3 ms·

"There are “frighteningly many ways that the investment industry regularly smokes people with complicated and unfalsifiable (and thus pseudoscientific) theories

"There are “frighteningly many ways that the investment industry regularly smokes people with complicated and unfalsifiable (and thus pseudoscientific) theories and cherry-picked market data” I've been following yahoo.finance and it's full of articles about "technical analysis" meaning patterns people claim to see in stock movements and what they mean and predict about the future. Isn't that just like astrology? I wonder how it's possible that they are allowed to publish such junk?

m101 5y ago
Mostly junk IMO, except insofar as there are market participants who trade on the back of it and move prices.
02020202 5y ago
Technical Analysis works very well in short-term. Hence why it is the bread and butter of traders. Even though it's still largely just a gamble. But for investors, Fundamental Analysis is what matters.
thefounder 5y ago
Technical trading made millionairs and billionairs during the pandemic era. You can't do that with astrology unless you find a sucker to sell your astrology services. It surely is "junk" as far as the value to the society is concerned but in finance/trading it's all about money and technical trading makes money. It's not really like astrology because it has some logic. For example: if a stock was sold for $ 10 yesterday and now it jumped to $100, based today's trading volume and on historical data we can infer that a percentage of them will sell to make a profit. Of course it's not a sure thing so we will balance our trades(bets). We don't even have to win "this" bet/prophecy. We just need to win most of the bets or the highest bets. Add to this the fact that if enough participants follow the same patterns they can move the market and make their bets a self fulfilling prophecy.
- samhw 5y ago
  > You can't do that with astrology unless you find a sucker to sell your astrology services. That's precisely what TA itself relies on. As the comment above mentions, the avowed rationale of TA is simply "other people use it too, so to that extent the patterns hold".
- ladberg 5y ago
  Lotteries also made millionaires and billionaires during the pandemic era, I don’t think I’ve seen any TA that legitimately provides returns at a better than random rate.
- noja 5y ago
  > Technical trading made millionairs and billionairs during the pandemic era. Because the market went up. Can you prove it was because of TA?
  - deleted 5y ago
    [deleted]
mettamage 5y ago
Well, yes, but more nuanced. TA is essentially a form of misguided quantitative analysis. The reason it's misguided is because the courses that teach you TA aren't properly backtested. Renaissance Technologies seems to have a lot of black box mathematical models that they make a lot of money on. How is that different than TA? It's backtested, and analyzed in further rigorous means. TA misses rigor, that's it. The problem: rigor is hard and many people are too immature to be rigorous, myself included as in many cases it means you need mathematical maturity. It's weird, I view trading as one of the few fields where academics are more practical than being practical. I don't think the world has learned this lesson yet. I might be wrong of course, just an opinion.
- vasco 5y ago
  Say a companies directors are not trustworthy and you get a bad feeling from the way they speak about people around them. Later on, huge fraud is uncovered at the company. What does (rigorous or not) TA or backtesting tell you about the likelyhood of something like this happening?
  - nightski 5y ago
    It doesn't need to. You don't put all your eggs in one basket. No trader expects 100% win rate, not even close.
  - mettamage 5y ago
    Nightski (sibling comment) has a point. Here are a few others. Disclaimer: I'm a retail trader and investor. I'm beginning to take retail trading/investing as seriously as founding a startup as they compete very much for the same rewards in many cases [0]. I'm assuming you're talking about seeing the CEO on television or something. I'm not assuming an insider context as I don't want to think about insider trading. I find your initial premise a tough one to accept. That people can detect lies based on their intuition. This is because I have learned in psychology classes that (1) lies are extremely tough to detect and (2) intuition is only reliable when you have practiced a lot in a consistent-rule-based environment (e.g. think Chess). While there are some lie detection patterns that outperform chance level, there are few and they don't outperform on a crazy scale. Then again, I'll indulge in the premise because it's tough to make concrete premises and I think I see where you want to go with this. So let's do this. From a quant standpoint, you could probably quantify "untrustworthy" speech somehow. You can backtest that algorithm. Obviously TA doesn't do this. Then again, I know little about TA because I think it is misguided. From a trader standpoint: maybe you actually