Does technical analysis work?

Appreciated. I don’t blame you … this is a big a challenge to retail traders …

Great discussion! Lots of good points and insight. I have learned and also been thinking. My “main” point was that the big bucks dont care about TA. However, they do care about value. When the price is good for a long or a short. So, when Pair X drops (or rises) to a certain level, they feel it is the right time to buy (or sell). They use their tools, calculations, observations. To us, this manifest in the form of chart and candlestick patterns. So they dont use TA, but their actions unintentionally form patterns, which we can see and act upon. I.e. there is a certain price that they think Pair x is a buy/sell, based on whatever. Each time the price is in tis area, they will act. We see this as support/resistance. And DT, DB etc. So patterns are formed, based on behavior of big volumes, even if the volumes do not pay attention to the patterns being created. I have more thoughts on this, and will be able to articulate better, but now it is late and I need to sleep :slight_smile: Keep the discussion going!

It (technical analysis; a.k.a., “TA”) does work, kind of, but in my (4 decades) experience it seems so far hands-on trade management works better. Which is probably why iconic traders like Tim Morge keep a stable of trading gnomes monitoring his famous TA algo’s.

This opinion stems from the efforts of my son and I to write bots to trade for us whilst we (want to) lounge in the sun on some tropical beach, umbrella drinks in hand, lately bringing AI–the epitome of “technical trading” in some sense–to bear on the problem.

Initially we perceived the problem to be picking probabilistic entries and exits at which TA purports to excel (see especially anything published by Tim Morge on his work with Andrews’ median lines).

Still exploring ideas but beginning to think we’re going to abandon pattern prediction, especially the idea of nailing the entry and/or exit except as possibly better than random entry (for which management algo’s have long existed) in favor of teaching the AI to trade. This would be the old Q-Learning path rather than neural nets or the new “transformational networks” in Google’s offering.

All of which Tim Morge proved doesn’t work, but that was a long time ago, before AI.

The same issue–pseudo random behavior of price–let’s call it, that defeats automated picking of foolproof entries and exits is what allows trade management to work.

In other words, age old fact remains: don’t try to pick entries. Learn how to pick exits.


The fact that TA is highly subjective, is what makes me think. Every price move and formation is seen differently by each trader. I see a pattern where you see randomness. You see a perfect double top, I see consolidation. I may have a set of rules to decide if a pattern is valid, you might have totally different rules. Adding all this together, the result is… randomness. Add all the false formations, false breakouts, and the fact that even if all your rules and guidelines line up, price might still decide to do something totally different. Of course, fundamental analysis is the same, people and analysts interpret numbers, statements and market conditions differently, leading to one saying Sell and the other Buy. Again, subjective. What I have experienced, is you need to pay attention to fundamental news, and with regards to TA, support and resistance may be the best tools. I also find ADX to work pretty well, but have not enough time and data to say this definitively. Candlestick patterns is also a double edged sword, but this might very well be down to my inexperience. All this being said, I will keep looking at the charts, hoping to see what everyone else is missing…

I am also intrigued by AI. I am not a computer scientist, and dont know computer programming, and so have difficulties in how to approach this. I can ask ChatGPT to code an indicator, but that is hardly a game changer. I looked up Tim Morge, but found his website to be pretty much under construction, and his MarketGeometry educational center to be offline. Any tips on further reading about TA and AI would be much appreciated!

My take on TA is that most people try to make it far more complicated than it needs to be to try and find an edge. They add multiple indicators and use strategies that are based off multiple indicators that churn our random results. For example, I know a guy who buys on engulfing candles when above a moving average and vice versa… This sounds logical, two strong signals = strength right? But the problem is the two are completely uncorrelated and therefore give random results. an engulfing candle can happen at any time for many reasons and on it’s own can’t be seen as strength. Price can also be above a moving average at any given time without being strong.

So to be a great TA trader you need to understand price action first. Understand when you have an edge, what the conditions are like, what the market feels like… THEN use TA to determine how to enter, where to risk and where to take profit. Use TA to spot a point where momentum is likely to come in for an entry, where your idea would be disproven for a stop and then set your R:R to maximize the trades potential.

