Is technical analysis just stock market astrology?

No. That comparison is an insult to astrology.

While the made-up character is similar, Astrology is far richer in concepts, orchestration and story telling.

Technical analysis is the ultimate dumbification of market structure and dynamics, which in itself is a major dumbification of the formal economy, which in itself is a major simplification of the stuff-that-matters(TM).

The objective of technical analysis is to get as many low-information actors as possible to transact with as low-cost as possible technology (I would totally not be surprised if current "technical analysis" verbiage is 100% automated).

From the comments here, I think most people just read the headline.

The article looked at 50/200 day simple moving average crossovers on the S&P 500 index (using SPY etf). Which are really just indicators of momentum. Buy when going up, sell when going down. This underperformed just buying and holding the SPY 480% return versus 520% over the last 25 years. However, it avoided big draw downs, so the risk adjusted return was better. In other words, it works in a world with no trading commissions and no bid ask spread. Is it worth it in real life? Probably not.

Here are the best arguments for why TA works IMO:

- The patterns are real in that they can be used to roughly identify groups of buyers and sellers who have price floors and ceilings. E.g. it's a way of gauging the momentum of a trend. However the signal:noise ratio is very high especially when traders try to act on these patterns so that their activity drowns out the original signal

- The patterns then become a schelling point and those who can read the patterns faster can front-run those who read it more slowly. The patterns themselves become reality rather than just a representation of reality.

The value is most likely fully drained from it in that there is no longer any alpha but remains sorta-kinda truish occasionally like "if they don't look you in the eyes it means they're lying" or "changing the lighting improves productivity"

If a meteorite hits earth, aliens are discovered, quantum computing breaks encryption, someone launches a nuclear bomb, etc, any of those will affect the stock market by a lot. Technical analysis can't predict a meteorite or any of those other things, therefore it cannot work.

It "might work if nothing significant happens" but that is just a weasel way of saying it doesn't work.

Now if you're saying you decided to invest in something and you're trying to get an entrypoint and you spot a moment of large deviation from the mean and you use that to influence your operational buying mechanics like how you space out your buys or time them, that I can definitely see. But online you always see these two very different things mixed together.

Mostly. I've been known to get my hands a little dirty using historical pricing combined with deep due diligence efforts. Think of my use of TA like the cherry on top, not the actual cake. I already know I want cake or I wouldn't be sitting at the table. But, I might consume the cake a little bit differently depending on the nature of the cherry.

For example, I'll listen to an earnings call or other investor presentation to determine if I even want to do business with some corporation. After I have committed to my decision to purchase based upon DD, I might look at how the market has historically treated their business up until today to develop an actual strategy for acquiring a position (or more of a position).

The most recent instance of this for me was AT&T and Verizon getting bad news raked over the coals last week. I already know I want to be in business with these organizations (already am), so I looked at how the market was reacting in near-real-time to the news and adjusted my cake-eating strategy accordingly.

Ultimately, the outlook you are working with is what will drive all of this. I don't ever sell stock. If I decide to buy something, I know I want to hold it for at least 3 years. Never selling and strategically buying seem to be a simple rule for not getting fucked over with how investors typically try to use these tools.

The least tortured analogy I can come up with is to compare pure TA investing strategies to poker. Is it gambling? Kinda yes. Is it also strategic? Maybe also yes. Really depends on the context and mindset of the participants going into it.

Well that was pretty shallow. Only a single pattern was included and even that performed worse than the index. If you were to include the transaction costs and the cost of time spent analysing that, the perf would be even worse. So a shallow article with a wrong conclusion. Since past returns are not a reliable indicator for future returns any back testing will only show if a thing would have worked in the past not in the future.

Yes. And what's more, not too long ago this was common knowledge. Every professional trader knows that TA is crystal-ball-tier nonsense. But the influx of morons in cryptocurrency and WSB memetrading have to learn this lesson all over again (and in an adversarial environment, since there are tons of '''gurus''' poisoning the well with bad info, insisting that their TA is totally legit and anyone saying otherwise probably has "political motivation")

Mandelbrot (of the set) studied the effectiveness of technical analysis and wrote about it in The Misbehavior of Markets: A Fractal View of Financial Turbulence. This PDF [1] has a summary of the findings.

Spoilers: The math shows TA's bullshit.

[1] https://users.math.yale.edu/users/mandelbrot/web_pdfs/getabs...

I tend to think so, because markets are anti-inductive: https://www.lesswrong.com/posts/h24JGbmweNpWZfBkM/markets-ar...

That is, since everyone knows that everyone knows about technical analysis, the value it may have had is long since sucked out of it. And in any submarket where a participant has the market power to paint the tape, all following technical analysis will do is allow then to make traps for you and drive your trading activity in response to the technical analysis.

It is possible that super-long-term technical analysis has some meaning, and there's some generalized principles about how to read things like depth of the market off of the tape, but I'm not convinced deeply about the utility of technical analysis in general.

Some dude is having their first naive thoughts about the stock market, writes a shallow post about it and gets onto the HN frontpage.

In general, investment discussions on HN are very shallow.

Is there some investing discussion forum on the web with substance?

