# Why Does TA Work?



## dogcom (May 23, 2009)

I believe TA works fine as long as it is your little secret. Since many people are now doing it, it requires more and more complex study or a snake going down the mountain as Aurgonaut mentioned about some of ddkay analysis on another thread. 

I think it works in giving you an idea on when a stock or the stock market is getting tired or ready for a rally. It gives you a snapshot of what the masses are doing or thinking. Money of course runs the market and the masses have a lot of money and can easily take over the fundamentals. TA also can warn you that a stock that you thought looks good is probably in trouble as it tops out and selling is seen on the chart before an event blindsides it.

Support and resistance can also be explained by the people wanting to get out when they get back their money so they don't take a loss. In this of course computer trading will be programmed with these inputs to help these trends along or play the other way if it breaks. 

Cycles also play a role to help us see the long term as it unfolds because we as humans keep repeating the same mistakes. We are now in a winter cycle as debt must be purged from the system as it was needed back in 1929 and before that. Knowing this means when you buy stocks you will be going against a long term trend which says the market should go down.

All in all what is it that makes TA work in that how people think as individuals that make stocks or markets behave the way they do?


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## OptsyEagle (Nov 29, 2009)

I think it is like looking at an ink blot for some people. They see what they want to see. 

In my opinion, at best it can tell you what might happen over the next hour and even then it is wrong more often then I like.


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## crazyjackcsa (Aug 8, 2010)

dogcom said:


> I believe TA works fine as long as it is your little secret. Since many people are now doing it, it requires more and more complex study or a snake going down the mountain as Aurgonaut mentioned about some of ddkay analysis on another thread.


It works because you think it works. I have a rock on my desk that keeps tigers away. People say I'm crazy, but I haven't seen a tiger in my neighbourhood ever since I got the rock.


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## KaeJS (Sep 28, 2010)

KaeJS said:


> You're all just children drawing funny lines on charts with a ruler and different coloured crayons.


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## FrugalTrader (Oct 13, 2008)

It probably works because the "smart" money is looking for the same things. As well, with more of the trading volume from computer algorithms , they are likely trading on significant technical indicators.


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## daddybigbucks (Jan 30, 2011)

crazyjackcsa said:


> It works because you think it works. I have a rock on my desk that keeps tigers away. People say I'm crazy, but I haven't seen a tiger in my neighbourhood ever since I got the rock.


did you see a tiger before you got the rock? 
If no,what made you get the rock?

I don't do TA but think it is real. 
If you look at a snow covered park, you will notice people take the same routes in the snow. 
When it snows again, even though there are no tracks, people instinctively take the same tracks.


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## crazyjackcsa (Aug 8, 2010)

daddybigbucks said:


> did you see a tiger before you got the rock?
> If no,what made you get the rock?
> 
> I don't do TA but think it is real.
> ...


Yeah.... way to read a little too much into it. I'm saying correlation does not equal causation. 

Patterns can be found anywhere. It's what the human mind is made to do. And If you're looking to prove a point? You can find a pattern to prove it. TA is like following an advisor. It's going to be right some of the time.


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## dogcom (May 23, 2009)

FrugalTrader is right that smart money and computer algorithms is one part of TA. TA is a sum of sellers or buyers showing a pattern that you can trade off of. I also think it is very useful in keeping an investor from constantly buying stocks and then seeing them drop as people constantly mention on the forum. It also requires a lot of people to dismiss it so the smart money can sell or buy from those people.

Cycles are also important to get a long term picture. The debt cycle and implosion is easy to spot and the problems are spotted in the actions of the market. Right now the market is telling us that we could get a big drop here unless something is done on the European front. But if you look around you will find others who think the market will rise above the 200 day and rally.

Either way to be good at TA you have to find out how to deal with things when they don't go your way which usually means small losses but big gains. Many others will hold stocks and take large losses which will overwhelm any gains they may have had.


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## webber22 (Mar 6, 2011)

TA is the most basic element in trading. Since most everyone has this information it does not become an advantage by itself. The advantage goes to those traders or systems that can understand the big picture, respond to news events, and roll with any market manipulations, either their own or someone else's.


