60

It's worth noting that Warren Buffett is a value investor, not a trader. As such, it doesn't tell you much about technical analysis or trend following. Instead, he's implying that when the market gets overly excited (overvalued) or panics (undervalued), there are opportunities for long-term profits, assuming you do your due diligence and have an opinion of ...


55

It doesn't literally involve astrology or tea leaf reading... While some people swear by it, technical analysis is often derided as pseudoscience, similar to astrology or tea leaf reading. As it's relatively common, knowing the basic concepts gives you an idea what other market participants might be thinking, especially with regard to support/resistance ...


47

The S&P 500 goes up most of the time. So just assume it always goes up. You will be right most of the time. This is the basis of most investment advice: diversify to match the market rather than try to beat the market. If there were a technical tool that anyone could use that could consistently determine if the S&P were going to go up or down ...


44

Mild vs. Wild Randomness: Focusing on those Risks that Matter and A focus on the exceptions that prove the rule are copies of the original article referenced by the Wikipedia page. The authors are well respected academics so I assume that they have some support for the statement but the article doesn't appear to explain exactly what they assumed. For a ...


40

No, your anecdotal experience is not proof that a concept is flawed. There are many many many many many flaws with TA, but proving something takes a lot more than one person's casual attempts. If I had a profitable strategy, I would not sell it, I wouldn't explain it to anyone, and I probably wouldn't even tell anyone I had it. So no, very unsurprisingly, ...


31

Nassim Taleb is remarkably brilliant. It's his work that's cited in the article. In my opinion, there are 2 choices, a misquote, if the article is wrong, or a misunderstanding on the part of the reader. There are a few things going on. Thanks to member Justin, I fixed the Wikipedia article link. I recall his assertion from the book "The Black Swan" (p275). ...


23

I am strongly skeptical of this. In fact, after reading your question, I did the following: I wrote a little program in python that "simulates" a stock by flipping a coin. Each time the coin comes up heads, the stock's value grows by 1. Each time the coin comes up tails, the stock's value drops by 1. I then group, say, 50 of these steps into a "day", and ...


17

Your questions In the world of technical analysis, is candlestick charting an effective trading tool in timing the markets? It depends on how you define effective. But as a standalone and systematic strategy, it tends not to be profitable. See for example Market Timing with Candlestick Technical Analysis: Using robust statistical techniques, we find ...


17

Since the book was written in 1997, the relevant period would be roughly 1947-1996. Yahoo Finance data starts from 1950, so I will look at "last 47 years" instead. Presumably, the finding by Mandelbrot and Taleb is not so trivial that it would no longer apply to even a slightly different time period. On Jan 3, 1950 the S&P closed $16.66. On December 31, ...


17

It's an analogy. In general, many hold the belief that the typical traders (read: not Warren Buffett levels of money where the simple act of trading can change the market) cannot beat the market in the long run. "Wisdom of the crowd" and all that — everyone has already made their best guess what the price should be and the average of those guesses ...


16

The simple answer: The opening price is the price of the first trade of the day and the closing price is the price of the last trade of the day. And since the stock price change from trade to trade they are usually different.


16

I would go even farther than Victor's answer. There is little evidence that candlestick patterns and technical analysis in general have any predictive power. Even if they did in the past, of which there is some evidence, in modern times they are so easy to do on computers that if they worked algorithmic traders would have scanned almost all traded stocks ...


15

My high school economics teacher mentioned that when she worked on Wall Street, she and her coworker would make daily bets on market performance. Her coworker would use a bunch of market data, and she decided to look at the weather (nice day = market up; gloomy day = market down). She said she won more often, but then again, she's not on Wall Street anymore....


14

There are firms and people doing exactly that: WSJ article Part of my masters thesis was using candle stick analysis and genetic algorithms, but my conclusion is that it is not really possible. The reason was that you needed an exhaustive amount of sell algorithms and one can never be sure that they discovered a sufficient set. Others disagree. ...


