I haven’t seen this discussed anywhere but I have been studying Elliot Wave Principles for the past 3 years and although not explicitly mentioned is very much in line with Austrian Economic though regarding human action.
The theory is unprovable and inconsistent with the efficient market hypothesis. The definite book on the subject is Ralph Nelson Elliot *Wave Principle (1938)*Its not an economics book per-se but is directly focused on market trading of securities,
The idea is that looking at the price data on charts.. you can observe recurring patterns (triangles, penants, head and sholders, cup and handle)… The market price is a result of human action.
Ive come to the conclusion that if you are an Austrian Economist… you must not accept the “random walk theory”
Elliot wave theory is one small part of technical analysis, and while the markets seem to be generally semi-strong form efficient, there are very small and complex opportunities to take advantage of past price information, and arbitrage opportunities. However, yes staring at charts seems to be quite useless, and outdated. For the most part, experts accept the idea that stocks (or whatever else) move in geometric brownian motion, in otherwords randomness.
On a personal note, I have taken a course in this chart trading from an “expert” in the field. I found her intellegence and logic about trading as humorus. It seems like these people “hope” that they are seeing patterns, instead of executing and testing their strategies objectivley.
i don’t agree at all… if you dont use technical analysis you cant “trade”.
the past price action is the simplest form of technical analysis, in conjunction with recognizable reaccuring patterns and moving averages there is clearly a visible “heard” mentality or self fulfilling action. like the laws of motion, " every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it." stock prices are no different, momentum, direction and acceleration are real characteristics of price movements.
support and resistence levels are also very real aspects of short term trading and are the equivalent to supply and demand analysis. I am a follower/practicioner of technical analysis in the simplest form, for the most part analyzing the price data ONLY. looking at the volume data can also be useful but the so called stochastic “indicators” only provide a guide to current direction and are useless in forecasting future prices.
Remember, I didn’t discount all of technical analysis. What places like RenTech or Susquehanna or SAC capital do, are all technically, technical analysis, however you probibaly wont find a stock chart on any of their screens.
These indicators you mentioned are useful might be correct if you were the only one looking at them.
For example you cite support and resistance, which is often argued as point at which demand>supply and visa versa. However, when this infromation is looked at by thousands of players, you find that these levels are more often broken through than bouncing off. It no longer reflects supply and demand.
The problem is if you look at traders that use classical technical analysis in general, it seems to me that their returns would follow a normal distribution. That seems to be my personal observation.
Also, I recently heard about a paper which found that all those candelstick patterns are unprofitable, but I haven’t been able to read it yet.
we have all seen the chart of the dollar index falling since 2002… just looking at that chart with no regard to interst rates or the fundamental conditions.. would you go long, or buy the dollar??.. NO… all that technical analysis says about THAT chart, is that there is no indication of a turn-around..
what makes me passionate about price analysis is that every chart is different and every pattern unique… the idea of support and resistence is only relevant to the time frame being looked at…
a ten year - monthly chart, has a different support and resistence level, and more significant… than the levels on a two week - 15 minute chart, but still relevant.
if you can recognize a devloping pattern with a favorable risk-reward ratio… you enter a position (short/long)… the wining strategy is to let the winners ride a and cut the loses.. you cant go wrong trading like this.
trader returns in any given day/year probably do follow a normal distribution but over time… is skewed towards positive returns because you have to assume the profitable traders are doing something right and the losers exit the market. every trade involves someone that belives the price is going up and another one that believes the price is going down… or else there wouldnt be a transaction. the market is the sum of all human action.
“a painted high” or the high price that was bought by one trader only to fall back becomes significant if the next time that high is reached the volume of trades around that price is also high… the market sentiment is visible on the price chart.. its curious why often times the support and resistence levels are psychological barriers like “$100”.. oil… cough cough
the losing traders are the ones that don’t follow a consistent strategy, are under capitalized, or dont know what they are doing. techincal analysis or price action is a study of HUMAN ACTION… elliot wave theory embodies the cummulative human action aspect of the maket.
If technical analysis worked, then investing would just be a matter of finding the right formula and sitting back as the profits rolled in. But even then, the beleaguered chartist would find competing investors piling on his coattails, bidding the ROI down.
