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The Siren’s Song of Technical Analysis

edited August 2011 in Fund Discussions
Hi Guys,

Technical Analysis sings a Siren’s song.

I have noticed an uptick from MFOers who are now defecting to technical analysis to inform their mutual fund investment decisions. That decision is likely prompted by a roiling marketplace that has destroyed investment returns.

Unfortunately, expected Technical Analysis (TA) results are more an illusion than a reality; TA methods are mostly a set of ad hoc rules that have no scientific foundation, little, if any, verifiable returns, and a paucity of documented performance studies. Its limited success is mostly asserted by the countless books and seminars that create wealth for their authors and lecturers, but not for their clients. The Internet offers a zillion technical analyses methods and unsupported claims.

The reason for its popularity is obvious; it promises reward without risk; it promises wealth by next Friday; it promises a mechanical system that requires no anxious decision making. These are false promises that are not reliably deliverable. Random successes occur.

I personally know several investors and have been exposed to a host of financial advisors who champion TA; some are True Believers, but others are slippery charlatans. I actually admire the principle-motivated True Believers, but they will learn over time of the discipline’s shortcomings. I did.

I started investing in the mid-1950s. My initial decision making tool was TA-based. My decisions were rooted in the methods proposed by Robert Edwards and John Magee in their classic book “Technical Analysis of Stock Trends”. I applied their methods using arduous, hand-drawn graphs. I still occasionally consult my tattered copy of their tome. My general conclusion is that pattern investing is a wasteful and profitless investment procedure, although graphs are a useful way to summarize huge data sets and it does yield some very generic trend guidelines.

TA proponents like to equate their methods with those of scientific, natural laws. I suspect that ephemeral comparison is made to foster credibility in the mind of investors; numbers have a powerful influence given uncertain outcomes. But investment outcomes are not governed by inviolable physical laws. Natural physical laws are static and do not change with circumstance or time; investment outcomes are dynamic phenomena that are event and people-driven happenings.

Physical laws are controlled by atoms and electrons on a sub-particle level, and by material properties and interactive forces on a macroscopic level. Equivalent investment laws do not exist because the agents (people, institutions, and events) and the characteristics that generate the interactions change constantly to reflect circumstances and human emotions.

Behavioral research has established that humans are pattern seekers. We like to identify and connect the dots. Technical analysis purveyors trade on this predisposition. And these TA purveyors and their techniques have proliferated. There are hundreds of TA procedures readily available for application. But, do they work as advertised?

What all these TA procedures have in common is the lack of a performance track record. This MIA (Missing In Action military jargon) evidence is shouting a loud message. If the success of the methodology is well established, its purveyor would jump at the opportunity to publish those results. He would be instantly famous. He can’t because it does not exist.

Most often, a recommended TA system is endorsed because of a successful back-tested comparison. Of course it was successful; that’s the primary reason that it is being endorsed. All the other procedures that failed in the search for a fruitful correlation have been summarily rejected and tossed into the wastebasket.

The challenge is if the recommended method will produce consistently superior returns in the future. That is the acid test. Be assured that they all have failed that test somewhere along the road. Otherwise, that surviving TA methodology would be the toast of the investment world. It would quickly and universally be adopted by all of us seeking financial security. It is an unfulfilled dream.

I do not know of any billionaire TA wizards. Even starting with a small kiddy, if these TA systems were so superior, they would create a billionaire in a short timeframe. Historically, equity markets annually return 10 % on average, bond markets about half that return. Warren Buffett manages an annual return in the low 20 % range, as does a rare group of other financial wizards. All these wizards fall into the conservative, fundamentally driven class of investors. Does any billionaire advocate a TA approach as the basis for his wealth? If so, has he documented the approach? My answer to both questions is a firm No.

I have discussed TA with John Murphy at the MoneyShow conferences several times. He is a humble, honest, and dedicated TA True Believer. I own several of his numerous books on the subject. But he can not document his methods with hard performance data. He is an emperor without cloths. He works very hard at conferences selling his books; I suspect he makes far more from giving investment advice than from actual investment success.