If anyone wants an almost too on-the-nose astrology/stock market analysis, check out LunaticTrader

https://lunatictrader.com/moon-cycles-in-the-markets/

https://lunatictrader.com/performance/

As someone who has dabbled in this sort of thing for a few years, dived pretty deep, and begun my journey into quantitative analysis I can tell you that all TA is pretty much useless. There are fundamental mathematical reasons as to why, but in a nutshell there is no TA indicator (that I'm aware of) that is a leading indicator. You simply cannot use technical analysis to glean any useful information about the future.

That isn't to say that you cannot use mathematics to glean useful information about the future. The medallion fund exists. People are doing it. But you're going to have to get very, very good at very domain specific math involving statistics, signal theory, information theory and the like, it's much more involved than TA, theres a reason quants make 7 figure salaries, you're not making useful predictions drawing triangles on a linear price chart.

Wow, the meta-analysis of comments versus the actual astrology thread are stark: https://news.ycombinator.com/item?id=36840674

Looking at both side to side shows how much the materialists influence places like this.

1. Astrology is seen as a "womanly lowly thing", but this has no people yelling such sexist connections.

2. Astrology has the underlying Hermetic beliefs that "As above, so below" and to know thyself, whereas this goal is "make money machine go brrr"

3. Astrologers/diviners know their art is imprecise and say so, whereas this Technical Analysis shrouds itself in "hard math badly applied" to fool people (including themselves).

4. The Materialists (anti-religion, anti-occult, anti-mystic) are absent, whereas in the Astrologer thread they were HOWLING.

Reddit stock gurus do the opposite of what a legit person would do. Unlike "world's smartest billionaire" Jim Simons, who's operations are super secret, finance influencers share their picks as a way to grow followers and sound smart. If the modern equivalent of haruspicy (technical analysis) worked as well as claimed, these con artists would realize they could make more money keeping quiet.

Short answer yes.

It's a simple reality that you can't just trade shares based on technical analysis alone. You are trading in a company, so you can't ignore what's going on with the company or the regional market.

The only place technical analysis might work is the forex market. Because the volumes are so enormous, and there is no centralised exchange.

But even then, you're still at the mercy of world events. Look what happened when the SNB pulled the peg on CHF overnight[1].

Sure the HFTs and Quants do it, but they do it on minuscule timeframes, and they have an enormous budget and even more enormous risk appetite.

As the old saying goes. Time in the market is better than timing the market. Oh, and "only invest what you can afford to loose".

[1] https://www.reuters.com/article/us-swiss-snb-brokers-idUSKBN...

This question can essentially be simplified to: "Is the stock market truly random?", as randomness is defined as the absence of patterns and TA is all about patterns.

Currently, the random walk hypothesis remains just that - a hypothesis. There is no definitive evidence to confirm that the stock market operates in a random manner.

On the other hand, many believe that there are some long-term patterns and invest huge chunks of money based on that belief. For example, one such belief is that the S&P 500 will continue to have an annual average return of something between 8% - 10% in the decades to come.

If the movements in stock charts, including ETFs like SPY, were truly random, such a pattern could not exist. Consequently, our expected average annual return from the S&P 500 should be 0%. This is because in a genuinely random environment, the likelihood of a rise and a fall would be precisely equal.

Yes. Also no.

First, no system is perfect. If you're a trader, you want something that will shift your odds from 50/50 to 55/45. Can some forms of TA do that in certain market conditions? I believe so. When the market is driven by certain factors, say, retail traders, TA likely performs better simply because other people are using TA. Doing TA can tell you what the morons are doing.

Also, I believe it was "The Long, Good Buy" book which covers the advantages of mean-reversion strategies and provides backtested analysis. If a stock moves by a large amount in a short period of time, it will likely mean-revert somewhat and you can take advantage of that.

Do I think any of us computer folk should mess around with this? No. The best trade is to improve your skills and get pay raises.

I prefer to look for the Bart Simpson pattern on my charts.

https://www.bloomberg.com/news/articles/2020-06-03/bitcoin-b...

https://archive.ph/teoSo

I think a more compelling argument against technical analysis can be found by considering the outcome of a semi-efficient market, and how unlikely it is that simple, purely momentum-based signals haven't already been arbitraged away by the other participants in the market (who have significantly more sophistication and speed-of-execution than anyone publishing technical analysis strategies online)

TA is a very broad umbrella, and forms of TA work. Day traders exploit it day after day. It doesn't require sophisticated technology or deep pockets. I see many people that necessarily aren't familiarized enough with the trading world argue otherwise, which is unfortunate since they're making categorical statements while being not very well informed.

I'm a bit blunt because of this, but you have to remember that calling "SMA crossover" TA is like calling setting up the washer "programming" it and equating it with programming in a software developer sense. And both are available to a wide population! Guys, there's much more to TA than that (and similar super simple strategies that just rely on no or very simple market structure).

I just had to reply. Someone down there said he spent time and said no indicator will reliably predict price. Forget about magical indicators, agreed. I have proved TA to myself, but it doesn't look at all like what the article or many of the comments describe. It's one TA system of many, though.

I'm happy to answer questions if anyone disagreeing has any. I may not be able to do so for a broad variety of scenarios, since I'm talking specifically about day trading, but the "patterns" (it's not just patterns, it's patterns in a market structure context where you get the alpha from, otherwise I understand the "astrology" analogy presented here) apply to longer timeframes as well.

That astrology managed to result in a significant loss compared to "buy and hold" shows that astrology is very effective, unlike the suggested "SMA crossovers" technique.

