When Technical Analysis Fails

The salient point, which everybody ignores, is that TA and Trading are two completely different skills: TA is the analysis of a chart; trading is controlling your emotions and your ability to make split-second decisions.

You can be brilliant at TA and awful at trading. To blame TA for someones inability as a trader is a nonsense and a conclusion that can only be drawn by someone who knows precisely zero on the subject.

I've got it and will read at a later time. It would seem to me, that if you want to evaluate 'Technical Analysis', then you need a definition as a starting point. I've taken this from www.investopedia.com/terms/t/technicalanalysis.asp

Definition of 'Technical Analysis'

A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Take this as a discussion point: if you see on a chart that a share price is dropping, you're unlikely to buy it, you're likely to wait until the price is no longer dropping. This can be done in fact, with or without a chart and in both cases, I personally would argue that it is a simple form of technical analysis. Clearly buying when it's stopped dropping will give you a better long entry than buying 'mid-drop'. So for example if there is no fundamental reason to shy away from the stock, technical analysis has provided a better entry than would be achieved randomly. If you have no plan in place to account for further drops post consolidation, then you're risk is linked to the size of your position. If however, you decide what your risk will be before entering the trade, you'll be stopped out thus limiting your risk (best to understand slippage).
From a quick skim of Hoffman/Sheffrins paper, it seems that investors are categorized based upon self reported preferences e.g. I am a technical analyst or I invest/trade on fundamentals etc. For me that makes interpretation of results quite difficult as it's clear from this website, personal contacts etc that we all have different ways of doing things. At the end of the day, you need to look at the bottom line of your account. If it's going up steadily you're doing ok. If it's not, you need to consider why that might be.

Agree shotry - I don't think it's an absolute drivel.

You can read the whole research article online - it's a pdf file you can google it!

Having access to pen and paper doesn't make you a Great Author!

Interesting piece RC, thanks. A knee jerk reaction to attack it on the basis of it not supporting personally held views would seem to be a mistake. Chris's article represents his summary of the research and he's chosen to conclude that TA has a negative impact upon the results achieved by his study group. There are hints in this precis that TA is being used without sensible risk management i.e. overconfidence about TA leads some traders/investors "to concentrate their portfolios and to take extreme positions in out-of-the-money options". My understanding of Options trading is that the odds are heavily stacked against you anyway so if this relates to 'Options' it may not have the same connotations for Stocks or indices. The only way to form a sensible view would be to access the original research.

Based on the standards of some of the TA you see banded about, particularly by so-called city 'experts', I'm not at all surprised they come to this conclusion.

The definition of an 'expert' is as follows - an 'ex' is a 'has-been'; a 'spurt' is a 'drip under pressure'. I just bet professors consider themselves experts - lol! They should have gone to the Chartsview University and maybe they would have learnt something before talking such drivel.

But, says Professor Shefrin: "technical analysis is not suitable for individual investors." - a pretty damning summary!

Anyway - I'm still enjoying learning about (& applying) technical analysis.

Happy Easter everyone!