In almost all forms, TA is simply a momentum strategy, either based on price movement or trading volume dynamics. In the mutual fund world, the FundX family of funds have practiced that discipline for an extended period. Their flagship product is FundX Upgrader, FUNDX. Janet Brown is the president of the DAL Investment Company that assembles and managers the growing FundX family. She is a compelling advocate for their brand of the generic TA approach. It is a pure momentum play that has enjoyed some successes, as well as some recent disappointments.

The issue here is that the deployed methodology is not constant over the reporting timeframe. It is slowly maturing so the record is distorted by that evolutionary process. In its early embodiment, the FundX holdings were more heavily committed to a small number of hot-hands, and diversification was sacrificed. Methodology adjustments have been made.

I subscribe to the WSJ. I wonder why, on a daily basis, the Journal graphically displays a 65-day Index Moving Average, and each Monday, it presents both the 65-day and the 200-day Moving Averages. These are rather arbitrary standards. Why not a 100-day criteria? The perturbations are endless.

Most other TA techniques are similarly vague about their selected data collection logic and criteria timeframes. They seem purely arbitrary, and most likely represent a rule set derived for a specific stock analyzed for a specific time. The operational rule extracted from this restricted study was extrapolated to become a universal rule. That rule has almost zero likelihood of being precisely applicable for the broad array of equities that populate the global marketplace. Its application to a group of ever-changing holdings that compose a mutual fund is even more suspect. Good luck on that extrapolation.

Can anyone explain the rationale or logic that dictated the various data gathering periods that are incorporated into the MACD (Moving Average Convergence/Divergence) statistic developed by Gerald Appel? A 12-day minus a 26-day accumulation period coupled with a 9-day crossing signal indicator seems unduly arbitrary. This unlikely specificity smacks of a data mining operation.

And MACD is just one of scores and scores of TA Indicators that are proposed for investment decision making. If that’s not enough, the TA protagonist also endorses combinations of this infinite array of dubious tools. An equation, or a theory, or a procedure that does not rest on a rock-solid fundamental understanding is literally a crapshoot. Do you want to risk a secure retirement on a dice throw?

In some ways TA is religion-like. True Believers believe because they want to believe.

Let me close by offering a challenge. If you are a TA True Believer and apply that approach to all or a segment of your personal portfolio (not someone else’s unverifiable claims made on the Internet), please submit a posting to this forum. Share your success stories and wisdom with us. I am still searching for a TA practitioner who has achieved market rewards that are a few percentage points above a realistic benchmark for his portfolio. To paraphrase a song, a good TA system is hard to find.

I’m patently waiting. I am always prepared to learn. We humans are hard wired for pattern recognition and are unduly susceptible to false patterns. Anyone for Robert Prechter and his form of the Elliot Wave Theory? How about some Oscillators or some Head and Shoulders necklines? Or a Fibonacci number or two? God, I hope not. All this is glittering junk science.

Best Regards.


  • A challenge?
    A challenge is a call to engage in a contest or battle. Your challenge sounds one-sided.
    You want to hear from someone who uses TA because you’re convinced that
    it cannot out perform the market.
    But you didn’t offer to square up against anyone.
    You just want someone to go through the effort of proving themselves to you.
    And you already have your reply. You’ll say that it’s all just data mining and back testing.
    On May 31, you did your math and calculations and predicted that the
    S&P 500 Index would close the year around 1345 (on the low side) or more likely
    1546 (on the high side).
    “I’m optimistic. At this posting, using the S&P 500 Index as a proxy for the equity marketplace, the year-to-date return is 5.8 %. At year’s end, I project that the S&P 500 Index will finish with a 9 % to 15 % annual return. I suspect the 15 % return is more likely. Here’s how I reached that forecast; it was not purely, but mostly, guesswork.”

