
A free, complete guide to Technical Analysis - SatyajitSarangi
http://zerodha.com/varsity/module/technical-analysis/
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math
Anyone thinking about doing doing some technical analysis may well become less
enthusiastic about the idea if they first played around with generating some
random time-series with statistics similar to the real thing and then dwelling
on the fact that they look pretty close to the real thing. GARCH(1,1) isn't a
bad place to start (although it's not perfect). I just put up some R code on
github for this here:
[https://github.com/mhowlett/garch11](https://github.com/mhowlett/garch11)
which I was experimenting with in the past. I can't remember the state of it
exactly, but I think it works.

~~~
fleitz
Looking pretty close to the real random and being actually random are two
different things, which is why RNG analysis is so difficult.

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oddtarball
Technical analysis is far from useless. As an active trader, it's the best
tool I have come across. I'm sorry, but to say that it is useless is to admit
pure ignorance, or to admit your failure to grasp the concepts and understand
how to apply them visually and correctly.

People do apply techniques incorrectly, yes. They can get confirmation bias
from it, yes. However, that does not invalidate successful traders who trade
primarily on technicals. Keep in mind that a "tool" is just that - but not
used the same way by everyone - and "this means that" isn't a blanket rule
that always works as described. Everything is part of a larger structural
puzzle. Also, HFT algos will eat your lunch if your hold period is too short.
I don't hold a position for more than a week, MAYBE two, but never less than
45 minutes - and as a retail trader, that makes a huge difference in P/L
ratios over time.

Through my trading experience I have continuously used less fundamentals and
more wonky technical techniques I have come up with. It has given me a massive
edge over whoever is on the other side of the trade, and has pulled me quite a
long way out of debt and into making a nice living doing it on the side. The
side of the story that you don't see in the endless "get rich quick" trading
schemes that promise to teach you all of those super awesome secrets is that
anyone who knows what they're doing isn't spending any time teaching it to the
masses.

But, to get back on topic: Well done with this site! It's a great beginner
guide to understand what a lot of the basics actually mean. Babypips falls
very short.

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thewarrior
But what is the empirical basis to things like Fibbonacci retracement levels ?

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topbanana
They are self fulfilling to an extent - because all the TA day traders are
using the same signals

~~~
math
If that is the case, it would create a market inefficiency which some other
market participant could come along and exploit (anticipate the TAs moves and
act preemptively). Your statement is basically saying there is no one out
there smart enough to do this.

~~~
danteembermage
Not necessarily! Suppose a bunch of noise traders are piling into a stock
because all seven green lights are on in the software they bought for 29.95
from an infomercial. Let's take as an assumption that this algorithm has no
idea what it's doing. The smart money thing to do would be to _buy_ now (since
investors are going to keep buying as they notice their text alerts or sound
alarms or whatever tells them to buy the stock) then sell again knowing full
well you are driving the price further from fundamentals in the short term.
The best response to past irrationality is to trade against it. The best
response to future irrationality is to trade with it. That irrational behavior
might be forecast-able should not be a huge surprise.

Momentum is a well established empirical regularity in stock prices. Knowing
this, you trade with the momentum at then trade against it later. This does
not help momentum go away.

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bubblemachine3k
Technical analysis doesn't have any science backing it up. However, as most
pop books are some form of swing, candlestick, Bollinger bands, mean
reversion, it creates a self-fulfilling prophecy.

If you're going to play the markets, it's quantitative analysis or go broke.
And that is a literal go broke!

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confluence
Funny, I read this is as a free and complete guide to the effects of
confirmation bias.

A free and complete guide to bullshit is just bullshit.

Technical analysis is a farce.

~~~
akhatri_aus
Its free to support their main business. Zerodha looks to be a brokerage.

~~~
mahmud
So, baiting more suckers, I mean, "day traders".

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markovbling
Technical analysis is the homeopathy of finance.

~~~
melling
Can you provide any useful information other than a cool sound bite? Is there
a better way to analyze equities? There is a lot of computer trading. Must be
some analysis happening. I'm sure a lot of us here would like to be pointed in
the right direction.

~~~
smrtinsert
They are better analyzed against each other. A starting point is modern
portfolio theory.

~~~
pmoriarty
Oh, you mean the portfolio theory that "risk managed" so many financial
institutions safely through the latest financial crisis without a scratch?