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## andrewf (Mar 1, 2010)

I think high level TA makes some sense from a market psychology perspective. All the chart formation business seems incredible to me. I suppose it makes person use it come up with a plan for the trade, which is a good thing. Failure to plan is a plan to fail.


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## dogcom (May 23, 2009)

Here is an article of TA I looked at yesterday and it does show you how dangerous the market could be right now. On its own I am not sure but with all the risk from Europe and so on and the dollar going up it does foretell something is wrong.http://www.safehaven.com/article/23339/has-the-bear-returned

Webber22 that is a very good answer. TA is useless on its own or an inkblot if you will. The advantage is there if you can see the seasonalities and the risks to the market like the European situation. I could see the risk to silver back in the spring and could also recognize the parabolic rise but was able to narrow down the time period to a few days of when to short silver. I also posted that I would short it here on the forum. It was also funny that my wife told me that someone at work said buy silver and I said I was about to short it. He said I was wrong and silver was going up, up and away but I knew that wouldn't be the case.


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## Mockingbird (Apr 29, 2009)

Technical analysis is a *part* of the robust system. It doesn't predict futures nor it makes you money. Successful traders understand probabilities, money flow, price action, and risk management.

MB


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## ddkay (Nov 20, 2010)

dogcom I posted that correlation a few months ago, it keeps popping up and now even the cnbc talking heads are pointing at it, you can't deny it's alarmingly similar to what we have now


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## dogcom (May 23, 2009)

Ddkay you are the TA expert on the forum and that is why I talked about the snake falling off the mountain. I was joking around but I honestly think you know what you are doing with TA.

Ok ddkay or anyone else what do you think of this thought?

Most people dismiss TA because it didn't work for them and often it will be misread and will not work. Do you think these people are looking in the wrong place and putting to much faith in thinking it should just work. Instead I think to be successful in TA you must have a failure position set up every time you enter a trade using TA. So if things don't go the right way and say the stock does go back under the 200 day or whatever for example you will sell.


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## Abha (Jun 26, 2011)

3 Most Important Things in TA

1. Price

2. Volume

3. Chart (The Overall Trend - If you can see it) 

Also good idea to compare multiple time frames. It's not foolproof but it gives you the best chance of being on the right side of the trade.


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## ddkay (Nov 20, 2010)

If you don't have an exit strategy or adjust your strategy as market conditions change, you shouldn't be putting your money in the market. Not having a strategy is like wearing a blindfold and trying to navigate a dark room.

Market movements are really more about fundamentals than people think. Yes you have the charts telling one thing, but nothing is ever random, there is always a reason. You may not know the reason, but there is always a reason.

The only way you are going to find that reason, is days and nights of relentless research, and stumbling upon useful information, like how our fiat money system works. It's easy to hop on the gold bandwagon and dismiss the value of the dollar because it has done poorly for a decade, but instead of actually doing your own due diligence, reading the stuff central bankers read, BIS papers, and thinking oh maybe it's because many countries have diversified their reserves away from US dollars in favour of their own currencies, people subscribe to some repackaged sellside research and call their day done.

How many retail investors can honestly call their fundamental analysis their own instead of using S&Ps buy or sell rating? People like when all their work is done for them. In a bear market, it's not that simple.

Now I've seen first hand how ridiculously high individual stock correlations are to the broader index in a bear market, I am completely disinterested in owning these. 

Let me give you one example, I already showed ACQ in another thread, of god forbid you ever touch these thing penny stocks. Some lead and some lag, but for the most part they all move up and down together. Paul Tudor Jones really summed it up best in his documentary, the market is just one big giant flow chart of the economy.


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## gibor365 (Apr 1, 2011)

ddkay said:


> If you don't have an exit strategy


But what do you mean by exit strategy? There can be many strategies and many of them can be wrong, exactly the same way like picking stocks on emotions...