    Are you still standing by that prediction?
    Following that prediction, your challenge sounds like sour grapes.
    And no, I’m not accepting your one-sided “challenge”.
    In previous posts, I’ve mentioned what instruments I use and provided several TA indicators
    with which I trade. I posted a buy in March of ’09 and you chided me for posting it two or three days
    after the fact. And, you once replied that you didn’t and wouldn’t give a moment’s thought to my
    portfolio or trading results. Good luck finding someone who will jump through hoops for you.
  • Hi MJG. I welcome the opportunity to discuss TA techniques, and for the sake of keeping the ball
    rolling, I'll toss in my 2-cents. I'm far from viewing TA as a religion; if it seems to work for
    me I'll use it. If not, I'll move on to something else. I've been investing in mutual funds for
    going on 30 years now, dollar-cost-averaging into primarily index funds, always no-load & low-fee.
    Being a computer programmer naturally I had to try my hand at implementing a system to calculate
    buy and sell signals, and I decided to stick with moving averages for that. For the first 20
    years of my investing life, I didn't attempt to use the signals, and the program's value to me was
    as a way to visualize a fund's performance over time (columns of numbers just don't do it for me).

    Eventually I got more serious about investigating whether the generated signals could lead to
    superior performance, so I did a lot of back-testing. I picked what looked like a fairly
    representative 10-year period of time, ran and re-ran a hypothetical investment over it, tweaking
    values until I was satisfied that it looked like a good system. It is based on sector rotation
    with the Fidelity Select funds, and my goal is to get performance that is better than just parking
    it all in the Vanguard S&P500 index fund.

    Since June 2006 I have been doing it with real money (my Roth-IRA). It definitely has its
    strengths and its weaknesses. Strengths: (1) when the market has trends that last long enough to
    justify sector rotation, it definitely pays to be in the strong sectors and out of the weak areas;
    (2) when the sustained plunge happens, it can get you out (after a bloody nose but before a
    knockout). Weaknesses: (1) if the plunge is not sustained, it can force you out at the very
    bottom, and you kick yourself; (2) when the market is wandering aimlessly or without a sustained
    trend, it's no better than the index; (3) since the system wants to see strength before getting
    you in, you miss out on the early part of most rallies.

    Now that I've been using it for 5 years, there are some things I can say about it. Number 1 is
    that it won't make me rich. It does better than the pure index, but only a little (+3.2%
    annualized better than the index over that time). The bad years (relative underperformance) are
    generally limited to single-digit losses (again, relative to the index, that is), but the good
    years include some double-digit outperformance, which is exhilarating. 2007 was one of those
    years, when the index gained +5.5%, but my system gained +25.3%. In a bad year such as 2008 the
    index lost 37% and my system lost 30.6%, so in a relative sense it did better, but of course it
    still hurt.

    I find that psychologically it is really hard to obey the signals when they are generated. You
    can't help thinking this time it's different, maybe this signal is not as good as the others.
    Perhaps it's having real money invested that makes following the system's rules so difficult.
    I can say I have deviated from the generated signals from time to time, but rarely. For me
    greed is not a problem, but fear is. I always worry that a sell signal will whipsaw me, so I
    hold too long trying not to lock in losses.

    I haven't given much detail about how the system works, but I thought I'd see if anyone is
    interested before putting any time into that. At the moment the system has me 60% invested
    (40% parked in money market) in gold, leisure, and energy. If the situation doesn't improve by
    the end of this week, I'll be cashing out of leisure and/or energy. Gold seems to be holding up
    well, about the only sector that is, so I'll hold onto it. The system generates about 20 trades
    a year.

  • edited August 2011
    Reply to @Flack: Because I'm too tired to go into detail:
    1. MJG is an old-fashioned investor. Buy and hold, yadda yadda.

