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     mosaic1996
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Username: mosaic1996
Post Number: 1394
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| | Thursday, April 05, 2007 - 05:16 pm: |  
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I know that Technical Analysis works in the sense that it can give reasonably reliable indications that a stock is more likely to move up than down (or vice versa). In other words, systems with relatively high win loss ratio (say 60% to 90%?).
This is distinct from TA approaches that rely more heavily on stop-loss/money management aspects to make a system profitable. In other words, systems with a lower win-loss ratio (say 40% to 60%).
So my question is, why/how does TA reveal opportunities that have a relatively high probability of producing a profit?
Cheers,
Mosaic
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hilarius
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Username: hilarius
Post Number: 2157
Registered: 04-2004
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| | Thursday, April 05, 2007 - 06:13 pm: |
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Stop Losses and Money Management are not part of TA
They can be used and are used by people who select with fundamental analysis or FA+TA
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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hilarius
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Username: hilarius
Post Number: 2158
Registered: 04-2004
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| | Thursday, April 05, 2007 - 10:51 pm: |
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TA works for the same reason that Pavlov's dog got fed when he (the dog) learned to ring the bell
He (the dog) got fed when he learned a particular action was related to a particular reward
Books have been published giving the probability of a future reward in the form of a price rise following various patterns on charts
If enough rewards result from trades based on the repetitive recognition of chart patterns it is reasonable to accept their predictive value ... otherwise it is not reasonable to rely on charts alone
[As we have discussed before I make no distinction between "probability" and "predictability". They are one and the same and I infer no greater probability to a prediction than I do to a probability. They are interchangeable terms with identical meaning]
In short if a reward follows often enough from a given chart pattern ... why not repeat the ringing of the bell i.e. the entry into the stock?
With Best Wishes
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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mosaic1996
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Username: mosaic1996
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| | Saturday, April 07, 2007 - 12:45 pm: |
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Hilarius,
I was really looking for a discussion on
* what causes the patterns to form
Cheers,
Mosaic
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hilarius
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Username: hilarius
Post Number: 2159
Registered: 04-2004
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| | Saturday, April 07, 2007 - 03:39 pm: |
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Mosaic
That is a most interesting question
I have been trying to recall which of the patterns were found to be the most reliable (an expensive book which I do not own by Bulkowski has provided data)
As I recall one of the most reliable (after eliminating a small number of false breakouts) is the move out of a rectangular consolidation
What is said to be depicted in the pattern as it forms is a contest of wills between bulls driving the price up and bears driving the the price down, creating a ranging consolidation pattern within upper and lower limits which neither are prepared to breach, perhaps because of fear of the other group
When a decisive move away from the consolidation occurs many others perceive that the war of wills has been decided and the inactive observers then become active participants in the resulting price trend
A similar battle of wills can be seen in ascending and descending triangles
I suppose the deeper question is what motivates anyone to buy anything and what networks if any operate between players during periods of consolidation and breakout
It would be interesting to catalogue every secret thought of every market participant and their tolerance to price falls and rises
I suspect that even if we could wire the brains of all participants to a central computer we might still have difficulty in monitoring the resulting behaviour patterns or even describing them
Some scientists at the Santa Fe Institute were given the task of analysing the causes of major events, from avalanches to weather events to economic collapses to political collapses such as the end of Apartheid and the Iron Curtain
They then received funding to model the entire world financial system ... and from there I believe the project moved in house to one of the larger investment institutions
Now they all are modelling markets and have their algorithmic models from which they are said to be making billions
Could the collective skills of IC members model THE CAUSES of price patterns? Or would this be merely re-inventing the wheel?
If patterns work do we need to know why they work?
I confess I don't know why the patterns form ... other than speculating about the competing behaviour of bears and bulls and their quest for certainty in uncertain markets ... trends then become patterns to follow and the blind perhaps follow the blind by copying the behaviour of others (momentum trading) ... so creating trend patterns where none previously existed
(I agree that it would be interesting to know how and why patterns work ... but is the science of discovering how and why they work accessible? I don't know that the science exists ... if it did we might be able to predict the formation of a pattern before it started and that would be an awesome trading edge.)