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## ddkay (Nov 20, 2010)

All exit strategies should be based on one thing and one thing only. Is the market moving against you? If yes, you should re-evaluate your investment thesis or exit the trade completely. If the market isn't moving against you, hit the snooze button nothing to worry about. Some people need a bigger butt kicking than others to get that the world doesn't revolve around them, it's constantly in flux and you either adapt with it or get left in the dust.


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## ddkay (Nov 20, 2010)

If you can use moving average crosses, draw a few trend lines with different coloured crayons, identify channels, and set stops on the lower end that is really the simplest way to define your limit and you are already ahead of 99% of investors


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## gibor365 (Apr 1, 2011)

ddkay said:


> If you can use moving average crosses, draw a few trend lines with different coloured crayons, identify channels, and set stops on the lower end that is really the simplest way to define your limit and you are already ahead of 99% of investors


Can you please give example for JNJ? I just took a look, ... on one side pattern looks like triangle with bottom 63 and top 65.... on other hand today close was below 63... What does it mean by TA criteria?


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## ddkay (Nov 20, 2010)

JNJ is doing the same thing as the S&P500, JNJ is part of the S&P500, if the S&P500 goes up this week because of short covering or whatever, JNJ should go up with it at the same time or a little later.


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## gibor365 (Apr 1, 2011)

Thanks.

I also draw trend lines for FTS, I don't know how to post this chart here, but it looks like 2 parallel lines with uptrend , bottom line at $32 and upper at $35. Does it mean that if tomorrow FTS will move up it has a good chance to go up to $35 that should behave as a resistance?


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## Mockingbird (Apr 29, 2009)

dogcom said:


> ... what do you think of this thought?
> 
> Most people dismiss TA because it didn't work for them and often it will be misread and will not work. Do you think these people are looking in the wrong place and putting to much faith in thinking it should just work. Instead I think to be successful in TA you must have a failure position set up every time you enter a trade using TA. So if things don't go the right way and say the stock does go back under the 200 day or whatever for example you will sell.


Most fail because they cannot distinguish between TA and trading.
Unfortunately, many will never understand the distinction.

MB


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## ddkay (Nov 20, 2010)

The Fortis uptrend channel from 3Y ago is still intact minus a few fakeouts, and the parallel lines between Oct 2010-present (29.44-34.21) you could call basing. It definitely won't go to $35 tomorrow, but if the market rallies hard enough maybe in 3 or 4 weeks time sure it is possible.. there is usually major resistance at the last recent high in this configuration, so in this case $33.98 from November 16th, I would not expect more than that in a 3-4 week time frame.


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## dogcom (May 23, 2009)

I think you hit the nail on the head about exit strategy ddkay. Most people fail because they won't have an exit strategy when entering a TA trade so they are blindfolded like you said so their conclusion will be that TA is hocus pocus or useless. Mockingbird some people will use TA for trading but yes it is more useful to use it as an end strategy after you have done all your analysis of the market or a stock you want to own.

Gibor and ddkay good discussion here and thanks for that. Gibor I also like Fortis but to me taking a quick glance at the chart I would say look to buy when the RSI on Fortis hits or goes below 30 it seems to have topped out at RSI 60 on the chart and is heading for $32.00. Of course I will look at more then this when I buy like if Europe really does fall apart sending down the overall market and so on.


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## gibor365 (Apr 1, 2011)

Abha said:


> 3 Most Important Things in TA
> 
> 2. Volume


How do Volume fits here? Let's say we can have 4 scenario:
1. stock is up with low volume
2. stock is down with low volume
3. stock is up with high volume
4. stock is down with low volume

What TA telling in those cases?


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## Causalien (Apr 4, 2009)

My view as a multi-strategist and Robo-trader. 

Certain TA techniques works as long as the majority of the money follows the same technique. It is a tug of war between multiple money sources for different TA signals and eventually, the one that can short long the most will win. It sounds weird at the beginning to hear that TA works because people believe in it and the more people that believe a certain TA, the more accurate it is. Sounds like something we already have in real life, except with this, when you put your money in the market, it actually serves to strengthen that conviction with price movements.

However, the downside to TA is that the more money which follows a certain strategy, the faster the bounce off once a signal is hit. I measure the intensity and time time between a signal is hit to when it stabilizes after a selloff/melt up to determine how much money is following certain strategy in a stock.