    2. MJG is an optimist in the "We've been through bad things before, the USA is so great that we'll get through this and all these problems aren't worth worrying a moment about" (to paraphrase) style. Hope and optimism are not investing strategies or a solid foundation for investing strategies. One can hope for the best as long as they don't completely ignore the idea to also plan for the worst just because they'd really like for things to be happy and wonderful. Because we got out of messes before does not make us getting out of this one assured. Anyone who believes our politicians are not capable of screwing things up much further is delusional (or under the belief that it's all "the other party"'s fault, which sounds a lot like what members of both parties are saying rather than trying to work together.)

    Overall blanket negativity (remember Bill?) is not a strategy either. However, to use an example, people acting like Bank of America (which is now heading lower again this morning) and Citigroup trading at fractions of their book value is not an issue because of blanket statements from financial media like "our banks are strong" (which, oddly, is sort of what the bank CEOs said a variation of right before 2008, wasn't it?) is, to put it lightly, actively choosing to look at the world through rose-colored glasses. Good luck with that, and I'm sure if there actually is a serious issue with either of these institutions (Bank of America at this point is either a tremendous value that everyone should be buying hand-over-fist or in serious trouble - I completely agree with this: and/or another financial crisis, there will be people who will go (again), "We could have never have seen this coming!". I argued on fundalarm over a year ago that these financial companies weren't values and hadn't changed since 2008 and people acted like I was nuts and screamed at me about how they were "value stocks!". BAC now down 50%YTD (add another 6% drop this morning as of this point and almost trading with a 5 handle), C down 44%YTD, the XLF down 25% YTD, AIG down half YTD, etc.

    This is indicating that these entities are all "strong" and "in great shape", right? Riiiiigghttt.

    Europe isn't in great shape either, but pointing out their problems does not do anything to solve ours (and we cannot blame all of our problems on them, although many would like to.)

    3. I don't know how TA works consistently in this environment when you can have sudden (reactionary or otherwise) policy shifts, aggressive rumors (wasn't there a European leader a couple of months back who flat-out admitted that he lied about the status of an important meeting because he didn't want to upset the market?), HFT and more. It's (fill in the blank) chart pattern until some rumor comes out and cancels it. I completely and wholly believe that if things get worse, sudden/reactionary rumors and policy shifts (from here or overseas) could be seen with greater frequency as leaders again scramble to solve longer-term issues within days (and then ignore them once everything has calmed down.) And holy crap, I don't want to put anymore time into thinking about investments than I already do; I don't want to sit and figure out if something is x% under the 200 day MA, and therefore, XYZ. However, I give respect to the people who do want to sit and do that and can. Theoretically, I don't get how TA can be consistently successful in this environment, but people pull it off and I give them credit for that.

    4. I own a TA-related fund (GTAA ETF), but it isn't a huge portion of my portfolio - however, it acts as a portfolio-within-a-portfolio. I don't want to try to carry out this strategy on my own (and especially on that epic a level) and this does. There are no manager decisions within this fund (aside from the ability to slightly hedge in periods of severe volatility; I believe it's used S & P puts on one or two occasions), it is purely technical and can be 100% invested or, if the situation calls for it, 0% invested. The managers of this fund have written extensively on the subject and their papers are available online or at the manager's blog, World Beta (anyone who doesn't believe in TA can read their case.) I don't think this strategy is foolproof (anyone who thinks any strategy is foolproof is insane), but I do think that there will be times when this strategy works well and times where it won't. I don't believe it will be a goldmine, but do expect to provide reasonable/conservative returns over a longer period and they have the infrastructure to potentially pull off their stated strategy (as well as expand it - the fund has taken on sector ETFs now.)

    5. This gets to the point of this bickering over which strategy works. I completely don't agree with the old-fashioned buy-and-hold strategy as one's only tactic in this market environment (or beyond that, this day and age). However, if you make it work, good for you.I don't get how TA can consistently work in this environment of policy changes, headline risk, HFT, etc - but if someone can pull it off, great.

