Is Technical Analysis a Waste of Time?

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DriftingDudeSC
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Is Technical Analysis a Waste of Time?

Post by DriftingDudeSC »

This is the latest entry from Larry Swedroe's blog.

I'm a simple man who believes in KISS (Keep It Simple Sugah). If the theory or charts are too complicated my eyes glaze over. :D

Link:


http://moneywatch.bnet.com/investing/bl ... blog-river
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Post by RadAudit »

5,000 trading rules? Even if that is the cummulation of unique rules per market studied - that's 100+ rules / market (Hopefully it's not 5000 rules to be applied across all markets). You're bound to mess up the technical analysis and pull the trigger at the wrong time with that many rules.
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AzRunner
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Post by AzRunner »

Here's the punch line:
These studies show that looking for patterns and studying historical stock price charts is simply a waste of time. Your time would be much better spent on other endeavors.
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Post by nisiprius »

Yeahyeahyeah, just tell me which of those 5,000 rules worked best. Isn't there some rule I can use to pick good rules?
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Post by norookie »

:D
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Jack
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Post by Jack »

Warren Buffett said:
I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer.
He also said:
If past history was all there was to the game, the richest people would be librarians.
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Boglenaut
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Post by Boglenaut »

Is Technical Analysis a Waste of Time?



Yes.
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Taylor Larimore
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Re: Is Technical Analysis a Waste of Time?

Post by Taylor Larimore »

DriftingDudeSC wrote:This is the latest entry from Larry Swedroe's blog.

http://moneywatch.bnet.com/investing/bl ... blog-river
Hi DD:

"Technical Analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data."--Wakipedia

Thank you for your link to Larry's article reminding us that forcasting the future direction of prices is "A Waste of Time"

This is why Bogleheads develop a simple low-cost, diversified, asset allocation plan--then stay-the-course.
"Simplicity is the master key to financial success." -- Jack Bogle
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Post by traineeinvestor »

Is Technical Analysis a Waste of Time?
Not at all. Just like tarot reading, you can make a good living writing books on the subject.
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Post by wshang »

I'm going to take a contrary position here. There are some advantages to chart analysis without having to take a broad position that all rules are useless. Support levels, moving averages and CMF are useful for deciding support levels. The basic rules are useful because if for no other reason, many on Wall Street are follow them and become self-fulfilling prophecies.

Other metrics of broad market action are useful of quantitating sentiment and breadth of movement such as VIX, Option premium and Advance/Decline lines.
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Post by paulsiu »

I am bias, but yes.

I have seen too many people try to make a living using technical analysis and then fail. Perhaps it does work for some people, but it looks like voodoo to me.

Paul
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Post by yobria »

Like all types of gambling, once you're drawn it, wasting one's time is not a consideration.

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Post by DriftingDudeSC »

You're welcome Taylor. Let's all follow the guidelines of Mr. Bogle.

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Re: Is Technical Analysis a Waste of Time?

Post by YDNAL »

Boglenaut wrote:
DriftingDudeSC wrote:Is Technical Analysis a Waste of Time?

Yes.
Yes.
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Post by peter71 »

Paper discussed in depth in this thread for anyone interested . . .

http://www.bogleheads.org/forum/viewtop ... tstrapping

All best,
Pete
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Post by ResNullius »

Technical analysis is irrelevant to a buy and holder. On the other hand, if you're a trader, then tech analysis can be important because most computerized trading programs are based in some part on historical trends and tech analysis. So, if you want to know when the trading programs are going to kick into high gear, then you need to pay some attention to tech analysis. For myself, I could care less about tech analysis, because I can mess things up just find by myself.
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Post by Tramper Al »

Even reading (or writing) about technical analysis is a waste of time.
ntsantak
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I totally disagree

Post by ntsantak »

Technical analysis is easy in comparison to valuation analysis. That is why it is so popular on CNBC. If they went into details on valuing a business they would put their viewers to sleep. After all when you buy a stock you are buying the value of the business NOT the chart. The recent runup has people baffled. Well if they knew that the SP500 and its bottom was trading at 1.5 x book value then they wouldn't be baffled. You could have bought top notch quality stocks at close to historical cost.

Also, people are drawn into the bond market because of recent performance. However, they should know that bonds are trading at historical high valuations (low coupon rate, low yield to maturity, high duration) they would be aware of its risks. I don't know what will happen in the future but it is always good to know what the valuations are NOT what the chart looks like.
mda42
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Post by mda42 »

Are there well-known people that have consistently made money with technical analysis over decades? (In value investing, there are such people.)
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Post by SP-diceman »

It is for a Boglehead.