If you think about it in a political way. You got individuals believing random different things. Yet we all vote for the few parties that's up for election. Fundamentals to the Conservatives, Technicals to the NDP, Bond market as The green party and Robot trading to the Pirate party. Just randomly fitting party to strategies, no political message meant.


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## Abha (Jun 26, 2011)

gibor said:


> How do Volume fits here? Let's say we can have 4 scenario:
> 1. stock is up with low volume
> 2. stock is down with low volume
> 3. stock is up with high volume
> ...


Under which timeframe are you asking. Most of my breakout trades are done by monitoring volume. If you can see volume accumulating or if there is a multiple on volume (for instance you can see that volume is 1.5x times the average) you can tell something is going on.

From there you start looking at the same chart under different time frames. Daily, 3 Day, 30 min, 5 min etc and you look at the price action.

From here you try to get the perfect entry and usually momentum carries the stock upwards....although breakouts sometimes fail so you usually place your stop at support (at or just under the moving averages)

If you are using volume for long term holds, then you can monitor if the big players are selling or buying by monitoring the average volume compared to the daily.

I've got books devoted entirely on these topics, so let me know and I'll email them to you.


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## dogcom (May 23, 2009)

Actually a volume reversal of a trend lasting weeks can be seen on intra-day charts and often will be the last thing that happens during a capitulation event. I used one of those reversals a few years back to buy Nat Gas at exactly the right time and this was after the down trend had been going on for months. Of course it helped that we were in September which is usually the time when Nat Gas would turn around.


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## gibor365 (Apr 1, 2011)

Abha said:


> I've got books devoted entirely on these topics, so let me know and I'll email them to you.


yes, please


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## gibor365 (Apr 1, 2011)

ddkay, could you please take a look at FIO from TA perspective?
It was down about 30% this week and a little bit up today....on other forum investor posted chart and telling that "developed a reversal pattern and in AH trading we are already past resistance" and "it's excellent buying point"...
But I see from the chart only that channel was sharply broken down....


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## gibor365 (Apr 1, 2011)

I'm still confused how volume can determine if stock worth buying.
For example below is data for LNV.TO
You can see that on Nov 21 and 22 LNV moved down -0.9 with very light volume and on Nov 23 it's up 1% with huge 103K volume... So, what this data could've tell me?


11/25/2011 30,336 0.070 0.71%
11/24/2011 51,753 -0.040 -0.40%
11/23/2011 103,772 0.100 1.02%
11/22/2011 12,749 -0.090 -0.91%
11/21/2011 6,002 -0.090 -0.90%
11/18/2011 19,374 0.180 1.83%
11/17/2011 53,203 -0.190 -1.89%
11/16/2011 46,758 0.290 2.97%


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## KaeJS (Sep 28, 2010)

I'm not into TA, so ddkay can probably do it a lot better than I can, but.... can I give it a shot?

Seems to me like my Slow Stochastics and Moving Average Convergence Divergence are telling me that the stock is flatlining only to fall lower.

Relative Strength Index is saying that its very slightly undervalued at the 43 mark, but hardly worth a buy, as buying in at this point could be a huge risk to fall further and break through 30 RSI, and then eventually cause a greater change with the Slow Stochastics. Then, when the MACD crosses over and the market turmoil eases up, it could be a buy.

Keep in mind this thing was $15 not too long ago. This is a new stock. When it falls, it will fall hard and fast. Stock is also not even $1 under the 50 day EMA.. so, its not really trading all that cheap, if you ask me. It just had a big fall - whoopie, it can fall again next week.

Volume was also extremely high on the selling side on the way down. Volume was quite low on this little "blip" up that it had, about 1/10 of the sell side volume.

My TA $0.02, if it's even worth two cents.