    I'm a very large believer in that there is not one correct answer to investing, but people hang on to their beliefs in TA or buy-and-hold or whatever to the level of religion.

    There's not one right answer, and in this environment, *a blend of different strategies* (I think) may be very helpful (and I've talked about trying to look at one's portfolio as a series of different buckets within the overall bigger picture), but this acting like something is "the one true strategy" is silly (to use a lighter word.) Trying to pull together a greater variety of tools is - I think - an excellent way to handle this environment. People never stop learning at this and as time passes (rise of technology in investing, etc) things change. I absolutely will be the first to admit that I continue to learn, but I do know that this debate over which "investing religion" you subscribe to and how x strategy is great/terrible is absurd.

    "In some ways TA is religion-like. True Believers believe because they want to believe."

    Give me a break - many strategies (including the "buy and holders") treat their particular strategy as "the one true strategy". You could very well be described as a "true believer" in the various investment theories you've written so extensively about. It's ridiculous, and people have had success using countless different strategies over the years.
  • Reply to @Flack:

    Hi Flack,

    Thank you so much for reading and responding to my posting.

    Somehow I sense that you and I do not share a common ground on the merits and shortcomings of investment Technical Analysis (TA).

    There’s absolutely nothing shocking or unusual about a divergence in opinion, especially over investment matters. The marketplace only functions effectively when there is a near equality in sell/buy decisions. I certainly respect your decision to embrace some form of TA; I anticipate that you respect my decision to mostly reject that approach.

    Note that I qualify my rejection with the adverb “mostly”. Although I do not deploy any TA techniques when making specific investment decisions, I do use Index-like Moving Average methods to confirm or reinforce my top-tier, global asset allocation decision.

    I am a little perplexed that my use of the word “challenge” rubbed a sore spot. It was not introduced in any aggressive manner; I was simply attempting to construct a more colorful, entertaining submittal. Perhaps I should have “invited” a reply rather than laying down the gauntlet challenge. Confronting and overcoming challenges are a ubiquitous and necessary part of life. I am somewhat stunned by your sensitivities. Without challenges, life would be moribund.

    If the choice of a single word represents the sum total of your objections to my piece, then I accomplished my goal. Look, if you subscribe to TA methodology and mythology that is your business and your business alone. Given that you are a seasoned and scarred investor, it would be imprudent of me to try to convince you otherwise. My posting was directed at neophyte investors who might benefit from my experiences, many of them involving fruitless TA adventures.

    I have been investing and studying investing for over 55 years, the first decade almost exclusively dedicated to understanding and applying TA approaches. For the most part, those approaches failed to deliver index-like rewards. I am flexible enough to recognize that the failures could be attributed to either the methods themselves or to the defective way I implemented them, or perhaps even to the investment period itself.

    You labored over the fact that I have formed biases and preferences. If an investor has not done so, he is truly lost at sea. Choices are the end game event in the decision making process. I further propose that the highest value product in decision making is the process itself, and not the actual final decision. Within the investment universe, the decision is really never final since it can be easily reversed whereas a corrupted decision process can do continuing damage to both wealth accumulation and preservation.

    Investing is all about alternatives, options, biases, preferences, and choices. Luckily, they are all temporal and reversible, albeit usually with some financial penalties. At this moment, and at the highest level of investment decision making, I favor diversification over concentration, mutual funds over individual securities, active over passive fund management, long-term investing over short-term speculation, fundamental analyses over technical analyses, and home grown products over foreign entities.

    These current favorites are not absolute nor are they forever permanent. Since the future is unknown and unforeseeable, I subscribe to a mixed portfolio asset allocation philosophy. To illustrate, my present portfolio contains two highly focused mutual funds, but is dominated by funds that have largely diversified holdings.

    Let’s agree to lighten the tension just a little bit. Your reply reminded me of a famous World War II pilot’s saying. It goes something like this: If you don’t take any Flack, then you are off-target. Since you provided the solicited commentary, I presume I was on-target. I apologize for the WW II reference; it is just my poor attempt to inject some humor into this exchange. This is not a serious matter that warrants misbehavior. We merely disagree on an investment approach. Among the investment cohort, what’s new about that? Nothing.