However, things like PE valuations, Cap weighting,
International, fixed income, diversification could be
considered in a broad sense forms of technical analysis.

The disappointing thing is the definitions used in these studies.
I wouldn't consider:

“no evidence that the profits to the technical trading rules we consider are greater than those that might be expected due to random data variation.”

the same as saying you go broke using technical analysis.

After all if it didn't work the comparison would be devastating, chalked up to more
than "random data variation".


Thanks
SP-diceman
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Judsen
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Post by Judsen »

As a former chartist and time waster I decided there were more interesting ways to waste time. I gave my chartist books to a person who was trying to give me stock picking advice.
Now I waste time more efficiently!
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Post by SP-diceman »

Are there well-known people that have consistently made money with technical analysis over decades?
Of course.

I don't know if Id call them famous because no one really cares who top
traders are. (or anyone who trades for a living)

I cant stand the guy but probably the most famous is Soros.

Even beginners pulled off the street successfully traded futures. (The Turtles)
(It started with a bet like the movie Trading Places)
Some continued to make their living at it.

The problem is most of this is silly apples to oranges comparisons that don't
really apply to anything a Boglehead does or would care about.


Thanks
SP-diceman
mathu1968
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Fundamental analysis

Post by mathu1968 »

Personally, I only look at things using a "fundamental analysis." "Technical analysis" just seems like a pseudo science. I really appreciated Malkiel's analysis and comparison of these two different approaches to making investment decisions which he offered in his classic work, "A Random Walk Down Wall Street." Those two chapters, if I recall correctly, were really helpful.

And yet there are some investment analysts I respect who use "technical analysis" now and then, although they work largely out of a "fundamental analysis" approach.
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Post by mathu1968 »

norookie wrote:
AzRunner wrote:Here's the punch line:
These studies show that looking for patterns and studying historical stock price charts is simply a waste of time. Your time would be much better spent on other endeavors.
I agree! However if you notice a few equites below 5bucks that normally in a stable mkt trade above 10X that + dividends,,(or Better) its up to you what your risk tolerance is! JMO................sometimes some just have to bet! Its betting pure and simple.
Building a bit on what you write, I personally wish the "experts" would be more disciplined and careful when using mathematics to analyse investment or economic issues. Sometimes it comes off as implying that the sciences of investing or economics can offer the same percision as math. And that of course leads to way too much confidence in regard to future returns etc.

all the best.
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Post by billb »

Now go ask on a technical analysis forum if buy and hold is for suckers. I think your audience on both is extremely biased.
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Post by richard »

ResNullius wrote:Technical analysis is irrelevant to a buy and holder. On the other hand, if you're a trader, then tech analysis can be important because most computerized trading programs are based in some part on historical trends and tech analysis. So, if you want to know when the trading programs are going to kick into high gear, then you need to pay some attention to tech analysis. For myself, I could care less about tech analysis, because I can mess things up just find by myself.
The problem is you can only profit from this if you can move faster than the computerized trading programs. That's somewhere between highly unlikely and impossible.
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Post by richard »

mda42 wrote:Are there well-known people that have consistently made money with technical analysis over decades? (In value investing, there are such people.)
It depends on what you mean by "consistently made money." If you mean made fee income for the fund managers, the answer is clearly "yes." If you mean made money for investors, the answer is not statistically different from random chance.
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Post by xerty24 »

When a group of successful high speed computerized traders were asked whether other people should pay attention to technical analysis, the answer was a resounding "No, no one ever makes money off that; it's all fundamentals that drive the stock movements between now and 3 minutes from now."
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Post by Adrian Nenu »

Is Technical Analysis a Waste of Time?
Yes. And a potentially dangerous ignorance of risk.

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Re: Is Technical Analysis a Waste of Time?

Post by Bradley »

The blue line typically does not rise or fall by more than ten in a day, today it went up 31 leaving technicians nervous and giddy. The angle of the line, while disconcerting, caused some bullishness, while more experienced technicians urged caution. One chartist in the background could be heard saying, that based on the steepness of the green line and the fact that it outperformed the yellow line, green line and came damn close to the dotted purple line, he expected to be handsomely rewarded, noting that this all had to be confirmed by Mar’s movement past Jupiter. :happy
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Re: Is Technical Analysis a Waste of Time?

