a solitary pastime!
Ramridge, the answer lies in momentum trading which is neither FA or TA.
Forgot to note that a (TA) price/RSI divergence just occurred....so there's a 60-70% chance that POWR is near a turnaround..... not that I believe in that sort of thing, for around 30-40% of the times it happens... :)
I just came across this irritating article and thought that perhaps the tone of these articles might be changed with the forthcoming charting enhancements in Stockopedia. Why bother investing time and money improving the charting aspect of Stockopedia if charting has been shown to be so cr**ap!! :) I've been a 'chartist' 20+yrs and my particular problem is with overtrading, NOT with the charting itself.
I decided to look at fundamentals more, (hence my recent membership of Stockopedia) but am shocked at how fundamental estimates appear to be chronologically detached from, or even in opposition to, what is happening to the price chart. Any price reaction to fundamental wizardry is often months or more apart....in either direction!
Also fundamental data, by its nature, is usually MONTHS out of date, (except for profit warnings!!) and is only available bi-annually in the UK. IF you're lucky the company reports may even be accurate AND honest !! (think Tesco!).
I believe that the only reason why investing, using fundamental data, might APPEAR to be more effective is that, due to its nature, investors are much more likely to be longer term holders and much less prone to overtrading.... which, bizarrely, can be more fun than making money!! :) :)
Take Powerflute Oyj, for example....enthused by a ninety niner type ranking in March, I bought it 'technically' on March 11th 2016 as it was hovering around on support. It didn't hold, so I sold it on March 24th. This is an example of what I am saying; great fundamentals but the share has just continued down steadily whilst merrily ignoring the great fundamental ranking and all the fundamental chat. This is NOT untypical and sure, the share will turn around EVENTUALLY and this is why a fundamental holder might hold on, BUT you've lost the TIME....and in investing, time can and should be money! I was tickled by a fundamental investor who said that he had held a particular share 'since the beginning of time' !!! :) 'One day your Pri(n)ce will come!! Good that.... just made it up! :)
As it happens Powerflute OMG :) was a CLEAR and OBVIOUS technical buy mid 2013, as it broke out of a long term, 5+ yr, resistance which started at the end of 2009. You could have bought it at around 25p and sold it technically when it broke down through resistance in Feb 2016... a 3 bagger. Just taking this share as an example of one I've bought recently due to glowing ranking and impatience, I would say that over the last number of years, Technical Analysis beats Fundamentals hands down. I wonder what the fundamentals were at the break out at the end of 2009..... must see if I can work out how to find that.
The POWR share price has been in a steady decline for ten months and I suspect that it will have been a 90+ ranking stock all that time. WHY tie up your money in such a stock, for all that time, when all you need to do is to watch for a proper turnaround....and by then the fundamentals might have deteriorated!! I was too premature and impatient and dazzled by the high ranking. :)
Now, if you find good TA breakouts etc COMBINED WITH good rankings THAT is the way to go...IM fairly HO.
You won't hear any complaints from me about integrating TA. My personal choice is using Ichimoku to time purchases and sales of companies that pass my Stockopedia filters. I also use Point n Figure Charts to generate price targets which help me assess risk/reward.
To all the detractors I just ask to see their performance in comparison to my publicly available 22% 3 year annualised return. Perhaps consider asking yourself ... "Of the people I chose to 'listen' to, how much do I know about their investing performance?"
Absolutely. Here's a few corkers I've caught in the last 3 months ...
Meet Me up 109% in last 3 months ... I've got a 118% profit since purchase in May. Currently StockRank 79 which has dropped since I bought it in early May
H & R AG up 55% in last 3 months ... I've got a 32% profit since purchase in June, Currently StockRank of 99.
Saracen Mineral Holdings up 54% in last 3 months ... I've got a 60% profit since purchase in May, Currently StockRank of 77 dropped since purchase in May.
Harboes Bryggeri A/S up 29% in last 3 months ... I've got a 28% profit since purchase in June, Currently StockRank of 95
Astec Industries up 25% in last 3 months ... I've got a 32% profit since purchase in May, Currently StockRank of 90
But still people seem to be determined to know everything about a company they invest in, to know when a CEO/CFO breaks winds and what that might mean. Kidding themselves that they know enough about the business to be sensible investors, not these fly by night traders.
Hey ho, each to their own.
Best of luck
Phil
Hi Phil
Do you have any books about charting in particular Ichimoku and Point n Figure charts that you would recommend.
TIA.
Imran.