    I’m puzzled and pleased by your interest in my annual market return forecast. I am surprised and flattered that you saved it. I do not. On a yearly schedule, I complete a rather superficial analysis to either affirm my present asset allocations or to inform of the need for an incremental adjustment to it. In performing the calculation, I employ a generic formulation recommended by John Bogle in his commonsense book.

    My modified version of the Bogle method includes a fundamental component that incorporates factors like equity dividend yields, population and productivity growth estimates, corporate profit projections, and a correlation between corporate profits and GDP growth rate. A second element in the calculation involves a speculative component that is evaluated using P/E ratio change guesstimates and sentiment signal forecasts. It is fun to assess likely market returns, but it is definitely not a precision tool. The procedure is unsophisticated from an economist’s perspective and demands only about one hour of attention.

    The procedure almost always yields a positive market prediction so it is directionally biased and consequently is historically correct only about 70 % of the time. I fully recognize the deficiencies of the overall method, and I documented it accordingly. I freely admit that the forecast has a lot of guesswork embedded in it. Perhaps I did not emphasize the shortcomings of the forecast clear enough when I posted it. Sorry about that. I do not claim soothsayer capabilities.

    If I felt the need to update my overall market forecast today, as you requested, I would likely lower my equity market projection somewhat. The various government efforts to revitalize the economy have disappointed. I fear full economic recovery is still a ways off. The Federal Reserve continuously addresses this dire situation. The current issue of the Business Outlook Survey by the Philadelphia Fed supports my assertion.

    Here is the Link to that referenced study:

    Best wishes for your continuing investment success.
  • Reply to @randynevin:

    Hi Randy,

    Thank you for participating in this TA discussion.

    Your carefully crafted response was in the spirit pf my original posting. Thanks for honestly presenting both the merits and the shortfalls of the TA method that you explored and then implemented.

    I too use Moving Averages with regard to broad Indices to supplement my more economically-based approach. It appears that my methodology is not as disciplined as yours. Congratulations on exploring alternate systems, on your backtesting, on your pilot program, and on your decision to proceed. Investment decisions are always emotional. But you have an organized and structured plan. I am sure you will be fully rewarded for your fine effort. Good for you.

    Thank you for sharing.

    Best wishes.
  • Reply to @scott:

    Hi Scott,

    Thanks for participating on this topic.

    Based on your submittal, I suppose you subscribe to the axiom that if you don’t agree with the message, attack the messenger.

    According to your assessment, I am a buy-and-hold geezer who is mired in the past. If you were a baseball hitter that would not be a bad batting average since you got one of the three characterizations correct.

    By most accepted definitions, I qualify as a geezer. That status is not all that bad; it does come with some physical handicaps, but it also offers some redeeming qualities. One of those redeeming qualities is that Geezers do absorb at least a little wisdom during the aging process. Professor Warren Bennis has coauthored a wonderful book on the subject. It is aptly titled “Geeks and Geezers”. The book illustrates how era, values, and defining moments shape leaders and differentiate the perspectives of the two cohorts.

    I immediately take umbrage with your uninformed assertion that I am a buy-and-hold investor, and that I am mired in history. Neither is a correct assessment. I will not waste too much verbiage defending my positions since they are not germane to the TA issue. Just be aware that I trade a minimum of twice annually (near the beginning and ending of each calendar year with separate objectives), enter the markets more often given a dynamic environment such as we are currently experiencing, use actively managed mutual funds and ETFs for a large fraction of my portfolio, and vigorously pursue evolving investment concepts.

    Although I study history to guide my decision making, I am fully cognizant that history never precisely repeats itself, although it sometimes reflects strong echoes from the past. I am committed to a program of continuing education, and I am dedicated to introducing neophyte investors on this Forum to the nuances of investing. That’s my primary motivation in submitting my rather lengthy postings.