This is something the Austrian school doesn’t do a good enough job of stressing: the clearing process of markets works in the other direction as well. The securities exchanges may not (nor can they be) perfectly efficient, but they’re pretty damn close.
Warren Buffet said “show me a rich chart trader” and “turn a chart upside down and ask them what’s going to happen”. In Liar’s Poker, Michael Lewis summed it up well. He said, that Technical Analysis works if everybody else is doing it.
Turning a chart upside down does not represent the psychology of the market participants and the sum of human action so that is a Non-Sequitur
Im going to defend technical analysis and chart reading as the only way to enter and exit positions… would you buy a stock that is falling like a rock? or sell a stock that is flying high? Thats technical analysis… even though the companies fundamental prospect may have a bright future.. purchasing a falling stock for the long run is a loss of opportunity cost. Warren Buffet made his fortune by picking bottoms.
Using the chart and price action, you can literally see the momentum dying right before bubbles bursts. In the stock market crash of 1929… would you be holding a bag of worthless stock the next day, thinking the crash was a fluke (thats how people lost everything)Trading securities is much like tournament poker… the best players profit consistently. YES there are rich chart traders… Goldman Sachs stock GS has a trading range of about 5% a week… trading hundreds of millions of dollars a day.. thats alot of money moving around… but nothing changes “fundamentally”.
BACK to the original post… Technical Analyis is the study of HUMAN ACTION and Elliot Wave has a grand theory on this..
I dont believe in black swan events… assuming you ALWAYS place a stop-loss and only risk < 3% of capital per trade… a preverbial 9-11 is within the range of standard variance. This isn’t roullette, i’ve never seen a liquid security crash 100% in one day. The problem is that the average “investor” isn’t constantly monitoring positions and in the case of 1987, and all other crashes, there are those who will cling on to the hope that a rebound will cover loses.
in the long run… with inflation… the stock market only goes up… the DJIA will be 100,000 points within 30 years… thats what Elliot predicts… but the real question is what is 100,000 points in relation to the price of commodities?
That’s kind of irrelevant though - you’re thinking in nominal terms when you should be thinking in relative terms. Using this argument EVERYTHING would be a good investment, simply becuase EVERYTHING (including stocks) always goes up in price. What’s important is not whether something is going up in price, but whether it’s going up in price/value relative to the things that you plan on purchasing with it further down the line. So if housing is booming (doubling in price every 5 years say) and stocks are doing pretty well (doubling every 10 years say) and you have a bit of cash that you’d like to invest so that you can buy a house in 5 to 10 years time, investing in the stock market simply isn’t going to get you where you want to be.
please dont take a quote half sentence like that again…read that post again and read the rest of that paragraph… I AGREE… yes, what is 100,000 DJindex relative to purchasing power of commodities? thats gonna depend on the fiscal and monetary condtions. In the past 50 - 100 years… the stock market has been the best performing class of assets. Annualized Real Return.
The stock market basically doubled since 2003 to the high last October and if you include reinvested dividends.. the nominal return is ALOT more the 100%. At the same time the dollar index tanked about 40% in that same time period. I understand the Austrian rationale for macro mal-investment but im just one agent out-pacing REAL inflation with the highest yeilds at opportunity cost. Just look at the charts[:P]
The entrepenuer that is so critical to the Austrian captial theory has to be risk seeking.
but really back to my original.. original post… If you are an Austrian Economist you should consider learning more about the human action of technical analysis… wave theory in my interpretation is the philosophy of price movements. The price history is very relevant to future prices.
methodological individualism just means studying the decisions and actions of individuals, which in turn lead to larger outcomes. It’s a way of studying how those outcomes come to be, as opposed to ignoring the element of the individual.
I believe that logic predicts that classical forms of technical analysis simply dont work. You could be seeing certain patterns and you predict that oil is going to bounce off a certain resistance level, but if some refinery blows up, technical analysis wont tell you that.
You mentioned that buying the DOW would be a bad idea because it recently has gone down. This simply doesn’t make sense. It’s current price reflects all known information, if people knew it was going down further, it would already be at that lower price. I believe buying in this market is just as risky/profitable as shorting it.
The real guys making money on technical analysis really are looking at information that only they and few others are looking at. This information is secluded because these strategies are so complex, and often highly mathematical, its not information that is completley publicly known.
Most of these guys agree that trying to outperform the market using charts is a fruitless effort.