A strategy that is based on pure chance is going to make, on average, as much as the "buy and hold" strategy, for the time you actually hold the stock. Looking at the "SMA crossover" graph, it looks like the stock is held for about 80% of the time, so, the result is about 25% better than 100% "buy and hold". Good but...

The "moon phases" technique gets zero benefits even though the stock is held for 50% of the time, seems bad right? Now think about it, if it made nothing during the time you held the stock, it means all the valuation must have happened during the time you didn't hold the stock. So all you need to do is to do the opposite of what is suggested: buy on new moon, sell on full moon. In the end, you should get as much as the 100% "buy and hold", but because you only held it for 50%, it is actually twice as good.

So to summarize, here is the ranking. The number corresponds of how much better it is to "buy and hold":

  - buy on full moon, sell on new moon => 0
  - buy and hold => 1 (reference)
  - SMA crossover => 1.25
  - buy on new moon, sell on full moon => 2

So, the article got it wrong, done right, astrology is clearly the best.

If anyone is interested in doing stock picking, at least seriously, I would recommend that they first read A Random Walk Down Wall Street, which just celebrated its fiftieth anniversary and released its thirteenth edition in January:

* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

If you just want to have fun (5-10% of your assets/portfolio), then just have fun.

TA is extremely useful for learning Python, Pandas and Matplotlib. The simple algos like MACD, RSI and SMA are easy to code and allow you to have a lot of fun learning how to build a simple trading system.

Other than that, its pretty much as useful as tarot cards.

It can be and some people treat it like that. But it can also be a tool used to identify trends and trend changes. The chart takes into account everything: financials, narrative, public opinion, future earning potential, etc. All of these inputs are probabilistically weighed against each other in real time. Keep the TA simple and it's an extremely useful tool. Anyone who dismisses TA entirely is leaving money on the table.

The primary metric I believe is important in evaluating the viability is TA is the number of people that "believe TA works." To the extent that other investors trade based on mystical figures on a chart, the price behavior may start to match investor movement and become somewhat of a self-fulfilling prophecy, at least until more meaningful fundamentals start to stabilize the behavior.

The key to make money in the market is not about prediction. It all about managing your risk. If you manage your risk well, that when Mr Market pays you your due.

Technical analysis is just one tool to pick potential stocks out of the many. The real money is how well you manage your risk on that particular stock you pick.

Shameless plug. I recently did a "Show HN: Weekly Charts of Strong Stocks and ETFs (https://weeklycharts.org)", which do the same thing like technical analysis. Its main purpose is to just show you potential stocks that need attention.

The hard work is risk management.

So, the author picks the most basic indicator applied in a way that most would not use it in modern times, questions its usefulness and compares it to astrology.

Why do people bother writing blog posts void of insight? This isn't even useful for SEO...

Yes, next question?

Also, this is a really pitiful article. Very short, badly written, proves nothing. Why is it getting this many upvotes?

The answer is of course - yes. But the funny thing about markets is that if enough people believe a thesis it is effectively true. Go figure. People will trade a "vomiting camel" so best to be abreast.

If there are youtube/twitter/etc guys "teaching" you a "strategy" then it's one to avoid like the plague. True edge generating strats are held onto like state secrets.

The proper way to study charts is to look at price action only. Moving averages, RSI and the like are all lagging indicators. The trade is already over by the time the signal hits.

Actual TA is based on human psychology. Imagine a lot of people are buying at $1 and price pumps and then drops. Now imagine the price moving towards the $1 again. There is a high probability (not certainty) that price rejects that price point. There will be people who want to get out at breakeven because they didn't have stop losses.

Dorsey Wright was acquired by the NASDAQ for over $200m in 2015. [1] They made a business of selling asset allocation and sector rotation model portfolios, mainly using RSI (Relative Strength Index). They are probably a bigger business now than when they were bought.

So the question of whether technical analysis makes money: Yes, for the right people it does.

As a long time trader and markets practitioner, I can also tell you that YMMV with technical indicators. Because many people use them, they are self-fulfilling in a way. The signal exists because people think there is a signal.

Another way to think about it, is technical indicators can be generalized to other well known price-based or volume-based indicators or factors such as momentum, reversion, etc... Understanding how volume interplays with price is also quite important. Big price moves with little volume may not have support. Technical indicators aren't bad. For "visual thinkers" it may be a great way to segway into a more "closed-form" solution or explanation of how a particular market works.

Also, to the folks who are poo-poohing the "simplistic" blog post: yes, the analogy to astrology is a bit contrived. But the point on using SMA for better risk-adjusted returns is excellent. This would be a great foundation for building a higher-Sharpe S&P-like replication strategy.

[1] https://ir.nasdaq.com/news-releases/news-release-details/nas...

I can't believe how many haters there are of Technical Analysis here. Perhaps the connotation and possibly the meaning of the term has changed in recent years. I've been using Technical Analysis since I read Stan Weinstein's book here (https://www.amazon.com/Stan-Weinsteins-Secrets-Profiting-Mar...) and as you can probably tell from the cover, this is not a new concept. I can't remember whether Stan actually refers to it as TA, but that's what it is. Here is what it comes down to:

Using TA, we can better determine when a stock is in the process of becoming more valuable aka trending up. We also can observe when it's likely that a stock will not become more valuable (the top) and even when a stock is likely to become less valuable (trending down).