Remembering One Tel and HIH perhaps the key words are greed and fear ... but the precise measurement of greed and fear in patterns will I suspect remain a mystery revealed only as major trend changes happen
Clearly though greed and fear do distort underlying fair value, available from fundamental analysis
In the longer term I like Weinstein's stages which depict (1) Preparation (2) Creative Energy and Growth (3) Consolidation and Maturity (4) Competitive Deterioration
These are patterns which were seen in the assumption of power from the Greeks to the Romans, the expansion of the Roman Empire, a period of apparent dominance, and then the Decline and Fall. These patterns are seen in miniature in the creation, growth, maturity and decline of most human enterprises.
The one exception to this rule is the Church, against which we are assured the gates of hell will not prevail
Perhaps then prayer is a means to discovering truth?
You could of course reply, in the words of Pontius Pilate, "Truth, what is truth?"
That is a good question, to which I have a suggested answer but far be it from me to introduce spirituality into this materially driven Forum
With Best Wishes
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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msparks
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Username: msparks
Post Number: 921
Registered: 10-2004
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| | Saturday, April 07, 2007 - 04:19 pm: |
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Try the placebo effect.
I tell you a pattern means this so you act accordingly.
This happens because there are hundreds of ta guru's looking for the pattern and know the probability of each one.
It is a pattern of human psycology.
http://www.marketscreen.com/help/chartpatterns/default.asp?hideHF=&Num=110
or look at candles and the psycology associated with candle patterns
What does Easter mean anyhow ?
Someone told me the eggs represent new life, re birth, but bunny rabbits don't lay eggs, chooks lay eggs.
Go Figure, who thought this up anyhow ?
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hilarius
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Username: hilarius
Post Number: 2160
Registered: 04-2004
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| | Saturday, April 07, 2007 - 04:56 pm: |
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Just another placebo effect :-
"The bunny was first used as a symbol of Easter in 16th century Germany, where it was first mentioned in German writings. The first edible Easter bunnies, made primarily of pastry and sugar, were produced in Germany as well, during the early 1800s. Also in Germany, children made nests of grass and placed them in their yards. They believed the Easter Bunny would fill these baskets with brightly decorated eggs during the night."
We can also thank Germany for the St Matthew Passion and the St John Passion of Johann Sebastian Bach
Take your pick 
Perhaps we could persuade the shopping centres to play the works of Bach, and donate the profits from the sale of Easter Eggs to the needy of the world?
And possibly pigs might fly
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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eric
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Username: eric
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| | Saturday, April 07, 2007 - 05:14 pm: |
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Hilarius, I agree with you about Weinstein's "pattern" of the 4 stages. And indeed these 4 stages have been a force in our history all along. As a matter of fact, they are also a psychological force in our life. Look at marriage p. ex.
Preparation could well be courtship. Many courtships do not go beyond this stage, as does Weinstein's Stage 1. Some charts stay in there for a very long time.
Creative Energy and Growth commences when we are entering marriage with all our good intentions and promises. Does not a stock in Stage 2 give us this feeling of joy and hope? Some, as in marriage, are in Stage 2 for a very long time. Some wither quickly.
Consolidation and maturity is a very interesting stage, both in marriage and with stocks. Sometimes this stage last for a very long time, indeed in marriage, forever (or at leasts as long as we last). For some it is a very short stage, boredom sets in and we enter the stage of decline. Stock retreats, marriage gets boring and dies a slow and lonely death. Well, c'est la vie.
One really can relate these stages to anything in life.
And what is truth? Well, your truth may well be different to my truth, and our truth may be different to everybody else's truth. In the end, I believe, the only truth is the one that is buried in the deepest laws of nature, which probably no human being has really discovered.
For what it is worth.
And by the way, Weinstein'r 4 Stages have been my trading bible for a very long time, with much success. Thank you Mr Weinstein, this year you are sending me to Thailand for 3 months.
Eric
Time frame: as long as it takes
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holycow
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Username: holycow
Post Number: 2955
Registered: 08-2004
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| | Saturday, April 07, 2007 - 07:09 pm: |
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Mosaic,
Let me try...