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## ddkay (Nov 20, 2010)

FIO is a recent IPO, it has share dilution risk. On Tuesday they issued an 8.8 million shares in a secondary offering, and an extra 108 million are expected to come on in 2012. Not a good investment IMO. I expect it to conitnue falling with the market... if not, Europe is solved temporarily, so $32->$39 is a pretty low risk swing on a 1 week period. I wouldn't buy it yet.

http://www.fusionio.com/press-relea...-fiscal-first-quarter-2012-financial-results/


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## gibor365 (Apr 1, 2011)

KaeJS, you sound like a pro in TA  I need some simple English and I'm not really familiar with those "animals" ; Slow Stochastics and Moving Average Convergence Divergence " and what they can tell.

Currently I'm reading about Trend lines...

ddkay, so if I understand you, in your opinion if FIO breaks resistance at $32 it can easy run to $39?


Also , guys will highly appreciate if anyone can give me some thoughts on volumes Posts: 968


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## ddkay (Nov 20, 2010)

That's the highest it could go in the short term, it could stop at $36 if Merkonti show the "big bazooka" but the next day SocGen files bankruptcy.. then the market is going to zero



> Follow-Through Day according to IBD (Investors Business Daily):
> 
> After a significant market correction, the market will look to regain its footing. Any up day then counts as Day 1 of an attempted rally.
> 
> ...


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## gibor365 (Apr 1, 2011)

What is your opinion about MO and PM from TA point of view? I just checked charts and both looking good and bullish imho


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## ddkay (Nov 20, 2010)

Why would you like PM or MO for a snapback rally? There's only ~3% upside possible there


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## KaeJS (Sep 28, 2010)

I agree with ddkay.

For a snapback rally (if we get one) you are going to want some industrial/tech stocks and other stocks with a high beta.

Whatever has a high beta has been hit the hardest and will rise the most.

It's all about the beta. Beta doesn't lie.


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## Dmoney (Apr 28, 2011)

KaeJS said:


> I agree with ddkay.
> 
> For a snapback rally (if we get one) you are going to want some industrial/tech stocks and other stocks with a high beta.
> 
> ...


There's a few problems with Beta though.

It's historical, so it doesn't necessarily predict future price movement patterns.
It changes depending on the time period and price points you use (ie. daily closing prices, monthly closing prices or Beta over a 1yr period, 5 yr period- it will change drastically over various periods).
It doesn't differentiate between performance in a Bull vs. Bear market.

Helpful, but far from flawless.


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## gibor365 (Apr 1, 2011)

ddkay said:


> Why would you like PM or MO for a snapback rally? There's only ~3% upside possible there


In this volatile market stocks like PM and MO the most stable, when market is sharply down , they drop less, and when market rebounds, they rebounds pretty good., so YTD for PM 20+% up and MO 10+% up...


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## gibor365 (Apr 1, 2011)

Question to ddkay and other TA gurus,

I'm reading some stuff about TA - Trend lines, and was looking at TCK.B chart:

if I draw trendline via Jul 25, oct 29 and nov 9 highs (downtrend) -> I get he major resistance at $38.5

if I draw trendline via Aug 11, sep 1 and oct 29 highs (downtrend) -> I get he major resistance at around $41

Which one is more reliable?


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## dogcom (May 23, 2009)

It looks to me like the downtrend was finally broken with the higher low a few days ago. Now it just needs to break through around the $40 dollar level as you mentioned and it should be the start of an uptrend. Also it may be heading into a period where it will take a run to a seasonal high since it hasn't seen a good uptrend for almost a year.

Central banks around the world are giving a nice base at this time for a stock like TCK.B to launch from. It looks like a good bet right now as long as we don't get a big push up in European bond yields despite what the banks have done here.

Everyone here also like to talk about SU and since March it has pretty much followed TCK.B and is also showing the same sort of profile as you mentioned as most things follow what is going on in Europe and what the central banks do.


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## gibor365 (Apr 1, 2011)

dogcom said:


> It looks to me like the downtrend was finally broken with the higher low a few days ago. Now it just needs to break through around the $40 dollar level as you mentioned and it should be the start of an uptrend. Also it may be heading into a period where it will take a run to a seasonal high since it hasn't seen a good uptrend for almost a year.
> 
> .