Post by bertilak »

Bradley wrote:The blue line typically does not rise or fall by more than ten in a day, today it went up 31 leaving technicians nervous and giddy. The angle of the line, while disconcerting, caused some bullishness, while more experienced technicians urged caution. One chartist in the background could be heard saying, that based on the steepness of the green line and the fact that it outperformed the yellow line, green line and came damn close to the dotted purple line, he expected to be handsomely rewarded, noting that this all had to be confirmed by Mar’s movement past Jupiter. :happy
Are you referring to this one?
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Re:

Post by Ged »

Tramper Al wrote:Even reading (or writing) about technical analysis is a waste of time.
But... reading about how it's a waste of time is productive.
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Re: Is Technical Analysis a Waste of Time?

Post by Best of Both Worlds »

Isnt it self fulfilling if enough traders use technical analysis?
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Re: Is Technical Analysis a Waste of Time?

Post by sometimesinvestor »

My limited experience is that resistance and support seem to have some value in deciding whether to buy or wait to buy on individual stocks. Those concepts also influence traders on broad market indices like the S+ P 500 but you shouldn't be trading broad indices like spdrs becase the computers will beat you for sure. However as intermediate long term investors in individual stocks it is worthwhile to notice that significant drops through known resistence levels may mean the fall may be bigger than anticipated and tryng to call the bottom may prove to be an error.Basically even if following tech analysis is foolish the greater fool theory should tell you there are lots of fools out there and you should avoid being mashed by a fool stampede by not going completely against their actions
Van
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Re: Is Technical Analysis a Waste of Time?

Post by Van »

YES & YES

(I WOULD HAVE JUST SAID YES ONCE, BUT FOR SOME REASON THE MESSAGE MUST CONTAIN AT LEAST 5 CHARACTERS........WHO MAKES UP THESE RULES?)
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Re: Is Technical Analysis a Waste of Time?

Post by Sriracha »

Charting makes me feel like John Nash engaging in his weakness for looking for patterns where no meaningful patterns exist (see or read A Beautiful Mind). I've always been afraid the men in white coats might come for me if I did that :shock: Another reason to KISS :happy
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Re: Is Technical Analysis a Waste of Time?

Post by Sam I Am »

Message deleted.
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Re: Is Technical Analysis a Waste of Time?

Post by garlandwhizzer »

Technical analysts can always identify exactly which pattern tells the tale of market movements, but only about 2 months after all the action is over. I believe it is essentially worthless in predicting the future. Its popularity is a measure of just how unreliable and worthless is most commentary and analysis by so the called "market experts" on TV and in the media. I believe that it is generally a waste of time and effort, designed largely to produce an income stream from those who purvey it rather than the investors who follow their advice.

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Re: Is Technical Analysis a Waste of Time?

Post by umfundi »

garlandwhizzer wrote:Technical analysts can always identify exactly which pattern tells the tale of market movements, but only about 2 months after all the action is over. I believe it is essentially worthless in predicting the future. Its popularity is a measure of just how unreliable and worthless is most commentary and analysis by so the called "market experts" on TV and in the media. I believe that it is generally a waste of time and effort, designed largely to produce an income stream from those who purvey it rather than the investors who follow their advice.

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Re: Is Technical Analysis a Waste of Time?

Post by hazlitt777 »

Burton Malkiel does a good job covering the issue of Technical Analysis in his book, A Random Walk Down Wall Street.

I'm not really a fan of technical analysis. It would take a lot of time to apply and it still strikes me as highly subjective. But it is kind of entertaining listening to people try to apply the method. But I wouldn't trust it.
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Re: Is Technical Analysis a Waste of Time?

Post by Dandy »

It is hard to say that any analysis is a waste of time. Whether it results in better investment returns over the long run is debatable. Technical analysis is like trying to predict who is going to win college football games by trying to data mine the team stats and injury reports. I used to watch a show with football betting "experts" who would spout all sorts of interesting statistics that backed up their "locks of the week". and then they would show their record to date and most were around 50%. They were undaunted by their past record.

Technical analysis is all in the rear view mirror. Interesting, might apply to the future - might not. How much is today similar to the past and will 5000+ variables from now on look anything like the past?
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Re: Is Technical Analysis a Waste of Time?

Post by Bradley »

hazlitt777 wrote:Burton Malkiel does a good job covering the issue of Technical Analysis in his book, A Random Walk Down Wall Street.
Burton Malkiel, wrote, Technical analysis is anathema to the academic world. We love to pick on it. Our bullying tactics are prompted by two consideration: (1) the method is patently false; and (2) it’s easy to pick on.
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Re: Is Technical Analysis a Waste of Time?

