Well, does TA really work?

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david_louisson

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Post Number: 267
Registered: 02-2004

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Monday, October 30, 2006 - 03:56 am:

Does TA really work?

Let's re-phrase the question:
Can the markets be profitably exploited by any kind of systematic approach?

Now let's cut directly to the bottom line.

For a system to be successful:

1) return must exceed risk/drawdown, to the point that the exercise is worthwhile, according to one's personal objectives;

AND

2) risk must be managed (e.g. through use of stoplosses and position sizes) to the point that drawdown is never likely to either:
a) compromise total trading capital irretrievably, OR
b) become emotionally intolerable.

Return and risk on each trade are ultimately determined by entry and exit points.

Assuming a TA-based trend-following system of entries and exits, then, in the time frame that one is trading:

a) if prices happen to trend often enough, and far enough, on balance, to overcome both margin for error (i.e. in being unable to enter/exit exactly at peaks and troughs), and transaction costs; AND

b) if one has the discipline (i.e. courage, patience and confidence) to exploit these trends sufficiently;

THEN one will ultimately profit; otherwise one will ultimately lose.

Of the above: (a) lies outside of the trader's control; (b) lies within it.

I think it's both as simple – and as difficult! – as that.

"Great minds discuss ideas; Average minds discuss events; Small minds discuss people" - Eleanor Roosevelt (1884-1962)

redrover

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Post Number: 775
Registered: 04-2005

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Monday, October 30, 2006 - 07:32 am:

What's the exact wording of that old saying.. something like "Past performance is not a reliable indicator of future performance." ??

resillent1

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Monday, October 30, 2006 - 02:22 pm:

I would think that choosing an appropriate time frame, to allow a meaningful trend to develop, does give you control over “a”.

Incorporating an appropriate time frame into your system won’t save you from bad stock selection (position sizing for this), however it will help you reap the greatest rewards from your positive selections.

A system with a 50/50 win loss ratio will prove profitable over time if you take more $$$ from your winners than you give back on your losers.