Things like moving average crossovers might work for some people. I'm sure there are people out there that swear by the MESA Sine Wave or some obscure study like that. Personally I've had more success just keeping it as simple as possible, and that's what you might find in Stan's book (which is not a referral link, and I'm sure you can find the information elsewhere).

This works because of Efficient Market Theory, which I do subscribe to. It doesn't invalidate other means of choosing investments, but for certain minds, it provides a good framework for making decisions. That's really why I'm confused about all the hate for TA in here: I was under the impression that hackers like to make decisions based on data. Maybe WallStreetBets has given it a bad name or something.

There are only two legal approaches to investing - available to average people and professionals alike - that have been shown to work over very long periods of time.

1) Buy the S&P500 via a very low cost index fund. Buy consistently, effectively cost averaging, over the long-term. Don't worry about valuations, timing, bulls or bears, recessions or euphoria, as that will all smooth out. Just keep buying over time. This is what works best for ~95%+ of all people and is one of the few ways to predictably build wealth (assuming enough income above expenses over decades of time).

2) The Ben Graham school of value investing. [1] This some takes time to learn and integrate. You have to build up a skill at understanding what represents a good value and you have to be able to have considerable discipline, understanding that you only need a few hits every so many years to fairly rapidly compound capital (ie that you don't need to constantly hit homeruns, so you properly grasp that you can safely afford to be patient and do not need to FOMO participate in market stupidity; with the first rule being do not destroy capital).

This is why so few professional money managers on Wall Street can beat the market over time (despite all they have access to) and skilled independent value investors can. There is a system that works and most of the Wall Street players do not have the time (they want/need results asap) or discipline to put it into action.

[1] The Superinvestors of Graham and Doddsville [PDF] https://www8.gsb.columbia.edu/sites/valueinvesting/files/fil...

Looking for patterns in charts is stock market astrology, but technical analysis is a broad term that goes beyond just that. An analysis of 10,000 institutional portfolios found technical analysis provided a small but statistically significant return advantage [1].

Perhaps the way most retail investors or get-rich-quick schemes use technical analysis (looking for patterns in charts) is astrology. But the big boys and institutional investors seem to profit from certain types of technical analysis. Highly reccomended watching this video by Benjamin: https://www.youtube.com/watch?v=ZN6P9ErUcOg

Essentially:

- Chart patterns are uselesss

- TA by itself is useless

- Using TA in tandem with a bigger strategy can (and is statiscally shown to) provide an edge

[1] https://scholar.google.com/scholar?hl=en&as_sdt=0%2C22&q=Hea...

This section tells me that the data is insufficient to draw conclusions:

> The strategy goes as follows: we purchase SPY on a new moon, and re-sell it on the next full moon. And repeat that every lunar month.

> Clearly, it fails at beating SMA crossovers. Or at doing basically anything, an investor using the moon phase strategy starting with 10.000$ would end up with only 11.110$ and a Sharpe ratio of only 0.09.

Under EMH, technical analysis doesn't work, and under technical theories there's no reason to expect a wax on / wane off strategy to do anything. Our strong assumption should be that a strategy that has you in the market 50% of the time should produce 50% of the return with 50% of the variation.

However, this arbitrary control strategy instead provided a strong return difference, somehow avoiding most periods of growth. If this backtesting period gives a false positive signal that this strategy differs from no strategy (appropriately weighted in-market investment), then the period is also likely insufficient to confirm the strength of the crossover technical strategy.

95% of the professional asset managers, for example those in wealthion, blockworks, paid macro people like 42macro and themacrocompass, nearly all of them, said stocks would most likely touch 4300 on the S&P and probably cycle down again to prior lows, as manufacturing PMIs, housing, etc weaken, as the long and variable lags from Fed tightening, credit environment, start to hit.

Instead, right after the debt ceiling, there was a massive short squeeze, parabolic AI tech pump, and we're at 4567 on the S&P.

As it turns out the people just trading off momentum, technical analysis, and liquidity expectations, did way better than those betting on certain industries to go down. Sure, it can still go down, but there are plenty of money managers, macro experts, that looked at the big picture based and made data driven decisions based on historical data, and still got completely burned because they were trading against the technicals (massive upward momentum since after October).

Nope, the fact is a private individual has a very low probably of building wealth on the stock market due to numerous factors. Much like a casino the assumptions the naive make are leveraged against the ambitious and irrational.

Traditionally, the homes and farms people earned would ultimately have better returns for individuals, but the primary mechanism was controlling for inflation and excluding debt bleeders on equity. These systems were slowly converted into commodities through investment hedge-funds, and are now the primary driver in speculative-markets (2008 crash mechanism was never mitigated). See Japan real estate if you would like to predict the logical conclusion of the naive commodity theory.

When one has the epiphany debt has real consequences despite the political rhetoric, Your investment risk profile will improve, and seeing currency in a global trade context becomes clear.

Rule #13: "Never reach out to a drowning man", as in their desperation they can push you under as well.

Good luck =)

If enough people believe it then it works and hence it’s not randomness and can be exploited to make money.

Much like it’s important to always say to your crush that you are the most compatible sign.

All sorts of BS narratives dominate the stock market, TA can be thought of as a meta-narrative.