want to trade on the lies, especially when you know about them [1]. It really comes down to your form of ethics [2] and if you can make a higher return. [0] The same rewards are: Note: I'm a bit creative in this. When I was younger I wasn't, which is why I wasn't interested in trading/investing. - Money - Having freedom in your own way of working - Getting to product market fit (aka understanding a market) - Having an impact on society. I struggled how to achieve this with trading/investing for a long while, but the way to do it is to share what you know (I do that for free, I'm quite vocal in my friend group about it). Every decision in life has an "investment" component to it (what should I eat today? Should I buy a house? Should I go to uni? Should I date that person? What route should I take from A to B?). I like to take that grand view and hone it though financial markets. - In both cases, you can create an environment where hardcore academics and truth seeking can have a huge financial and societal impact. If I ever get to the stage where I'm smart enough to make a lot of money due to truth, then at one point I'll make my strategies public if they have a strong "truth seeking" component to it (and provided I can isolate it from the luck factor involved). [1] Example: look at the whole cryptocurrency space. Note: there are genuine believers, earnest hard workers (on protocols and such) and true visionairies. However, the opposite of those archetypes are also abundant in that space: hardcore cynical speculators, lazy scammers and copycats. So there are enough traders there that simply try to beat other people in a trade despite the fact that they believe it's all worth nothing and it's all bullshit. [2] My younger self would find it unacceptable, so I'd never trade on it. Nowadays I find it acceptable to trade on "unethical things" in quite a few circumstances. In both cases, I still require that I think and feel deeply about it.
cblconfederate 5y ago
If you listen to Bloomberg radio it s a 24/7 namedropping "technical terms" that are supposed to dazzle its geriatric audience.
lordnacho 5y ago
Quant hedge fund guy here. Astrologers look at the positions of the stars and planets. Astronomers look at the positions of the stars and planets. Over the past centuries, astronomers have discovered such amazing things like the distances to other galaxies, the paths of quite small rocks in our solar system, the age of the universe, redshift, cosmic background radiation, and so on. TA, basically looking at the numbers that come out of the market, is the same. You can do silly unscientific things with it, or you can apply a falsifiable method and make real progress. If you go down the scientific route, you will find the same data takes you down a rabbit hole of low latency coding, linear algebra, infrastructure, financial theory (time value of money, optionality), economics, and so forth.
- csee 5y ago
  Have you seen traditional TA methods applied profitably within a quant framework?
  - lordnacho 5y ago
    What I've always missed with "Traditional TA" is a rigorous accounting of how to do it, and what the results are. You can do this yourself on a spreadsheet: - Get some data - Calculate the 50 bar moving average - apply some rule like "trade when it crosses this or that stat" - See what the PnL is. - Think about whether this is a fluke and whether it will keep working. Somehow none of the ads and articles I see do this completely. But yes, you can take the same data and use it effectively. Needs more than a spreadsheet, admittedly.
    - csee 5y ago
      Forgetting MA crossovers (which don't work), what are your thoughts on backtesting trendlines and support/resistance lines. Have you seen anyone try that?
      - lordnacho 5y ago
        I have actually. It's not so easy to keep your degrees of freedom down, so it's hard to conclude anything. Or it was for that project.
WA 5y ago
> Isn't that just like astrology? I wonder how it's possible that they are allowed to publish such junk? The TA crowd will tell you that TA is a self-fulfilling prophecy: People believe in patterns and whatnot, take profits at certain levels, buy at others, and that makes TA "true". However, if you think it through, it doesn't make any sense, because it is basically a price inefficiency. If levels and patterns were reliable indicators for predicting the future, there surely would also be a system that exploits these patterns, and thus, TA would be inefficient. Imagine a hedge fund with enough money to "create" patterns in a market. You could have perfect setups to exploit everyone else in the market. Reminder: Generating alpha / active trading is a zero-sum game. I enjoyed reading the free articles in this blog. They give you quite a bit of understanding of TA, active trading and all the fallacies around it: https://www.priceactionlab.com/Blog/article-selection/ https://www.priceactionlab.com/Blog/article-selection/

m101 5y ago

Mostly junk IMO, except insofar as there are market participants who trade on the back of it and move prices.

