About a year ago, I took some time to investigate technical analysis. It was basically motivated by the fact that TA detractors seemed to be almost ideological in their opposition, and that made me think that there might be something to it after all. It was also motivated by the fact that anything that requires assuming that a human system is efficient should be investigated critically. My basic conclusion: I think technical analysis can work, but that there are good and bad ways to do it. Good TA is generally based on some behavioral theory of markets and connects technical signals to those behaviors. Bad TA is generally just an attempt at pattern recognition. Not that pattern recognition can’t work - it’s just that there’s know way to know if the patterns really mean anything if that’s all one’s doing. My initial thoughts http://tinyurl.com/4dr8xl My conclusions http://tinyurl.com/3wspzv
I just finished up reading Covel’s “Trend Following.” What a fascinating read. Here’s a message to all true believers in the Efficient Markets Hypothesis who believe in normal distributions and only fundamentals: Yes, I totally agree with you that markets are perfectly efficient across all time, asset classes, static/dynamic strategies, etc…you are totally right. Technical analysis and trends are ridiculous things. (wink wink) I hope the press continues to perpetuate this belief…since it is the correct one. 
“Trend Following”, was one of the best I read on the subject of invsting based on trend analysis. The book is not heavy on technical analysis, but it gives plenty of examples of how people who learn to read the trend can benefit greatly from it. Another good read is Stock Market Wizards: Interviews, paper. Jack D. Schwager. Also, reading Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score, Andy Kessler, is a super reading (not TA, though). And finally the classic fun to read is this one from the 1950’s “How I Made 2,000,000 in the Stock Market, Nicolas Darvas.”.
man, if im spending all these hours studying TA, it better be worth something. i remember the level 1 cfa review teacher reviewing TA and EMH and he said something along the lines like “yall better hope the markets are not completely efficient cause then you are all wasting your time with this information” people laughed at first, then it was like,“wait a minute…sh*t!”
Hi Dreary, Thanks very much, those are on my list. I’m also starting a subscription to TA of Stocks and Commodities. Good thing I didn’t find out all this mid- or late-career!
Re: Technical Analysis new Posted by: Dreary (IP Logged) [hide posts from this user] Date: October 2, 2008 06:52PM “Trend Following”, was one of the best I read on the subject of invsting based on trend analysis. The book is not heavy on technical analysis, but it gives plenty of examples of how people who learn to read the trend can benefit greatly from it. Another good read is Stock Market Wizards: Interviews, paper. Jack D. Schwager. - - - - - - I just started reading “The New Market Wizards” - - - also by Schwager. Good/Quick read so far - read 70 pages in just a few days.
I easily read 10’s of books on investing, but there are only 5-10 books that I really liked. Those three were one of the best.
Halfway through The New Market Wizards now. One section I like: “” Schwager: Your long term performance has far surpassed the industry average. To what do you attribute your superior track record? Stanley Druckenmiller: George Soros has a philosophy that I have also adopted: The way to build long-term returns is through preservation of capital and home runs. You can be far more aggressive when you’re making good profits. Many managers, once they’re up 30 or 40 percent, will book their year (ie. trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized). The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year. If you can put together a few near 100-percent years and avoid down years, then you can achieve really outstanding long-term returns. Schwager: What else have you learned from Soros? Stanley Druckenmiller: I’ve learned many things from him, but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you can make when you’re right and how much you lose when you’re wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn’t maximize the opportunity. As an example, shortly after I had started working for Soros, I was very bearish on the dollar and put on a large short position against the Deutsche mark. The position had started going in my favor, and I felt rather proud of myself. Soros came into my office, and we talked about the trade. “How big a position do you have?” he asked. “One billion dollars,” I answered. “You call that a position?” he said dismissingly. He encouraged me to double my position. I did, and the trade went dramatically further in our favor. Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough. … Soros is also the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re extremely confident, taking a loss doesn’t bother you. “”
bump.