1) What cause patterns to form? My own conclusion is they are due to a combination of factors: a) supply and demand of shares, b) stock investors/traders reaction of the stock fundamentals and price, manifested by a combination of human greed and fear - greed for profit, fear of missing out, fear of losing money, etc
2) Stock price may go up or down, fundamentals may change with time, human basic emotion of greed and fear doesn't change and hence chart pattern repeats itself when a "similar" market condition appears although the stock price may be different (higher or lower).
3) Some of the market cliche probably reflects what is behind the chart patterns... for example: a) price has memory - this forms the basis of support and resistance "concept", b) price falls on its own weight - as a result of profit taking, c) the trend is your friend - trade with the trend and not against it (true up to a point), etc...
4) A generalised equation: stock price movement = stock fundamentals + stock/market sentiment. Many use FA to attempt to understand stock fundamentals, this tends to be logical and maths oriented. TA/chart patterns are used to study the sentiment or the psychological part of the equation. Both FA and TA work but they have to be applied in the "correct" way, ie, say, in terms of timing (or Weinstein's various stages), in temrs of the big picture view as the background/foundation behind certain market/stock movement from fundamental angle.
There's no reason why FA and TA cannot be applied together, but to do it correctly and properly require a great deal more discipline and a broadbase understanding of big picture issues and interplay of human psychology (greed and fear factors).
5) Referring to the attached charts: JHX and BLD. They are chosen because of a) they are in the same group, so they can provide us a view of how the market view the group as well as how each stock fundamental influenes their individual stock price.
6) The chart on the left is the daily chart of JHX, starting from the top...
6.1) pt "0" - shows a H&S formation, why it forms? As a result of human reaction to greed and fear - the first time when the stock price reaches a new high, profit takers set in and took their profit - fundamentally their exit of the market may be due to JHX's court case, could be due to the US building industry slumping, etc. Emotionally, it could be a simple case of they are looking at a lot of profit sitting on the table, they just want to lock it in for fear of losing it (some of them may have bought in as low as 5.50 or 6.0.
The stock price rebounded higher as a result of those who had missed out the in the recent new high, jumped in and grabbed their lots. These people were driven by greed and a strong belief of a bullish market and in this stock.
6.2) The stock price rebounded higher, but the same people who sold out in the first spike were not done, they took more profit, and as a result the price dropped, back to the previous support. This time, the same group of buyers moved in, may be with a few more less experienced speculators, they bought the lots thinking that since it worked the first time, why not the second?
6.3) The stock price had a quick rebound but were quickly sold down, this time, the more experienced traders and the "big profit takers" behind the recent sell down knew the game was up and many exited the stock as shown by the sudden increased in volume - pt "1". (note: they could only milk the market that much for that long...).
7) pt "2" shows the effect of "price has memory". It also shows why support and resistance exist and work - because most people when come to buying and selling their stock, they think in terms of profit/loss and not just stock price or just number of shares. They remember how much and when they bought and they will be thinking in terms of how much loss or profit they are taking if they were to sell the stock - this has the effect of making them to: a) not selling (if there's a loss), b) buying more (the perception of "cheap" price since that's the reason why they bought in the first place).
The support line "s1" illustrates this very well - at 8.15 there are quite a few people who are thinking it's either quite cheap or quite expensive to buy/sell. This level has a "psychological" impact to those who own this stock - it's "the line drawn in the sand" - if the price crosses this line, they will sell and hence it is necessary for the "bulls" to hold tight or see the price collapses after this level. (The overall shape of a H&S on the right hand side doesn't bode well for the price to hold as H&S pattern is a reflection of people are beginning to "see" the stock as not that good a stock to hold as a result of price deterioration in the last two months. These folks are worrying and the fear is driving them having second thought of holding on.
8) pt "3" shows another support level @7.30
9) pt "4" shows a "base"/double top/triple top/double bottom/rectangle had been made. The "SS" support was holding. The pattern description is not important. What is important is the stock price doesn't fall through support anymore( hence a base). This is saying the selling has stopped. It also says the stock price at 6.50 is
"really cheap" - bottom pickers began their basement bargain hunting. And the price bounced since there were more buyers than sellers - the supply and demand of shares has a net effect of pushing up the stock price here.