Hi Imran,
These are my two reference texts but it was a few years ago when I first bought them.
I was able to write my won charting software from both of these texts so they are very detailed in terms of explaining how the charts are constructed and why/how that's useful.
Point n Figure
The Definitive Guide to Point and Figure: A Comprehensive Guide to the Theory and Practical Use of the Point and Figure Charting Method
Ichimoku Charting
Trading with Ichimoku Clouds: The Essential Guide to Ichimoku Kinko Hyo Technical Analysis
I hope that helps
Phil
Hello again,
I'm certainly not a cheerleader for a pure TA based approach. I've tried that and it was just as unsuccessful as following story cheerleaders on forums.
However for me an integrated Fundamental & Technical approach has worked really well. Using fundamental Stockopedia filters allied with some TA to identify breakouts, supports and resistance levels.
To those that think this must produce an inherently risky portfolio here are the 3 year portfolio profiles of my investments. I can't provide overall stats for the consolidated investments so I'll provide the constituents.
My SIPP
My ISA
Partner's ISA
Generally I've been able to generate high alpha with low beta, low information error and generally high Sharpe ratios. R-Squared also indicates that the portfolios are not overly linked to the performance of the underlying index.
The data is provided directly from my YouInvest portfolios.
I hope that helps
Phil
Hi PhilH,
Just been doing some research on Ichimoku clouds. Interesting stuff and I put some stocks on my watchlist through the ichimoku trader website to see what they came up with.
Are you saying that if you had a share on your watchlist (lets say with a high stockrank) but which didn't have 5 "Bull" signals would you hold off buying until it had all 5 signals?
or does it not have to be all 5?
I appreciate that it may not be easy (and you may not want to) explain your full approach to your investing here but any pointers for investors looking at sensible combining of ichimoku TA with fundamentals to time buys and sells would be appreciated.
cheers
Carey
Sorry I'm in deepest Cornwall so don't have the best signal on my phone ...
Ideally 5 bullish signals plus if I look left on the chart I don't want to see any price action above the current price that might interfere with a breakout. This previous price action is/are called 'shadows'. That's why I like stocks that are posting new highs or new recent highs as they have less 'shadows'. This also means that the trailing line (the chikou) has loads of space around it. When this line starts to tangle with the price action it indicates that the stock has started to consolidate. I don't want to purchase stocks that are consolidating.
For example one stock I've been tracking for a whille is Austevoll Seafood ASA which trades on the Olso exchange with the ticker AUSS. If you bring up the Ichimoku chart ... I've been waiting for a break over 75 Euros due to the shadow cast by the high on May 25.
Kudelski SA which trades on the Zurich exchange is another example I've been tracking waiting for it to break over 20 CHF.
So I run Stocko filters to spit out High Quality & High Momentum selections, then I look at the Ichimoku charts to see if I'm happy with the price action. If not I set a target where I would be and wait. When/If it hits that point, I revisit Checklist feature of Stocko and assess if the stock would still pass my Stocko filter.
Does that make sense?
Phil
Hi,
Yes, that makes sense. Thanks for the info, i'll look into it some more. It would be interesting to do some studies into the Ichimoku signals using Stockopedia data.
I wonder what would happen if there was a Stockopedia Screen where all stocks in the index were processed each day and any stock which had just achieved 5 Bull signals and which were at a 3 month price high (or maybe 6 months) were promoted into the screen results. Any which then lost one or more of their bull signals would then be demoted from the screen.
I would be interested to see how that screen would do compared to other Guru screens - maybe a job for Ed Croft and team! :-)
cheers
Carey
I don't think this kind of article should be posted on a web site trying to help investors. Both fundamental and technical analysis are powerful tools and it is up to each individual what they do with them. I for one am happy that I understand what support and resistance means.
Find a method, be it fundamental or technical, that works for you. Don't discredit others, let them get on with it for the simple reason that if you are right, you will make more money from them being wrong. My guess is the best fundamental and technical strategies don't get written about, simply because their inventors are too busy enjoying the high life!
For what its worth, Anthony Bolton who is a great fundamental investor said he'd never invest without looking at a chart, and if he was only allowed one regular piece of information to run a portfolio, it would be a chart book.
Looks like an interesting book on TA - http://www.amazon.com/dp/0470008741/
I agree that technical analysis is a giant house of mirrors but that doesn't mean that there is no truth to be found in it. The New Zealand study you quoted only tested the 4 oldest and crudest methods, no longer used by any successful trader (these strategies were popularized during the commodity boom of tbe 1970's and were wildly profitable then). We could do a similar study on fundamental analysis and prove that P/E ratios and book value are useless, but would that disprove all of fundamental analysis? What would we have left?