Some quant hedge fund understood that sunny days in Manhattan are correlated with the market going up, TA could be the same, if some particular chart figure emerges then it prompts people to buy or sell thus creating the same effect of a sunny day in Manhattan.

logically speaking both the sunny day and the peculiar TA chart appearing should not prompt people to buy or sell a security who are we to question their psychology? And most importantly why question it when we can exploit it?

Other people would turn around and exploit our psychology when being in a good mood due to having made money on the stock market exploiting the TA meta-narrative , people in a good mood are notoriously more likely to spend on stuff and even overpay for it

Sigh. A lot of the arguments here amount to "there is no heuristic that's 100% correct, so heuristics are useless". That's not how that works.

TA ultimately is supposed to give you insight into how the overall market is currently thinking about a specific stock. Of course it doesn't work by itself, because yes, new info changes attitudes.

And yes, some heuristics are worse than others. Some are more sophisticated than others. But they help paint a picture.

Sometimes, the picture is "hey, the market seems currently full of people making irrational decisions, they all disagree with me". That's a signal you look at your fundamental assumption to figure out if you're the fool, or they are. That's where TA makes sense. It's a way to highlight where to look, not a way to make decisions.

In the complete absence of any other analysis? Probably not so much. Though I'd certainly love to see more thorough backtesting than one stock, one metric.

Well, the thing is that it once had value. But before computers and the internet and real time data made creating all sorts of charts really easy. Jesse Livermore is regarded as an early technician in that he would spot price patterns that he interpreted to signify behavior. For example if he saw a lot of buying while people were bearish he would reason that there were insiders who knew something driving the buying. And yes, he did hand chart stock prices meticulously according to a particular system. But again, in those days it took a tremendous amount of work.

Hell, stock indices which we all take for granted today were largely created because it was so difficult to know at a given moment what the overall market was doing and tabulating those was a ton of work by today’s standards.

But now technical analysis has been democratized and everyone has access to the same indicators. So the value has been destroyed.

This brings me to a larger point. Markets are constantly evolving to take what used to be hardly noticed and difficult to understand and make it the focal point of everyone after it works. But people fail to realize that because so much attention is now placed on it that it changes the market in the process so that that thing no longer has significance.

One recent example- the fed used to not even tell you that they had changed the fed funds rate! So some clever market observers would follow the prime rate and figured out that there was a relationship between that and the stock market. Eventually everyone caught on and so the fed itself became politicized and so now they telegraph to the market what they’re going to weeks and sometimes months in advance. So what the market might only begin to price in after like a rate hike now gets priced in months before they start hiking. This has caused market cycles to be thrown out of whack and very few can make sense of it because they believe market should continue to behave with similar timing as before.

Market sentiment is driven by a lot of factors including human emotion. So none of these tools are going to be accurate predictors of price movement. However, there are certain things in the market that are pretty solid indicators in my opinion. For example, RSI (relative strength index) shows when something is overbought or oversold and is a great tool to use. Typically an RSI of 70-80 is indicative of a coming sell-off or people taking profits after participating in the price appreciation rally (if RSI remains elevated for a period of time). Similarly, an RSI of 30, 40, 50 indicates that a company is over-sold and could present a good opportunity for starting a new position. Other things like head and shoulders and double top patterns are generally a crapshoot in my opinion. With that said, I do think that algorithmic trading uses these patterns, so maybe there is some merit to them.

Like everything in the stock market technical analysis works when a lot of people are doing technical analysis, which is why people doing it tend to talk about it and sell books, rather than keep their “winning” strategies to themselves.

People seem a little smarter than they used to be (or they just bought crypto), so it doesnt work well now…

To quote Adam Robinson [1]:

> My only concern about empowering individual investors is that when you invest as an individual, you are entering the fieriest, gladiatorial arena ever invented and you’re competing with highly incentivized participants around the world who are out for your lunch and going to eat it if you don’t have an edge.

It seems profits are possible with technical trading; it's just that they're zero sum, and there are extremely few (although big) winners.

This numberphile video gives an interview with someone who was successful at it:

https://www.youtube.com/watch?v=gjVDqfUhXOY

[1] https://tim.blog/2018/06/22/the-tim-ferriss-show-transcripts...

More like straight up fraud: https://www.reuters.com/article/cramer-interview/jim-cramer-...

^ 2007 Cramer spilled the beans

It doesn't have to be. As long as you can specify what your system actually does, you can test it, and you can falsify it as a hypothesis about how the market works.

However it has to be done in a statistically sound way. Just showing a backtest that makes money or beats the market is not enough evidence.

I wouldn't say all technical analysis techniques are "astrology". It depends on what method. Support and resistance for example is an economic optimization behavior where people would buy when the price is at the local minima and sell at local maxima. Other "non-astrology" technique is "riding the wave" which is following what large number of people / big volume traders are doing (selling or buying) in a way it's like how AI being the magic buzzword where VC would invest in at the moment, and hence it's easier to get invested in the area

I have a pet hypothesis that Fibonacci Retracements accidentally lines up with some reasonable noise quantiles (or something, I'm not a finance type) and thus is a sound strategy, but for the wrong reasons.

The whole point of TA is to create a distributed pump and dump. You tell everyone to take some action when something behaves a certain way and you will have made some percentage of volume predictable.

Technical analysis is basically just taking advantage of people. All for the benefit of creating short-term liquidity. I feel the cons outweigh the pros. But it is difficult to draw the line.