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vgrocha
The only guys that get rich with technical analysis are the ones that sell
books about it.

~~~
_3u10
That's true in most industries, don't dig for gold, sell shovels.

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riveralabs
The only important indicator on a chart is price, and volume in some cases to
confirm price. But all decisions need to be based on price action. Chart
analysis is just a tool to read the emotions of other traders, that’s it.

Think about it, you see a 3 day rally with wide range bars and on day 4 you
get a narrow range bar where the open and close are the same (or very close).
What does that tell you? Momentum has stopped and people are undecided.
There’s nothing subjective about that. After this the stock can move either
way, but you are getting an indicator that something’s going to happen and you
have to monitor closely. You can tighten the stops or exit completely. The
decision is up to you. But you are using the chart to make an educated
decision.

Another example, after a 3 day pullback on day 4 you see a narrow range bar
with a very long tail. This is called a Hammer
[[http://en.wikipedia.org/wiki/Hammer_(candlestick_pattern)](http://en.wikipedia.org/wiki/Hammer_\(candlestick_pattern\))].
This tells you that at some point during the day the sellers were in control
but something happened and buyers took control and raised the price. This was
a war and the buyers won. This usually changes momentum and leads to a rally.
An explanation for this could be that at some point during the day many stop
loss orders from long term investors were triggered and short-term buyers see
it as an opportunity to buy and raise the price.

I just gave you two examples where Technical Analysis can be effective. Does
it work all the time? Of course not. But you have a better picture of what’s
happening, therefore your odds are higher and you can use this information to
lower your risk.

Finally, you have to remember that for every buyer there’s also a seller and
vice versa. When you buy a stock (long) you have to ask yourself. Is the
person selling me the stock profiting or taking a loss? Is the other person a
beginner, professional trader or institution? You have to find scenarios where
you buy the stock from the beginners taking a loss (even if it sounds cruel).
Given enough time and hard work you can develop experience necessary to spot
where all these people buy and sell and use this information to your
advantage.

Does it work all the time? NO

Will you have losses? YES

Can you still make money? YES

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pmoriarty
Backtesting[1] is really critical when deciding on whether to use a given
technical indicator.

I've read too many books and articles, and heard too many anecdotes that make
some technical indicator sound fantastic. But until you backtest it (and then
forward test it) against a large amount of data, and make sure you're not
curve-fitting, I don't think you can have much confidence in it actually
working in the real world in the long run (though you may get lucky and have
it work for a brief period of time).

For backtesting, the best tool I've found is AmiBroker[2]. It's orders of
magnitude faster than any other backtesting tool that I've found, and lets me
backtest mountains of data against any indicator I can dream up within seconds
or minutes, and then go on to the next one. It's pretty awesome (though kind
of quirky in that its programming language is array-based). Anyway, highly
recommended.

[1] -
[https://en.wikipedia.org/wiki/Backtesting](https://en.wikipedia.org/wiki/Backtesting)

[2] - [http://www.amibroker.com/](http://www.amibroker.com/)

~~~
cjfont
Alternatively, you can save your money and use one of the myriad of
backtesting tools built into existing trading platforms using a demo account.

~~~
pmoriarty
Yeah, you can, but they usually suck... especially compared to AmiBroker, in
my opinion.

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B1narySunset
Technical Analysis can be useful, because it enables a systematic approach to
trading - eliminating subjectivity when making trading decisions.
_Consistently_ exploiting some edge with a well defined set of rules and
conservative risk management is key.

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PSeitz
Just put a tools ruler on a chart and you can see the future. Easy as that.
And wrong.

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gearhart
The guide opens with an analogy suggesting that picking the best stocks to
invest in is equivalent to picking the best restaurant to eat at, and that
technical analysis is equivalent to looking for the stall with the most people
at it.

If technical analysis is equivalent to looking for the restaurant with the
most people at it, then the restaurant that you're trying to find is the one
that, over the period that you intend to eat there, will gain the most new
customers, relative to the number of customers it had when you walked in, not
the one that's best to eat at.

The flawed analogy exactly explains the problem with technical analysis.

~~~
pmelendez
> "If technical analysis is equivalent to looking for the restaurant with the
> most people at it, then the restaurant that you're trying to find is the one
> that, over the period that you intend to eat there, will gain the most new
> customers,"

Which pretty much is what you want to achieve in certain markets.

For instance, if you are trading with CFDs and want to close your positions in
the short term, you want to predict the right direction in an instrument with
high volatility, which tends to be correlated with the amount of people
trading in the same instrument (restaurant with the most people for a given
period of time)

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thewarrior
How would you account for the effect of other people using Technical analysis
on stock prices

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xiphias
It's not complete bullshit, just unusable for trading nowdays: these
algorithms that found trends worked until better algorithms were used:

[http://en.wikipedia.org/wiki/Technical_analysis#Scientific_T...](http://en.wikipedia.org/wiki/Technical_analysis#Scientific_Technical_Analysis)
The results were positive with an overwhelming statistical confidence for each
of the patterns using the data set of all S&P 500 stocks daily for the five
year period 1992-1996.

~~~
akhatri_aus
> The results were positive with an overwhelming statistical confidence for
> each of the patterns using the data set of all S&P 500 stocks daily for the
> five year period 1992-1996.

Looks a bit like cherry picking