A nice skeptical discussion of this can be found at http://skepticaltradingstrategies.com/index/does-technical-analysis-work/
you could actually remove the charts and trade with both fundamental and technical analysis using only a spreadsheet. But that wouldn't be good eye candy.
I think less focus on pitting two sides of the same coin and more focus on developing profitable strategy, regardless of the adjectives placed on it.
This trader thinks he can be 40% right with TA patterns and make money to retire:
http://peterlbrandt.com/chart-trading-for-dummies/
Essentially he is calling you a dummy. He says that when a pattern fails he is not wrong.
Can you write a blog to rebut his assertions? or Not?
here's my original-research contribution to the TA debate. question is: should you chase highly traded shares? here's a graph..
the origin is the barely-visible black circle in the thickest part of the tangle. this is data from the LSE AIM monthly statistics, plotting the change in share price (y axis, rising price is upwards) against change in volume (x axis, rising volume is rightwards, log scales) over the previous month. 5 monthly changes, from august to january. so for instance, a company which rose in the month on increased volume contributes a point in the top right quarter.
not really sure what to make of this. i had a small hope of unearthing a winning strategy of following the money, but all lines switch back towards zero, so it could just be that the past is no guide to the future..
From MoneyWeek trader today;
The euro question has been answered
From John C Burford
How the “ultimate contrarian trade” is playing out
In my 4 January email The ultimate contrarian trade to kick off 2012,
I posed the heretical question: Will the euro stage a big rally? I included the long-term chart showing the uncanny tendency of the euro to make major turns at the year-ends.
I suggested that this is one of the most important charts for 2012.
Here it is again: (see the link below)
---ooo000ooo---
As outrageous as my question seemed then, I believe I have attracted a few more converts to my cause with the subsequent 600 pip rally!
Incidentally, last year when all the talk started of a collapsing euro, I suggested – again, against the mainstream of opinion – that an exit of the weaker members could be very bullish for the euro, as it would leave the northern stronger nations who can withstand a strong currency.
I hope this link works so you can read John Burfords article;
http://du109w.dub109.mail.live.com/mail/InboxLight.aspx?n=854170947&fid=1&fav=1&mid=93f49a42-5250-11e1-9695-00237de46158&fv=1#n=1740349833&fid=1&fav=1&mid=60d21656-526b-11e1-9be8-0
I hope this is a useful addition to the debate here.
I do not do this sort of trading. The only one I do is Soco, where I have a fair idea what is likely to happen.
MadDutch.
Like ee and djp, I am a fundamental investor and very glad I am; it has made all the money I have gained on the stock market over 15 years.
But I do use charts, for example I would not sell when a short term chart is moving up, I wait until it turns.
So why the misleading name "technical" analysis? There is nothing technical about pattern recognition.
I have found a TA investor who forward tests his trades and is honest with his losses. He publishes his trades in 3 or 4 episodes, from entry to exit with progress reports in between. Some trades last over a week.
His name is John Burford and his blog is a free service from MoneyWeek. In my email today, he discusses his short on gold, including what went wrong and what he intends to do now. His graphs are good illustrations of his developing trades, and he tells his readers what he is doing as it happens. He also has some useful video tutorials, which clearly explain different trading methods such as drawing tramlines and Fibronacci. As ee pointed out, some people make money in training; Mr Burford is free of charge, and he does not claim his methods are technical, which inclines me to trust him. Being able to follow his trades is interesting.
I cannot say if his methods work for me; I recognise today's market as a once in a lifetime opportunity and am focused on high dividend blue chips, so have no time for trading games!
MadDutch
Too true we.
The distinction between TA and quanta was very sensible. enough money is punted in the city using at least some element of quant/black box trading that there is probably some element of influence but, as the authors have said, can a Joe schmo beat the hedgies etc?
For me,I'll always be an FA man as the central point is that the market is not efficient and all seeing, especially when it comes to fundamentals.
Just as a matter of curiosity, when did you liquidate your longs and go short before the 2008 crash? Jan 8, 08 for me. Where did you liquidate your longs and go short before the latest break?July 28 for me.
Post your record proving that your method works better than a chart. Put up or shut up.
cordially,
TA author of 8 books.
Probably the most reliable way to make money from TA.......