To be pedantic and HN about it, "horary astrology" is actual stock market astrology. :)

Disclaimer: I would not advise you try it as a way to get rich quick, but it's fun to read about!

Question. The below, taken from a comment on this thread, is a common statement regarding stock price movement.

> Stock price movements are literally text book examples of unpredictable (or more specifically, random walk)

I never understand the above.

How is this possibly true on long time scales?

I can say with relatively strong confidence that Tesla is going to be worth more than $1 trillion in three years.

In March, it was clear NVIDIA would boom in the scale of one year. Just, nobody knew how soon and how fast.

So the walk is not random in these cases...

So in what way are stock prices a random walk?

Is the walk pseudorandom?

Random with a bias?

I would think so, because if it was indeed that straightforward (pattern X reveals future movement Y), it would inherently mean that the stock market is easy to predict and that markets are rational.

Markets aren't easy to predict (that's why people who DO predict them correctly make bank) nor are they rational.

TA can provide historical reference points, sure, and in some cases can indicate that something is likely to happen (to a degree, anyway), but cannot accurately predict anything consistently.

In my experience technical analysis works ok at resolutions of 1 to 5 minutes. i.e. if you want to grind at day trading watching the live candlesticks and have a reasonably fast trading platform you might make enough to get by. This assumes you are familiar with the asset and are up to date on latest news relating to it and use that as a lens to read the TA indicators. As the timeframe grows it's just alchemy. Applying to to asset activity over days is meaningless.

I have been in trading software for over a decade now.

This article is a bit misleading. Nobody trades on a TA alone ignoring the reality around. That just doesn't happen. TA is an indicator, a raw information. It's up to you what you make of it.

Also: the cross SMA strategy the author mentions is indicative of one of the basic forces of market and works very well on certain markets.

Also: nothing actually works on SPY, it's the most efficient market there is.

We’re pattern matching animals suited to staying alive by making snap decisions without perfect information. This works perfectly when we think there’s a tiger behind a bush. Suboptimal when we’re faced with the random movements of the market economy.

“tendency to perceive meaningful connections between unrelated things”

https://en.m.wikipedia.org/wiki/Apophenia

Doesn't TA work just because some people believe in it, thus bet money basing on that? ;)

Jokes aside, I'm only betting on stocks that im familiar with (e.g my hobby industry)

Obviously the double camel hump pattern predicting a breakout at the 47 day moving average is bullshit.

But I think its more interesting to find the least bullshit aspects of TA. Its not clear what constitutes technical analysis. Momentum is a real signal that can be seen on a chart. If you trade based off momentum is that TA? Momentum trading can be effective.

I almost feel like the simpler the TA concept, the more beneficial it is. But then it’s arguably less of a TA concept.

I'm surprised that this made the front page. This is the investing equivalent of someone new to programming writing a single benchmark of some if statements versus a switch and blogging about which one was faster. The results are far more likely to be random noise than anything meaningful.

I think this type of calculation is valuable exploration for anyone to try out if they are interested in investing, and is a great way to get some hands-on learning with real data. I'm glad for the author and for anyone who reads this and decides to replicate it or extend it for their own practice and leaning. It's just that the results are not notable in the slightest.

Though it's a rare counterexample to Betteridge's Law of Headlines!

I can only talk about it from a crypto perspective. I've never cared for looking deeper into TA. All I saw was people drawing lines and looking at patterns, so I spent time figuring out how that works practically.

When I can draw lines, which are called channels iirc, and the price follows that channel over time, it's already more accurate than astrology.

When time passes and I can copypaste the lines to a newer structure (that came later) and the lines fit the new structure just as much, it's already more accurate than astrology.

When I can see that a repeating pattern exists, which repeats itself on a bigger time-frame, then it's already more accurate than astrology.

When I can watch good analysts (not the assholes on youtube who just bait the dopamine-addicts/greedy into watching) continuously doing TA properly up to the point where most of the things they predict are likely to happen, then that's already more accurate than astrology.

Of course it's not exact. Outside influence can throw it all off. That doesn't mean that it's wrong, things simply change.

Anyone talking about TA without understanding that it has value, either never did TA, or was too dumb to draw a few lines and compare patterns.

All of this works, to the degree it does, because most of the trading is done by bots, which all more or less orient themselves around the same data. As long as everything goes smooth, TA is extremely usefull. When something happens that throws everything off, it's back to the drawing board.

Back when LUNA crashed, Binance pulled it from the exchange. I thought that wasn't right ... simply too soon ... and got ready for when they'll bring it back. They did. With TA I made 1200+ in two days of trading LUNA, because price movement was entirely predictable.

I have no idea what's wrong with the people who shit on TA. It works to a certain degree and that's all that matters. All this yammering about it reminds me of children who don't know what they're doing, which causes them to shit on it.

It would help a lot if people were capable of recognizing when they're listening to someone who they shouldn't listen to. There's too many assholes out there abusing the simple minded, who happily listen to them, because the assholes them what they want to hear.

Most probably the answer to this question is yes. Quant hedge funds like Renaissance technology claim they are making their money by exploiting the mistakes of these technical analysis people.

https://youtu.be/Q2u0dKRA1cA?t=1216

"Never send a human to do a machines job!" (Agent Smith)

Reducing technical analysis to SMA crossovers is like questioning the effectiveness of physics by just mentioning strings theory

Technical analysis trivially cannot work for commonly known and widely used signals, because the market will correct eventually. For little known signals, it can work, but so can any trading strategy within a narrow window or with low probability. I think the union between seemingly successful TA anecdotes and random noise approaches 1.