02020202 5y ago

Technical Analysis works very well in short-term. Hence why it is the bread and butter of traders. Even though it's still largely just a gamble. But for investors, Fundamental Analysis is what matters.

thefounder 5y ago

Technical trading made millionairs and billionairs during the pandemic era. You can't do that with astrology unless you find a sucker to sell your astrology services. It surely is "junk" as far as the value to the society is concerned but in finance/trading it's all about money and technical trading makes money. It's not really like astrology because it has some logic. For example: if a stock was sold for $ 10 yesterday and now it jumped to $100, based today's trading volume and on historical data we can infer that a percentage of them will sell to make a profit. Of course it's not a sure thing so we will balance our trades(bets). We don't even have to win "this" bet/prophecy. We just need to win most of the bets or the highest bets. Add to this the fact that if enough participants follow the same patterns they can move the market and make their bets a self fulfilling prophecy.

samhw 5y ago
> You can't do that with astrology unless you find a sucker to sell your astrology services. That's precisely what TA itself relies on. As the comment above mentions, the avowed rationale of TA is simply "other people use it too, so to that extent the patterns hold".
ladberg 5y ago
Lotteries also made millionaires and billionaires during the pandemic era, I don’t think I’ve seen any TA that legitimately provides returns at a better than random rate.
noja 5y ago
> Technical trading made millionairs and billionairs during the pandemic era. Because the market went up. Can you prove it was because of TA?
- deleted 5y ago
  [deleted]

mettamage 5y ago

Well, yes, but more nuanced. TA is essentially a form of misguided quantitative analysis. The reason it's misguided is because the courses that teach you TA aren't properly backtested. Renaissance Technologies seems to have a lot of black box mathematical models that they make a lot of money on. How is that different than TA? It's backtested, and analyzed in further rigorous means. TA misses rigor, that's it. The problem: rigor is hard and many people are too immature to be rigorous, myself included as in many cases it means you need mathematical maturity. It's weird, I view trading as one of the few fields where academics are more practical than being practical. I don't think the world has learned this lesson yet. I might be wrong of course, just an opinion.

vasco 5y ago
Say a companies directors are not trustworthy and you get a bad feeling from the way they speak about people around them. Later on, huge fraud is uncovered at the company. What does (rigorous or not) TA or backtesting tell you about the likelyhood of something like this happening?
- nightski 5y ago
  It doesn't need to. You don't put all your eggs in one basket. No trader expects 100% win rate, not even close.
- mettamage 5y ago
  Nightski (sibling comment) has a point. Here are a few others. Disclaimer: I'm a retail trader and investor. I'm beginning to take retail trading/investing as seriously as founding a startup as they compete very much for the same rewards in many cases [0]. I'm assuming you're talking about seeing the CEO on television or something. I'm not assuming an insider context as I don't want to think about insider trading. I find your initial premise a tough one to accept. That people can detect lies based on their intuition. This is because I have learned in psychology classes that (1) lies are extremely tough to detect and (2) intuition is only reliable when you have practiced a lot in a consistent-rule-based environment (e.g. think Chess). While there are some lie detection patterns that outperform chance level, there are few and they don't outperform on a crazy scale. Then again, I'll indulge in the premise because it's tough to make concrete premises and I think I see where you want to go with this. So let's do this. From a quant standpoint, you could probably quantify "untrustworthy" speech somehow. You can backtest that algorithm. Obviously TA doesn't do this. Then again, I know little about TA because I think it is misguided. From a trader standpoint: maybe you actually want to trade on the lies, especially when you know about them [1]. It really comes down to your form of ethics [2] and if you can make a higher return. [0] The same rewards are: Note: I'm a bit creative in this. When I was younger I wasn't, which is why I wasn't interested in trading/investing. - Money - Having freedom in your own way of working - Getting to product market fit (aka understanding a market) - Having an impact on society. I struggled how to achieve this with trading/investing for a long while, but the way to do it is to share what you know (I do that for free, I'm quite vocal in my friend group about it). Every decision in life has an "investment" component to it (what should I eat today? Should I buy a house? Should I go to uni? Should I date that person? What route should I take from A to B?). I like to take that grand view and hone it though financial markets. - In both cases, you can create an environment where hardcore academics and truth seeking can have a huge financial and societal impact. If I ever get to the stage where I'm smart enough to make a lot of money due to truth, then at one point I'll make my strategies public if they have a strong "truth seeking" component to it (and provided I can isolate it from the luck factor involved). [1] Example: look at the whole cryptocurrency space. Note: there are genuine believers, earnest hard workers (on protocols and such) and true visionairies. However, the opposite of those archetypes are also abundant in that space: hardcore cynical speculators, lazy scammers and copycats. So there are enough traders there that simply try to beat other people in a trade despite the fact that they believe it's all worth nothing and it's all bullshit. [2] My younger self would find it unacceptable, so I'd never trade on it. Nowadays I find it acceptable to trade on "unethical things" in quite a few circumstances. In both cases, I still require that I think and feel deeply about it.

