My 2¢ on Charts…by Danny on August 1st, 2008 at 3:59:00 pm |
I wanted to add a quick thought the the TA analysis debate between The Mexican and my friend The Shed.
My point is that charts let you know where you stand in relation to other sellers.
Think of it as Texas Hold ‘Em. In the market, like poker, you’re really just battling other players. You know a 3-7 off-suite is a weak hand, so you don’t bet. You know pocket aces is a strong hand, so you would be inclined to bet. That’s how you play. I think of my cost basis as my hand, and I want to know whether it is a strong or weak one.
So take this old chart of AAPL. You know it’s trending up, viz the 200day sloping upward. You have to assume that trend will continue, until is doesn’t. You’re getting long, you want the price to go higher. So the trend assumption is implicit by virtue of buying the stock. This goes for professionals and you–both want a higher price.
If you bought right at the turn of 2006, you had the worst hand possible relative to other holders. If you bought at the the bottom of the trendline in July of 2006, you had a higher probability of getting a better hand relative to other holders.
Because you have to assume that they are like you, and are eager to protect profits.
When I use TA, I am trying to align myself with the players I know have the best hand. In practicing this, you learn what hands are good-ta-go, and which hands are frequently folded. This is another way to think about the market that makes sense to me.
Terms like support/ resistance etc. could just be synonyms for strong and weak hands.*
*I mean card hands, not “weak hands” as in the exression of weak holders of stock.
Don Juan,
Your market analogy to poker is simply nonsense.
There are 52 cards in the deck, with a limited # of permutations, thus probabilities are easily calculated, giving you a Gaussian distribution.
The market however does not possess a finite # of possibilities [future outcomes] thus, there is no Gaussian distribution, rather a Mandelbrotion distribution.
jog on
August 1st, 2008 at 4:07:57 pmduc
THAT is nonsense. What you said is true, but unrelated to what I said.
In terms of using TA to buy or sell something, I think my analogy makes sense. You’re analyzing other peoples hands. You know strong holders will come in at support, so that is the best “hand.”
OT point: my roomate works at an offshoot of DB that calculated NAV for hedge funds each day.
This give him privy to what the funds he accounts for are buying and selling. So when he sees one of his funds systematically buying a stock, or initating a position, he can’t trade off that, but curiosity warrants investiagtion.
He said he was amazed, simply stunned, at how frequently “pros” use the 50 day, 200 day, or “buying at support” in their decisions to buy or sell.
I think that alone lends credence to their use in making decisions.
Cheerio.
August 1st, 2008 at 4:15:50 pmI just like the fact that Danny plays cards.
Gambling and trading are kissing cousins.
Chess is also good for the soul. Successful chess players are good analysts, but they’re also adept at pattern recognition.
As in chess, a good trader is able to spot those profitable set ups, aka patterns when he/she sees them.
August 1st, 2008 at 6:15:11 pmAll one has to do is obtain some inexpensive software and run average returns for stocks making 52 week highs vs stocks making 52 week lows. If still convinced a stock’s chart doesn’t matter, well - the earth aint flat either.
Oh yea, poker isn’t gambling either.
August 1st, 2008 at 6:32:26 pmyeah I firmly believe you have to buy BOs to all time highs, especially off a catalyst like earnings. I will probably never own a staid blue chip.
I think we’re all saying the same shit here, just not ducati, because he has sand in his vagina.
August 1st, 2008 at 6:51:40 pmOne of the best things about trading is it doesn’t matter 2 shits what someone else thinks. In fact, the more people that believe is fairy tales like random walk, time machines and that their “gut” has some yet undiscovered sixth sense, the greater the advantage for those who know how to find and exploit statistical edges in the market.
August 1st, 2008 at 7:11:24 pmDanny,
That was a very relevant analogy. Especially, since the mkt is fueled by a mix of fundamentals and sentiment. Anybody can connect to reuters or bloomberg and check out the fundies. The sentiment gauge is where TA comes in — drawing the squiggly lines, checking stochastics, relative strength and so on to figure out what the other “players” are doing.
I’ll give you an example: gold. June CPI was the highest in over 20 years. That number was released about 2 weeks ago. We’re clearly going into a period of higher inflation regardless of whether oil goes up or down 30 pts in the next 6 months. Prices are getting raised across the board: from DOW Chemical to International Paper, input prices are getting passed on to the consumer — that’s a fact.