Yes. In fact we'd be surprised how much of our modern world is just attempts to guess the future, like the ancients, but instead of reading goat entrails or judging the alignment of Venus and Ursa Minor we instead worship the god of "statistics" and "the science". I don't want it to seem as if I am anti-science, not at all, but "the science" is the cargo cult that Feyman warned us of.

And lest you think I am off some examples:

The diet and nutrition studies constantly getting pushed are the new fertility rituals, and the last one didn't work because it didn't please the diet gods, but atkins, or paleo, or weight watchers, or whatever will really work this time.

Econimics is worshiping the god of the harvest to ensure a bountiful crop, and when their predictions fail to come to pass, it's because the goat entrails were read wrong, or the math was off, never because the whole thing is useless.

Psychology is self evident if one examines the replication crises.

The point is we aren't really that much superior to the ancients in many ways. Sure we've figured out some of the fundamental laws of nature and are able to use them better, but that's mostly been the work of a few geniuses over the past 400 years and much less because we as humanity are far superior.

There are always posts on r/algotrading that debate this sort of thing. As in, can it work or not? There are always those that have found some success, even if it doesn't always last.

Full link: https://reddit.com/r/algotrading

Everything is wrong about this article. TA is just an indicator of market psychology, automating trades based on setups (sma) is a nonsense for a trader as it doesn't include execution which is the most important part. No trading bot have performed better than human traders, ever. Bot doesn't have glut feelings.

TA is an egregore in that it is a concept that is only empowered/useful when everyone "believes" in it.

Novice: "technical analysis is legit!"

Intermediate: "technical analysis is total BS!"

Pro: "technical analysis is legit."

Tech analysis esp on penny stocks is actually a type of self-fulfilling prophecy where almost every gambler there uses the similar analysis and see who can front run or get out the fastest when such pattern is forming. Other than that it’s news that make it pop.

Isn’t technical analysis ultimately just reading patterns into trading exchange data - and don’t quantitative hedge funds have strategies that make money from doing precisely this? (albeit automatically and at massive scale through the use of computer systems)

TA is unlikely to produce alpha when used on its own, but it's certainly possible. However, combining TA with other indicators such as macroeconomic data, VIX futures curve, and tracking interest rates and Fed actions can lead to a consistently profitable model, as long as overfitting is kept in check and slippage is properly accounted for. It's much easier said than done.

It took us years of 80 hour weeks to become consistently profitable at Grizzly Bulls, but the result is quite satisfying. Our top model, https://grizzlybulls.com/models/vix-ta-macro-mp-extreme, has produced +17.92% returns since launch in January 2022, vs. -4.15% for the S&P 500 over that same time period. TA plays a role in timing swing trades / hedges once other indicators align.

Interesting how an entire discussion can be hostage of an association to a single analogy. Instead of astrology, alchemy is a better analogy for what is commonly called technical analysis.

I have a very little experience in trading crypto and the only helpful/working for me kind of technical analysis is a moving average. I am excited about learning similar moving-something things.

Author is playing a trick.

By allowing the money to be in the market only 1/2 the time, it will not do as well. This is common sense to anyone who understands even the most basic thing about markets.

I present Bull and Moon[0], an app that pick stocks based on your astrological signs.

[0] https://bullandmoon.com

What’s the distinction between quants and TA?

I’m having trouble figuring out what specifically people are talking about; but everyone has apparently strong opinions on the subject.

I think that it is, but I perform a lot better when I pretend that it isn't, probably because it imposes some discipline, however arbitrary.

The comments for this article are surprisingly shallow. A much more interesting article about Technical analysis can be found here : https://elite.finviz.com/help/technical-analysis/backtests_r... They also found the SMA indicator to be useless. Hardly worthwhile to say all TA is useless since SMA is useless, when people that are in favor of TA say SMA is useless.

Yes.

Given that HFT exists, I can't imagine technical analysis can be useful. Many of the rules it proposes would be easy to feed into a trading bot and you would expect firms to be making profits using these strategies already while being able to execute trades far faster than you can.

So either:

a. HFT firms are already doing this and what the retail trader sees is the left-overs with little profit left to capture.

b. HFT firms are not doing this because it doesn't work.

Neither option bodes well for doing retail trades based on TA.

wondering if anyone can definitely pass judgement on technical analysis, as it encompasses so many metrics. anecdotal evidence is just that, and it has no value. metrics that accurately describe market dynamics are definitely useful. an indicator i use often before placing an order is On Balance Volume, i find it relevant.

Most stock trades including TA wins are attributed to skill when it’s pure luck. Especially if there is a bull market

Any serious (retail or not) investor must read 'Consequences of fat tails' by Nassim Taleb. Period.

So author tested ONE strategy on a single ETF and decided it's statistically significant...?

The fact that enough people believe it makes it self fulfilling and thus true. And thus more believe it.

Very odd overall

Yes, insofar as awareness of it may influence your own behavior which gives it some predictive power

The folks selling technical analysis systems are much more effective scammers than astrologers.

Isn't it something that can be answered scientifically by statistical tests?

What regulates the valuation of stocks as legit? Well, there's your answer.

Of course it is bs... and people love it.