10) The "up cycle" began with resistance level taken out due to buying outstripping selling (Demand greater than supply, a stock price needs (sustained) buying to move up). Pt "6" shows a triangle being formed and there was a "breakout". Not suprisingly the triangle happened near 8.15 since that price level has a strong psychological impact on the stock holders. The bulls and bears had a fight here as shown by the triangle - a pattern reflecting an indecisive crowd - the bulls wanted to push higher but the bears (those who missed out selling when the price was coming down) wanted to get out of this "loser". Eventually the bulls won as the "breakout" shows the buying took out all the sellers.
11) At pt "7", history repeats itself one more time - the price has memory - this time, those people who got "hurt" in the previous selldown had learned their lesson. They were not hanging around to wait and see, the moment the price touches 10.00, many considered the number "ten" as their lucky number and they promptly exited the stock. History again repeated as shown by the double top made near 10.00 - this time most people learned well from their H&S lesson. There's no time for the crowd to form a H&S - they learn their lesson of not holding on in two lessons as in double top instead of three as in H&S (well done!)
12) The price collapsed after the double top and now it is sitting on "s1" - that strong psychological level again - the bulls and bears are again slugging it out. If the bears win, the price will drop lower, possibly to test the support at "SS". If the bulls win, the price may bounce from here and test a high of 9.50 but... looking at it from a fundamental angle, with the weak US property market and the generally poorly performing building sector, if I were to draw a conclusion here, it has to be "bad news". In terms of risk/reward in this stock, I think it doesn't stack up, at best it's about 50/50, but with a poor Fa view, I think I would rate it as 70/30.
I am actually shorting this stock just in case anyone asks.
13) This post has got out of hand... I will stop here. As an exercise, draw your own conclusion in BLD. Some of the points worth considering are: a) BLD's price pattern and the frequent more "violent" price spikes, b) BLD's business and its geographical business distribution - the impact of the local building sector and the impact of the US building sector, c) other FA considerations.
14) ps: please excuse the lousy spelling and poor grammar - too darn lazy at this point to correct them.
15) Happy Easter Everyone.
JHX/BLD Daily
HC
"According to some, reading and believing in what I have written can lead you down the road of misery, hence you are advised to eat more vegetables and drink plenty of water, or you'll end up with a big bad case of constipation..."
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msparks
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Username: msparks
Post Number: 922
Registered: 10-2004
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| | Saturday, April 07, 2007 - 08:58 pm: |
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HC
Happy Easter
Would it be possible to drop those charts in individually, bit small to see the points and wouldn't want to waste all that analysis due to poor eyesight.
Cheers
JHX was interesting because with all the talk of asbestos etc and court case and tax implications, and management bonus's the price just kept going up.
Re BLD, have you got any theory on why the GAP can be such a strong "stop" for a chart as with the BLD chart.
I find it amazing that a gap can have so much "power" over price action, it happens all the time, or a lot anyhow.
Anyone listening to the news would have thought the company was in the doldrums yet the price kept increasing.
Seems the profits too good for any negative press , and the press think they control the world.
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holycow
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Username: holycow
Post Number: 2956
Registered: 08-2004
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| | Monday, April 09, 2007 - 11:18 am: |
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JHX Daily
BLD Daily
1) BLD, the gap @9.0 seems like a good place to take profit, but if you look a little to the left, you can see there's a fair amount of resistance immediately above 9.00. In any case, if you are a trader and when you see the stock price kind of stuck at 9 and is not moving higher and then the SSE meltdown hit the global market, it's quite natural for the trader to take their profit and exit the stock.
2) The frequent price spikes in BLD I believe indicates this stock has a lot of trading activities going on esp before/near divy time. Sometimes it's important to distinguish the difference between free floats and the total number of share being held by the long term investment funds. Frequent sizeable fluctuations are the work of the (big) traders. My assumption here, the instos don't normally trade their stocks other than loaning them out to the shorties or writing warrants with their holdings. (I am however quite open to the argument that this assumption could be wrong).
3) This stock has the tendency to form H&S pattern, so the latest H&S may not "play" out as anticipated.
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