    If you are searching for a simple characterization of my investment style, I consider myself an economics-directed investor. I have a rather large portfolio; its size alone essentially means that I own almost all segments of the global marketplace. Therefore, my primary investment tool kit is rooted in national and international economic and political considerations. I try to be very open-minded and flexible when addressing our constantly evolving and maturing investment environment. Sometimes (maybe too often) my judgment fails, but I do learn from those failures. You judge me incorrectly. That hardly matters to me personally except it casts a doubt on the clarity of my submittals. That’s not a good thing.

    Prior to retirement, I spent a lifetime as a practicing engineer. I fully understand the need to expect the unexpected. Engineering practice embraces the concepts of inclusive planning, data gathering, cost control, contingencies, safety factors, and multiple backup systems. Those are part of our DNA. By nature we are skeptical and very demanding of proof-of-concept. We love experimental data and like pilot programs to stress test novel approaches. I have consistently applied these common engineering principles to my personal investment program.

    Almost by definition, engineers must be an optimistic breed; perplexing and challenging assignments demand that viewpoint. Unabashedly, I am an optimist. Simultaneously, engineers are trained to seek multiple solutions and execute tradeoff studies. We always develop a Plan B as a safety valve for a poorly performing Plan A. Both training and practice have drilled that discipline into our very souls.

    Engineers attempt to anticipate failure modes and to accommodate them with innovative designs. We have always employed mechanisms to identify approaching hazards, to provide alternate load pathways, to mitigate component failure damage, and to continue the mission under adverse conditions. Portfolios can be constructed in a similar manner. Mine is.

    Our glass is always half-full, but we resiliently seek a stronger glass, and search for propagating cracks in that glass. I apply these time-tested generic engineering principles to my investment philosophy. It has served me well. I do not worry over the marketplace today, nor tomorrow, nor next month. I am confident in the asset allocation decisions that I previously made, and review them very infrequently. For example, I do not currently know the value of my portfolio because it is unnecessary to do so. I do not plan to assess it until the third quarter ends.

    By the way, you have properly identified a fundamental limitation in all Technical Analysis. Embedded in that methodology is the assumption that nothing really changes, that the past provides a perfect, mirror image of the future. The TA specialist trades on the reliability and repeatability of chart patterns. Of course that happens randomly, but it is a gross oversimplification.

    From your postings, you seem like an angry man. I hope your postings assuage some of that anger and direct it into more productive channels. I am happy with my investments; I hope you are as happy with both your portfolio elements and overall.

    Best Wishes.
  • MJG,

    Thanks for initiating the dialog.

    Any strong opinions from proponents/opponents of B&H, market timing, technical/fundamental analysis tend to immediately attract strong responses. I like to take multiple approaches while investing.

    I studied TA for quite a while using the usual books, Stockcharts training school, dummy trading, etc. and came to the conclusion that I should stick to the simplest approaches. The only ones I use are the moving averages (usually 200 day, sometimes 50 day), trend lines (as a rough indicator of trend) and my own way of calculating 'momentum' (based on performance and volatility). I just don't understand the various patterns (head-and-shoulders, inverted candle,...) Why the specific periods for moving averages? I don't think there is anything magical about the numbers, but they tend to be used by a lot of traders and tend to influence the market because of that. My rules (for the tax-sheltered account) which have evolved over my investing period are (1) use ETFs to avoid trading fees, (2) stay only in 2-3 ETFs, with the strongest momentum, which are above 200 day MA (3) invest only in broad ETFs (e.g., no single country ETFs outside US) (4) trade no more than once a month. I find that trends in broader sectors persist for an intermediate periods (typically 3-6 months). I track my performance against mock portfolios similar to fundadvice ones and find that I outperform by a few percent (3-5%) per year. This is insufficient to overcome the additional tax burden of short-term trading, which means I can only use this for tax-sheltered accounts with sizable portfolio (to minimize impact of brokerage commissions). For my taxable portfolio, the only option for me is to invest primarily in moderate allocation funds such as OAKBX and FPACX, with smaller amounts in other managed funds. Even there, I make tactical adjustments while taking care to minimize tax impact.