Gold should be higher now than when the news came out. But it isnt. Why? B/c oil happens to be selling off. Does that change the inflation picture? Well, unless you believe oil goes to $50 this year and doesnt come back — then, no. The fact is TA tells a story to the carefull observer about the other “players” in the market.
The current read is that nobody wants to own gold. Gold stocks like Yamana, Goldcorp and Kinross have all broken down from 12-month uptrends. Spot gold failed a recent break out from a 3-to-4-month mini base. So, you fold your cards and stay away from gold. At some point, fundies and technicals will allign again, and the smart hand will be to own gold.
In the meantime, TA allows you to spare yourself the opportunity cost and the needless downside expenses of sitting in a sector that the other players at the table just arent willing to wager on — just yet.
That was my read into it at least.
Great post!
-Phil_from_Brazil
August 1st, 2008 at 7:41:55 pmDon Juan,
“In terms of using TA to buy or sell something, I think my analogy makes sense. You’re analyzing other peoples hands. You know strong holders will come in at support, so that is the best “hand.”
You *know* nothing of the sort. If you knew, why would you require some form of *risk management* [and I'm assuming from prior posts that you utilise some form of risk management]
“OT point: my roomate works at an offshoot of DB that calculated NAV for hedge funds each day.
He said he was amazed, simply stunned, at how frequently “pros” use the 50 day, 200 day, or “buying at support” in their decisions to buy or sell.
I think that alone lends credence to their use in making decisions.”
Really?
How so?
Have you examined Hedge Fund return data recently, viz. this increased volatility period?
If you had, I’m curious whether you would make the same assertion.
jog on
August 1st, 2008 at 7:44:34 pmduc
alpha,
Same criticism.
Chart pattern recognition and chess, correlated…please.
Same again for trading and gambling. This rather echo’s the original “random walk” hypothesis. Stocks DO NOT follow a random walk.
For stocks to follow a random walk 2 criteria must be fulfilled;
*Finite future outcomes, viz only six sides to a dice.
*No memory. That is to say, the outcome of a previous roll, cannot affect the next.
On both criteria, stocks fail. Thus, simply, stocks do not follow a random walk.
Gambling, games of chance, however have finite outcomes and no memory. Thus, hand-to-hand, or roll-to-roll, they can follow a random walk in the SHORT TERM.
In the LONG TERM, you would expect to see a Gaussian distribution.
jog on
August 1st, 2008 at 7:52:33 pmduc
Phil,
Have you a cogent analysis of the drivers of inflation, or have you already posted said drivers?
jog on
August 1st, 2008 at 7:56:13 pmduc
Phil, that was extremely well said.
August 1st, 2008 at 8:41:26 pmDon Juan,
Unfortunately, Phil’s rather superficial analysis, rather misses the point entirely.
jog on
August 2nd, 2008 at 12:35:58 pmduc
Hey Danny… finally got to make my rounds to the other bloggers. Just wanted to drop by and see how you roll here. I like the poker analogy, except there’s one thing- I suck at it. I’m good at reading people and using probability when the river comes out, but there always seems to be one chick who always gets a flush when you have 3 Jacks. What the?!! For real man, I just got back from playing poker, and this girl dominated, no, she DOMINATED the game, like wiped us out on 3 freak hands.
August 3rd, 2008 at 6:33:21 amDanny,
Great point about buying at 52 week highs WITH a catalyst of some sort, preferably earnings. I’m doing some reading on the post earnings announcement drift (PEAD) and it’s one anomaly that still seems to work…confusing a whole generation of befuddled finance professors.
Longtime reader, first time poster here so feel free to bash…I can man-up until I prove myself.
August 4th, 2008 at 2:26:51 amGio - That’s fucked up! I used to hate poker, but then I started to play and had crazy beginners luck. Then the beginners luck never left. Then I realized only experienced poker players know how to gamble and read other players. Turns out from market experience that I know risk:reward, probability, and a smidge of gambling. So they get owned.
Then theres the phenomenon that says “every person thinks they are better at things than they really are.” My bros assume that by virtue of being a dude and holding a beer that they are good at poker. Ha. I use that to my advantage, playing up my “rookiness.” But now they don’t want to play as much.
Darvas - Welcome, please comment any time. I usually bash people who talk shit and bring nothing to the table, and so far, that’s not you, so you remain shit-talked free.
I strongly believe in PEAD.
August 4th, 2008 at 2:30:58 pm