Post by SVariance1 »

In B School, A professor of mine frequently commented that technical analysis is voodoo finance. On a related note, I had the opportunity or misfortune or watch some CNBC this week while on vacation. They are fixated on technical analysis. Despite being a financial guy, I had to flip the channel.
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Re: Is Technical Analysis a Waste of Time?

Post by nedsaid »

Yes.

I remember Louis Ruykeyser and his "elves". The "elves" (the panel of technical analysts) were bearish when they should have been bullish and bullish when they should have been bearish. it was worst than flipping a coin. Instead of being wrong half the time, they were wrong most of the time. Rukeyser finally fired the "elves". That was before he fired Gail Dudack, who was correctly bearish when everyone else on the panel was bullish. After Dudack was fired, we had the 2000-2002 bear market.

The trouble with technical analysis is that it is like trying to drive while looking in the rearview mirror. The technical analysts can tell you in great deal what happened and why it happened but they can't tell you what is going to happen. I remember when the Hindenburg Omen flashed and the stock market went up. (Oh the humanity!)

I think it has some value in understanding why the market does what it does. It has no predictive power at all.
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Re: Is Technical Analysis a Waste of Time?

Post by Kalo »

nedsaid wrote:Yes.

I remember Louis Ruykeyser and his "elves". The "elves" (the panel of technical analysts) were bearish when they should have been bullish and bullish when they should have been bearish. it was worst than flipping a coin. Instead of being wrong half the time, they were wrong most of the time. Rukeyser finally fired the "elves". That was before he fired Gail Dudack, who was correctly bearish when everyone else on the panel was bullish. After Dudack was fired, we had the 2000-2002 bear market.

The trouble with technical analysis is that it is like trying to drive while looking in the rearview mirror. The technical analysts can tell you in great deal what happened and why it happened but they can't tell you what is going to happen. I remember when the Hindenburg Omen flashed and the stock market went up. (Oh the humanity!)

I think it has some value in understanding why the market does what it does. It has no predictive power at all.
I remember when Rukeyser fired Dudack, and I just have to add that the reason was that she had been predicting a bear market for something like 10 years (a long time in any event). It is ironic that she was just about to be right, but as the old saying goes, even a stopped clock is right twice a day. Reminds me also of Krusty the Clown on the Simpsons betting on the Washington Generals against the Harlem Globetrotters because he felt they were overdue for a win.

:happy
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Re: Is Technical Analysis a Waste of Time?

Post by nedsaid »

You mean the Washington Generals still haven't won? Darn!! :D
A fool and his money are good for business.
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Re: Is Technical Analysis a Waste of Time?

Post by grayfox »

Technical Analysis look at past price data to forecast future prices. Sometimes they may also look at Volume. So they draw various price charts and look for patterns that foretell price movements. Technicians believe that everything of importance is in in the price data. There is no need for fundamental analysis because all fundamentals are already taken into account in the price.

Here is the problem. :arrow: If you perform statistical analysis on monthly stock returns, for example run an Auto-Correlation Function ACF, you will find that monthly returns are essentially uncorrelated. In other words, unpredictable.

So, yes, technical analysts are wasting their time trying to predict what is basically unpredictable. :oops:

It is like trying to predict coin flips based on the past history of coin flips. You may see patterns in the random series, but it is pure coincidence and has no predictive power.
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Re:

Post by FrugalInvestor »

ResNullius wrote:I can mess things up just find by myself.
Was that typo intentional? If so, it's funny. If not, it's still funny! :)
Have a plan, stay the course and simplify. Then ignore the noise!
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Re: Is Technical Analysis a Waste of Time?

Post by magician »

As part of the Quantitative Methods topic in the Level I CFA curriculum, I feel an obligation to teach the candidates about technical analysis: the curriculum includes a number of learning outcome statements (LOSs) concerning technical analysis.

However, I preface the topic by telling them that, although CFA Institute says that they have to know it (and, by implication, that I have to teach it), they don't say that the candidates (or I, for that matter), have to enjoy it, or even believe in it.

I feel that that puts it in the proper context. Thence, we proceed.
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Re: Is Technical Analysis a Waste of Time?

Post by magician »

grayfox wrote:It is like trying to predict coin flips based on the past history of coin flips. You may see patterns in the random series, but it is pure coincidence and has no predictive power.
Except, perhaps, to tell you something about the probability of getting a head and getting a tail. Should the coin be biased, that historical information may be very useful (especially if you're making even-money bets on the outcome).
Simplify the complicated side; don't complify the simplicated side.
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