If you don’t use price action then TA won’t work. TA strategies will give random results when not applying some form of price action reading because you will get so many random signals when your edge is not in play.

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Technical analysis works great. But we need consistency in actions and trades. Therefore, you need to create your own trading strategy, it will signal when to make trades, and when to wait patiently and not enter the market until there are conditions for this. Only such systematicity and calculation will help you make money on Forex.

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I heard a long time ago, that in FX, the only analysis tool you have is TA. The reason being that there are a million factors influencing an exchange rate, and in FX you are dealing with two. No one can be on top of all the influencing factors. My experience is that is true. The influencing factors part. TA is not used by the big players, who can actually influence a price, so our efforts at identifying double tops etc. are futile. The amount of players and their ability to influence is simply too big. On stocks however, I feel TA carries much more weight. This is because many times, individual traders play a bigger role in stocks. The sheep herd will do what the sheep herd does.

A widespread but actually very mistaken belief - as can be seen from many things.

For example, all the different settings for Ichimoku indicators used by traders of various Japanese banks; or those seen in standard textbooks (e.g. “Dynamic Technical Analysis”) written by current/former institutional traders; or on the authority sites like Investopedia which explain that indicators are widely used by institutional traders; or even just from all the interviews with expert institutional traders in Schwager’s “Market Wizards” books, in which they describe the TA used on institutional trading floors.

The double-tops etc that we identify are on the charts of the counterparty market makers against whom we’re trading, so they’re relevant to our bets, not to the market because our “trades” aren’t in a market.

I agree with you about that.

I don’t think that’s the reason at all!! :face_with_spiral_eyes:

To me (and to the authors of the books I’ve read) it seems clear that the reason is simply that one - the stock market - is a centralized (i.e. real/actual/genuine) market in which the price movements are determined by the buying/selling-pressures of the market participants, while the other isn’t actually a “market” at all in any meaningful sense of the term, but just sets of artificially assembled “prices” created for the sole purpose of taking bets on them.

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Thanks for engaging, @Pipsteroid. My comment about big players not using TA is based on conversations with actual traders, and a podcast interview with a trader for 30 years. They all said it was not a factor whatsoever, they relied on fundamentals (economic data release) and demand/supply in the market (on big bank and importers/exporters level). Beyond this I dont have any more insight, just relying on this.
The double top example, I see what you mean. However, it can be argued that the market makers are not acting on such signals, and so the “market” will not move accordingly or because of it. I am somewhat split on this, but in my experience DT and DB are not very reliable, maybe due to this.
The last two items are related, and I think you kind of makes my point in your comment. As the stock market is a “real market”, individual behaviour impacts price at a different level. One is the HFT-traders, which obviously can move prices, but also when lots of retail traders jump on a stock. There is a limited number of shares available to trade, and so the supply/demand structure plays a bigger role (or a role, as in FX there isn’t really a volume factor, as discussed). This, combined with FOMO, day traders and even chat rooms (think GME, AMC), is a large part of the reason a low priced stock can rally 400% and more on news.

I used to hear regularly from a friend who was a long- and medium-term value investor, dealing only in company shares, that he distrusted TA and never used it. His approach, he said, was to study the company’s annual reports, P&L data, chairman’s statements, CEO’s credentials, visit their HQ and branches if possible, talk to managers and directors, study their business strategies, etc. etc. He knew everything about his targets’ NAV, PE, PEG, etc. He never looked at charts, he didn’t even own a computer.

He outlined his methods to me and others numerous times.

But always, before making a buying decision, he would look at the current share price and check where it was a year ago. He liked to fool himself that this was not TA and that he never used TA.

I think your friend was on to something, even if he didnt admit to the charting aspect. A combination of fundamental and TA. I used to work at a broker (bank) that was all fundamental. TA was never considered, and charts were only used to show how price had developed. Then, I worked for a all-in TA broker, where brokers were actually forbidden to mention or look at anything to do with fundamentals. I then switched to a (CFD) broker who combined the two. I found that to be the best strategy. There will be hit and miss with both fundamentals and TA, analysts miss all the time. I think a keen eye on fundamentals, and using TA to place entries and exits, might be a good strategy.

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