I felt compelled to re-post this great post form @Oracleyoda (and my reply), here on this thread, in case anyone wants to make a weekend discussion on it
From Oracleyoda......................
I was in your camp some years ago and then I completed a Finance Masters and undertook some research and ended up running a fund. What I learned was that technical are a real thing and are a graphical representation of human behavior which in some cases is persistently repeated. Even to the extent that belief in technical is self fulfilling.
In the long run value is value and there is no avoiding that measurement. In the short term the market is an emotional creature and some of those emotions can happen predictably.
There are some quite successful hedge funds that make a crust out of this and some research about that supports the repetition of certain patterns. Worth reading material on the debate about efficient market theory case against.
I find the RSI very instructive, MACD and certain candle patters in trading activity signaling a turn in trend. I actually learned a few tricks from clever people on Hot copper and then researched it to solidify my understanding. What is really interesting is the narrative around phycology attached to some of the technical signals.
Let me offer an example of an inefficiency. There are numerous studies available with large samples, that show that companies that report surprise earnings upside outperform the market for about 90 days following the announcement. If the market were efficient the new information would be immediately reflected in the price.
I think technical works best when trading around quality which is underwritten by fundamental analysis. E.g. It is better to trade around a stock and business model that you believe in than one headed for insolvency.
The other thing is that patterns and technical work until they do not. Good traders stop themselves out of mistakes. If it were entirely accurate and predictable, everyone would do it and the arbitrage available to skill and judgment would disappear. Markets would be perfectly efficient (and they are not).
Just my humble learning and I am not rich. If I were great at this I would be and I would not be phaffing about posting on Hotcopper.
and from me...................
think it's important to give credit where credit is due. You articulate very clearly the role of technical analysis in pursuit of higher returns in active investing/trading of certain financial instruments. I can go to any physical (antiques/collectibles/clearence sales) auction and I could chart the bids/ask as the auction proceeds and the pattern that emerges would be similiar over and over again, no matter the place or the time of that auction. You are observing people's behaviour and that is what charting does.
The only extra point, I would add, is that for small investors/traders, relevent to the big funds/money managers, is that it is the small size of of their trade that gives us the edge. it allows for nimbleness that the big funds can't match.
from Mark Minervini..............
Individuals, in contrast, can react to surprises that create new price trends almost instantly. There is no committee approval process and no diversification mandate. With today’s technology, most traders—professional and individual alike—have nearly identical tools at their disposal.
However, individual traders have a tremendous advantage over professionals mainly because they have greater liquidity and speed, enabling them to be more concentrated in a small list of well-selected names at even lower risk because an individual can utilize stop-loss protection with little or no slippage. An individual, with a faster response time, can be more patient and strike at only the most opportune moments, which is the best advantage of all.
Most big institutions would rather make what they regard as safe investments than pursue big capital gains. They will boast about success if the market is down 40 percent but their portfolio has lost only, say, 32 percent. That’s an example of what they claim is beating the market! If you think for a minute that the big institutional approach is safer or less risky, I suggest you take a look at your favorite mutual funds and study their performance during past major bear markets.
For a big fund manager, size impairs precision: the ability to enter and exit stock positions without affecting price in a counterproductive way. This technical disadvantage forces the manager to seek informational superiority. Although tactics and techniques play a role for virtually every investor, the individual can utilize a tactical approach with far greater efficiency and effectiveness than can the large institutional player.
The bottom line is that if you want mutual fund–like results, invest like a fund manager. If you want superperformance results, you must invest like a superperformance investor.
(20min delay)