cblconfederate 5y ago

If you listen to Bloomberg radio it s a 24/7 namedropping "technical terms" that are supposed to dazzle its geriatric audience.

lordnacho 5y ago

Quant hedge fund guy here. Astrologers look at the positions of the stars and planets. Astronomers look at the positions of the stars and planets. Over the past centuries, astronomers have discovered such amazing things like the distances to other galaxies, the paths of quite small rocks in our solar system, the age of the universe, redshift, cosmic background radiation, and so on. TA, basically looking at the numbers that come out of the market, is the same. You can do silly unscientific things with it, or you can apply a falsifiable method and make real progress. If you go down the scientific route, you will find the same data takes you down a rabbit hole of low latency coding, linear algebra, infrastructure, financial theory (time value of money, optionality), economics, and so forth.

csee 5y ago
Have you seen traditional TA methods applied profitably within a quant framework?
- lordnacho 5y ago
  What I've always missed with "Traditional TA" is a rigorous accounting of how to do it, and what the results are. You can do this yourself on a spreadsheet: - Get some data - Calculate the 50 bar moving average - apply some rule like "trade when it crosses this or that stat" - See what the PnL is. - Think about whether this is a fluke and whether it will keep working. Somehow none of the ads and articles I see do this completely. But yes, you can take the same data and use it effectively. Needs more than a spreadsheet, admittedly.
  - csee 5y ago
    Forgetting MA crossovers (which don't work), what are your thoughts on backtesting trendlines and support/resistance lines. Have you seen anyone try that?
    - lordnacho 5y ago
      I have actually. It's not so easy to keep your degrees of freedom down, so it's hard to conclude anything. Or it was for that project.

WA 5y ago

> Isn't that just like astrology? I wonder how it's possible that they are allowed to publish such junk? The TA crowd will tell you that TA is a self-fulfilling prophecy: People believe in patterns and whatnot, take profits at certain levels, buy at others, and that makes TA "true". However, if you think it through, it doesn't make any sense, because it is basically a price inefficiency. If levels and patterns were reliable indicators for predicting the future, there surely would also be a system that exploits these patterns, and thus, TA would be inefficient. Imagine a hedge fund with enough money to "create" patterns in a market. You could have perfect setups to exploit everyone else in the market. Reminder: Generating alpha / active trading is a zero-sum game. I enjoyed reading the free articles in this blog. They give you quite a bit of understanding of TA, active trading and all the fallacies around it: https://www.priceactionlab.com/Blog/article-selection/ https://www.priceactionlab.com/Blog/article-selection/