This is exactly what I hope can happened. I opened small position in TCK.B this Monday, so far nice 10% gain...wanted to sell, but suspect it can start uptrend.... so for now I just place stop loss limits just under 2nd support level...


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## Abha (Jun 26, 2011)

gibor said:


> This is exactly what I hope can happened. I opened small position in TCK.B this Monday, so far nice 10% gain...wanted to sell, but suspect it can start uptrend.... so for now I just place stop loss limits just under 2nd support level...


Hey that was super quick learning you did. 

Congratulations on picking up TA concepts in a rapid manner

TCK.B looks great if we get that santa claus rally going into december


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## Causalien (Apr 4, 2009)

gibor said:


> Question to ddkay and other TA gurus,
> 
> I'm reading some stuff about TA - Trend lines, and was looking at TCK.B chart:
> 
> ...


Took a 30 sec look so I didn't read too much into the actual details. They are both resistances. But because the second one pierces some mountains on the left side, hence does not envelop the whole picture, it has less of a macro TA significance. Therefore Trendline 1 > Trendline 2. Next is to analyze volume on those days to determine which one is more significant. Having done that, I would proceed to see if any of the two trendlines will intersect with other technicals. 

Finally, I'd draw the bottom channel (with downward peaks ) for each of the trendlines to see which one the robots are actually using.


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## dogcom (May 23, 2009)

Causalien most people don't understand that a lot of money can be made on the back of robots and so on so that is a very good comment to make. Looking at TA in this light does give you some explanation of why things work the way they do.

I generally don't use the line drawings when I buy a stock but instead look at them at a glance to see where breakouts or breakdowns might apply. 

I first look to see if the seasonality is favorable for the stocks or sectors I am looking at. I will also glance at the macro picture to make sure that conditions are favorable for the stock or sectors I like. Long term I hate the macro picture so I am bearish on that so long term holdings are generally not for me at this time. Also one must see the news that something isn't going to upset your stock or sector that you are looking at. I said buy RIM a few days ago and that was good but yesterday I saw a report about hackers breaking the security on RIM which is huge for RIM so I would have sold it right away if I had got my bid a few days ago.

Next I do like to look at RSI to see if it is overbought or oversold so it has room to move. I will also look at the MACD to see if it is also in a favorable setup for the move. Lastly I will check volume or volume events to see if there are any possible clues there.


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## dogcom (May 23, 2009)

I should also add that as you learn TA and use it your way it does become a fun thing to do. It is almost like a professional sports team going for the trophy and even though it is a serious job for you, you still want to go out there and have fun.


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## gibor365 (Apr 1, 2011)

Causalien said:


> Finally, I'd draw the bottom channel (with downward peaks ) for each of the trendlines to see which one the robots are actually using.


The problem is that bottom channel is reliable, it has maximu, 2 downward peaks


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## Mockingbird (Apr 29, 2009)

dogcom said:


> ... I said buy RIM a few days ago and that was good but yesterday I saw a report about hackers breaking the security on RIM which is huge for RIM so I would have sold it right away if I had got my bid a few days ago...


The hack didn't cause RIM to drop. You missed the bigger news. 
Also, if the news breaks pre/afterhours, good luck getting your price. 

MB


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## dogcom (May 23, 2009)

I don't know what the news was you are talking about mock but sell I will loss or not. Being wrong is fine as long as you dump when you are. I don't hope, I just realize I screwed up and move on.


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## dogcom (May 23, 2009)

Gibor you seem like a very quick learner by the analysis you shared with us. Now you need to figure out how to deal with being wrong and what other kind of technical analysis you can bring to help confirm a move for you. I am still learning and with every day I get better and better with the way I handle it. Anyone can check and my picks on the forum they are usually pretty good and a lot better then 50/50.

Also like anything things will change and so should your analysis as we move from secular bear market to secular bull market. During a secular bull market you won't need a lot of TA but during a secular bear market you need to be in cash or very active to make money.


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## gibor365 (Apr 1, 2011)

ddkay disappear  
TA gurus, could you please take a look at SLTM. It looks as very nice looking ascending triangle that just on Friday got broken on upside....at around 2.50


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