Yes it is, but groupthink sometimes makes it self-fulfilling.

both are not a science. Stock market is social science, which is not even a science since there is no LAW that regulates it, compared to physic.

All of the technical analysis in the world won't predict something like Musk tweeting "use signal", causing a 438% increase in some random company's stock price.

A thinly traded device maker called Signal Advance soared for the third consecutive trading session after Elon Musk said to “use Signal,” even though he was referring to a messaging app that has nothing to do with the company.

https://www.cnbc.com/2021/01/11/signal-advance-jumps-another...

It's stock market cloudgazing

A rare counter-example to Betteridge's Law of Headlines!

(The answer is Yes)

https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headline...

Technical analysis is neither technical nor analysis

So... a lot of smug comments on both sides claiming what technical analysis is and isn't. Let's get something straight, there are only two ways of analysing markets: fundamentally or technically.

I've been actively trading nearly every day for the past 6 months and can tell you there are people who extract profits from the market every single day (I'm not one of them yet, but I'm at least modestly profitable the past few months). Being profitable every day can ONLY be done using technical analysis. You're not going to profit every single day doing intraday trades on fundamentals. People think 'technical analysis' is as simple as what this blog post mentions - using something as rudimentary as SMAs. Unfortunately, this is case for most people. Come back when:

- you know what auction market theory is (AMT)

- you know what one time framing is (OTF)

- you know what delta divergence is

- you know what poor market structure / single prints / excess all are

- you know what low / high volume reversals are

All these are NOT fancy indicators or contrived signals but are quite literally real structures and residuals of actual BUYERS and SELLERS in a market (i.e. exactly what a market is, NOT astrology!) that can help show where the markets MAY go (of course the future is never certain)

Further more, you have to synthesize the context of all of these things in real time as the session unfolds and block out any of the emotions or psychology of putting money on the table entails! To get to this top tier (being profitable nearly every day) is as hard and takes as much time as any other performance profession (athletes, sales, etc.)

Of course you're going to have an extremely bad time if you try and implement something like a SMA crossover!

Think of it this way: any automated technical strategy you can think up within even a few days of effort have been done over 1000 times by every financial firm on the planet - and you can guess they don't work - if they did there would be a lot more billionaires on the planet! Most of the automated strategies that are actually profitable are designed by engineers with the help of decades+ traders who have been consistently profitable. Even then, you'll be lucky if in a raw win/loss ratio is over 50% (but this gets into expected value of the trade, etc. too long to post about here, you can be profitable with just a 30% win rate, for example if you're reward to risk is 2:1)

Anyway, thats my 2 cents from someone who trades with real money on the line. It's probably pretty easy to say that TA is made up and use it as a scapegoat when you YOLOed a bunch of money on GME and lost it a few years back.

Yes

I think there's something to technical analysis, but am skeptical it is the be-all / end-all. Consider this:

1. The dollar is a mildly inflationary currency, by design. (though recent events show us that sometimes it is more mildly inflationary than others.) The fed engineers the dollar to be inflationary so people don't park their value in dollars in bank accounts. The modern concept of a currency is that it circulates. Liquidity is generally believed to be good for an economy. So... over the long run you'll always have inflation that, all other things being equal, will cause security prices to go up. I think that part of econometrics is not astrology.

2. Many of the metrics people commonly use, notably the previous 30, 90 or 180 day averages and when they cross each other are tied to real events. Publicly traded companies publish quarterly results, so it always seemed to me that these averages have something to do with the aggregate sentiment regarding a security's performance (i.e. - the wisdom of the crowd will lift or lower a security's stock price based on the crowd's aggregate interpretation of the quantitative and qualitative aspects of that company's behaviour.) Does this mean it's a science and not astrology? I say "Largely, but not completely," as there are still numerous fools out there. And maybe there are whales out there trying to tilt the market for later financial gain? And sometimes people are just wrong when they interpret a financial statement.

3. But there are higher order effects. Everyone seems to know about basic quantitative measurements and it's not hard to find people to analyze a security quantitatively. So... if everyone is using the same metrics, then shouldn't everyone come up with the same buy/hold/sell signals? Of course not. Not everyone has the same risk profile or understanding of the context of the markets (i.e. - you don't have to be an insider to know what the macro-economic situation is, and there are a lot of insiders.) That part of technical analysis may seem like astrology because people are telling you what they think will happen based on their own view of the market, the economy or a particular security, but they're not telling you how they came up with their analysis criteria. I don't think it is astrology, because somewhere, someone is making a decision based on what they think are rational reasons. But you don't know what they are, so like an astrologer of old, you're left trying to decipher the relationship between causes and effects and people often see relationships between the two that really aren't there (especially if they have small data sets.)

4. And there are probably some people out there who are buying/holding/selling at random. Maybe there are enough of them to affect the popular technical indicators.

So... is technical analysis just stock market astrology? No. Not at it's core. But without sufficient information about what market participants are thinking, it may be indistinguishable from astrology in many cases.

Yes

This article is a rare exception to Betteridge's law

Ask Jim Simons

xgboost

look a violation of the betteridge's law of headlines!

Not really, since all stock market analysis is about as woo-ful as astrology. No need to consider any sub-genre for the title.

I really don't understand how, decades after "A Random Walk Down Wall St." was published, there is anyone who can take any sort of "stock market analysis" seriously.