Yes, this old thing again… Does it work? Or not?
5.5% of trading volume is by retail traders, according to one study. Others has it at well below 10%. I listened to a podcast with a professional FX trader for 50 years, he said they paid absolutely no attention to TA. None. This means that well over 90% of the volume is traded based on other factors. Fundamentals, economic indicators. You would think? No. He said they base desicions on where the money flows. I.e. where the big bucks go. They watched how the big international banks moved, and tried to anticipate. At no stage was TA applied. Why do we, as retail traders, think imagined chart patterns or candles matter? And, most times they dont! If we could get a view of overall volume, and not only our brokers’ volume, we might get a feel of direction.
If looking at a chart indicates that price will do one thing more often than it does another thing, then looking at that chart gives the reader an edge. The edge is possibly only small but anything over 50% is an edge.
For example, I live in the UK. People here have recorded the weather for such a long time that we know the wind blows here from the south-west more than from any other direction. Also if I look at a weather chart and see that there is a low pressure atmospheric area to the south-west of Britain, I can say that there is a better chance that weather system will be coming here soon than there is of it drifting off in any other direction. when the system arrives it will bring strong winds, warm air and lots of rain. It’s not 100%, but I will probably be doing the right thing if I buy an umbrella today.
To get practical, I’m looking at yet another strategy which is TA-based and which I picked up from TheTransparentTrader on Youtube.
It’s a mean reversion strategy. If price closes in the bottom 20% of today’s’ range and this is below the 50EMA, go long. Exit at the first profitable daily close. Put your stop-loss miles away so it probably won’t get hit. Signals are not rare and the win rate is impressive.
My opinion would be both fundamental is technical analysis work. But, it depends on how much experience the trader has to interpret it.
A good technical trader should be able to find instruments that is in demand or the opposite. This is the only way the trader would be able to do an educated guess the likelihood of where the direction should be and then only apply his/her so called favorite indicators for entry. The key is to be able to pick a direction first so that there is a trend for the trader to ride. Most technical trader are too busy to create a strategy that is rely fully on indicators (not downplay those people, if they really found success on it, then who am I to judge right?). The problem with fully rely on indicator is that if the instrument they are trading have no direction, then it doesn’t really matter, the position will get stopped out eventually. You want to be in the market that the larger players are also interested. It’s like you have the best coffee shop in town but if the shop has no demand, nobody would want to go there. It’s gonna close shop soon.
Fundamental analysis is good also if you know how to use it but based on my experience is not that easy to interpret. The easiest way to wait for the news to be released first and then see if the direction can sustain or not. If it sustainable, then maybe can look for the entry to position ourself. Just follow the price.
TBH, for the majority of retail traders, the truth is that we have very little solid information to base decisions on. Whether one looks at fundamentals, indicators, naked charts, what “big banks” are supposedly all doing, or pure market sentiment, we only see a small proportion of the whole picture. And in that respect TA is often the most reliable and informative source that we have.
It is not a question of whether TA “works” in general, rather it is what TA techniques one chooses to apply to price movement and how one builds them into a trading strategy - and then whether one actually trades that strategy or not!!
There are so many TA techniques and approaches available nowadays that certainly most will work some of the time. Question is, do they work often enough to be reliable!
Some techniques are based on trying to determine what price should be doing, i.e. S/R levels, fibonacci retracements, RSI, etc
And other techniques are based on inputting past/current price data into a mathematical formula in order to identify what price is doing now - and then extrapolating that movement into the future.
The point is with TA that it is only a window on what price is actually doing now and what it has done in the past. It is then the trader that tries to interpret some meaning into it and build a strategy concerning what is likely to happen next.
Whatever approach is used, the situation is the same - there is no certainty about where price will go, only a probability. So success in trading is more related to building a strategy with a higher probability and then managing risk exposure to aim at gaining more when we are right than losing when we are wrong.
The only axiom that I adhere to is ‘price has a tendancy to do what it has been doing’ ie. ‘The trend is your friend until the bend in the end’.
Of course, it can stay in a range until it breaks out. I’m no good at range trading but some people are.
As for ‘technical analysis’ other than support and resistance, I would consider to be fortune telling, akin to reading tea leaves in a tea cup.
And yet many traders (including me ) use, for example, MA’s as a means of indicating precisely that: - when the trend momentum is continuing or when it is waning as we enter a consolidation/reversal phase!
Which just goes to show that the effectiveness of TA is down to how it is used rather than any absolute value. An MA will go up when price rises and go down when price falls. It has to, that is the formula. But that alone does not make it work at all in terms of trader profitability/consistency!
I, on the other hand, have never had any use for so-called support/resistance levels. I see no justification why prices should rebound off a level just because it has done so before (it does - until it doesn’t!). Just goes to show how personal TA interpretation really is - which brings us to the comment by @dushimes above:
@WeRideAtDawn You may be absolutely right. Retail traders may look like bottom feeders in a fish tank swimming to survive or to be eaten by sharks.
Which Podcast you are referring to? Can you please share with us?
On the contrary, I have seen retail traders that are successful and making money. So, it is possible to make money. It is just a matter of practice and mastering it.
Many professionals employed in the multi-national banks and funds will say that TA doesn’t work, and it’s therefore impossible for a private retail forex trader to make money.
But that’s like asking Lewis Hamilton if a Citroen Ami is a economical and practical runabout.
Anyway, what are they going to say? - Maybe something like, “Oh yes, I know I’m on a 6-figure salary but in practice any herbert with a cheap PC can make money trading forex.” Hardly likely.
@tommor I believe TA works up to some extent. Yes, economics works too and it’s important and of course, big banks rock the market, and Algo traders messing the charts too …
The major question is, what retail traders “Bottom Feeders” can do to survive and not be eaten by sharks?
It’s very difficult.
@tommor I agree with you. But economics may set the direction in the long run. it brings me to the famous question of which method works better … Intraday, Swing, or long-term trade … and we know how this discussion goes …
I take the easy route. I acknowledge the importance of economics but I can’t start to understand it. So I track which currencies are above or below the 50EMA, and this tells me which pairs to be long or short.
) use, for example, MA’s as a means of indicating precisely that: - when the trend momentum is continuing or when it is waning as we enter a consolidation/reversal phase! 