    Another important advantage of this strategy (for me) is that psychologically I don't think I can practice pure buy-and-hold. I just don't have the needed iron stomach to hold on to funds which have dropped 25-50%. My tendency would be (I have done a lot of introspection) to sell it at exactly the wrong time (after there is a huge dip). I suspect this is true for majority of the investors. Some selling discipline helps me. My confidence in the strategy has increased over the years. In 2001/02, I only made small changes. Before the 2008 dip (market had dropped below 200 MA towards the end of 2007), I was about 30% in cash. Before the present dip, I am about 67% in cash, with rest in GLD (in tax-sheltered account). If I can avoid majority of the big dips

    One more point: Just like TA, I think all investing assumes some (probabilistic) predictability of future based on current and past environment. TA restricts it to price/volume/breadth, etc. FA relies on predictability of various fundamental factors related to value and growth in influencing price. Asset allocation assumes that certain characteristics of prior performance (long-term returns, asset correlations) will continue in future. If there is no expectation of future performance, investing would not be worthwhile at all.
  • Whoa! TA is not about outperforming the market. It is about not being stupid. If FAIRX was a buy last year, it was a screaming buy in February and it is a sell-everything-and-buy-one-fund buy today.

    6 months from now it might become sell-yourself-and-buy-fund. With TA you don't have to "guess". That's the point. Fundamental analysis is about making a BET and then sticking with the BET. Technical Analysis is about setting your metrics and then stop worrying about it. Here's a simple thing I do with my 401K investments.$SPX&p=W&yr=1&mn=9&dy=0&id=p27022342535

    When the price is below the line I'm in cash, but I keep rolling in my monthly contributions. When the price is above the line I'm all in. People need to understand how they are using TA. I use it to minimize risk. This does not automatically mean I maximize returns. It just means I can sleep at night.

    Stop fighting. Yes you are fighting even when you are being civil:-P
  • I have no skin in this discussion, but low and behold, I just got an article emailed to me through my AAII membership (american association of individual investors). If I can paraphrase what I think it's saying, TA is not the holy grail for investing. It is a system of looking at past market behavior that attempts to set the probabilities of markets moving up or down in your favor. It does not predict the future. Does it work? I have know idea. Sounds like a couple of you guys have used it successfully. But as vintagefreak commented, if you use it to minimize risk, to sleep at night, to get out before big market drops, maybe that's a benefit. Problem I see (just my opinion) is there may be just as good a chance you are getting out (or in) at precisely the wrong time.

    I can't link the article because you would need to be a member to view it, but below I copy/pasted one interesting section, fwiw:

    "How It Works

    Critics will point out that forecasting future price movement based on past price movement is akin to reading tea leaves or divining the future from the textures of chicken entrails. Many of the high priests of fundamental analysis are quick to call technical analysis the financial world’s alchemy.

    Indeed, chart watchers cannot predict the future any better than your broker, your spouse or a Ouija board.

    But what they can do better than most is make a decision about what to do—buy, sell or hold—based on the probabilities of the actions of others given certain conditions. In other words, if a pattern on the chart appears, a chart watcher can create a framework for what the market might do if and when prices break free from that pattern. It does not work every time, but past performance does give us an idea of what will happen so we can do something about it."
  • VintageFreak,

    You’re using an Exponential Moving Average.
    Add a 26 period Simple Moving Average to your chart and look at the difference.
    This is slightly slower (longer time period) and will smooth out some
    of the weekly volatility.
    Notice that it reduces the number of trades over the past several years.
    I haven’t calculated the return difference, but you can do that - it appears to be the same.
    So, the result – same return, more sleep.
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