13

Let’s simplify it, our example investment is very boring except for one day when it goes crazy. Two investors with same $1,000 initial investment, the market doubles every 7 years except for one day at the end of the first 7 years when it goes up by 50%. The first investor invests for the whole period, the second investor skips just one day. Investor 1: ...


12

I interned for about six months at a firm that employed a few technical analysts, so I'll try to provide what little information I can. Since the bulk of the intra-day trading was decided algorithmically, technical analysts had two main functions: Working with the researchers to translate potentially profitable chart patterns into algorithms for the trading ...


12

I believe you are confused by the vague language. Trading is a process where smart money and institutions take money from the public. Consider the concept of "market cycle". Institutions start a trend, buying in at the bottom, and only then it gets the public's attention and they start buying in higher, chasing the price. When the public is at ...


11

Technical Analysis in general is something to be cognizant of, I don't use a majority of studies and consider them a waste of time. I also use quantitative analysis more so than technical analysis, and prefer the insight it gives into the market. The markets are more about predicting other people's behavior, psychology. So if you are trading an equity ...


11

Why do value investors ignore technical analysis? Technical analysis tries to predict future behavior from past behavior purely by looking at prices (and possibly other stats like volume traded). Fundamental analysis looks at the present fundamental financial attributes of a company (and possibly the recent past of those fundamentals) to predict future ...


10

If you want a book that's a bit more modern than A Random Walk Down Wall Street, try David Aaronson's book, Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals. The author discusses a lot of the evidence for and against certain technical indicators; for example, he discusses how head-and-shoulders ...


10

The "fat" part of the candlestick represents the beginning and ending prices. If the end price is higher than the beginning price the stick will be colored green. If the end price is below the beginning price the stick will be colored red. Typically green sticks are hollow and red are filled in so that up and down movements can be distinguished when shown ...


10

There is no way to accurately predict the movement direction or severety of the stock market or any market index over any time period.


10

I can't speak to the research methods used in that study but Taleb was likely trying to build on his "black swan" hypothesis by showing that the "black swan" trading days have the biggest impact on the market overall. The math behind Mandelbrot's and Taleb's analyses always goes over my head, even though I'm a fan of Taleb's work from a philosophical ...


9

200 period moving average means the average over the last 200 units the chart is in. So if you are looking at a weekly chart the period is weeks, if you are looking at a daily chart the period is daily, if you are looking at an hourly chart the period is hourly, etc.


9

Technical analysis is, by its nature, something that evaluates the past. Making money in stocks requires evaluating the future. If there was a foolproof way to evaluate the future by measuring things in the present and past, everyone would use it and it would stop working (because prices would adjust to reflect it). I think that the story of Peter Lynch ...


9

In theory it is possible, but very impractical. So much so that it approaches the impossible. Also this does not make much sense. Assuming that it takes 100 hours to do proper fundamental analysis on a company the DJIA would take 3000 hours, the S&P 50,000 hours. That seems like an impractical amount of time given the short estimate of 100 hours. ...


8

Technical analysis is based more on psychology than anything else. As an example, if an analyst estimates or believes that a stock is undervalued, or simply wants to re-balance their portfolio, then they will buy some amount, moving the price up. Others in the market see the upwards move as the start of an upwards trend, an indication that the stock is ...


7

The efficient frontier is drawn from the risk-returns of various combinations of portfolio assets. The general theory is described here: Theoretical Basis Calculating the average return of a basket of assets is fairly staightforward. where Xi is the fraction of the investor's funds invested in the i th asset. The calculation of risk (standard deviation, ...


7

The study of technical analysis is generally used (sometimes successfully) to time the markets. There are many aspects to technical analysis, but the simplest form is to look for uptrends and downtrends in the charts. Generally higher highs and higher lows is considered an uptrend. And lower lows and lower highs is considered a downtrend. A trend ...


7

When talking about stocks, we sometimes like to pretend that the prices are completely rational and entirely related to the intrinsic value of the stock. The fact of the matter is that this is not true. In reality, stock prices are affected by human psychology (and human-designed algorithms). If a stock repeatedly approaches a particular price before ...


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