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Finding an edge with Technical Confluence
Most if not at all traders, be they day, swing or buy and
holders have come across technical analysis. You know what I’m talking about!
Those squiggly lines all the gurus seem to have on their charts! They consist
of patterns like the famous ‘Head and Shoulders’, age old equations seen across
nature like ‘Fibonacci’, even historic wave movements measured by ‘Elliott
Wave’.
As great as the names may sound, most if not all these
methods and the many others boil down to one key technical principle ‘Support
and Resistance’. Support Levels are where demand overtakes supply and
Resistance levels are where supply overtakes demand. Most of the methods serve
the single purpose of helping traders identify Support and/or Resistance.
Within the technical analysis group are two subgroups we
call Proactive and Reactive. Proactive technical analysis methods are based
upon a calculation derived from price and include Fibonacci, Pivot Points and
Moving Averages and many times identify Support and Resistance areas where
price has never been before. Reactive technical analysis methods are derived
directly from price action and include Price swing highs/lows, Volume profile
and Open Gaps, these methods are based upon the direct action of price.
Now following on from this logic, if most technical analysis
methods are used to identify Support and Resistance, why are there so many
different methods? Well one of the main reasons for these adaptations is market
personality; the market can go through many distinct personalities or phases.
This is why a trading style that’s been profitable for you for the last 3
months may become a loser now that the market ‘phase’ has changed. Markets can
go through bullish, bearish, sideways, high volatility, low volatility and
every other phase in between.
The Schizophrenic nature of evolving market environments
mean that in given phases certain types of technical analysis work better than
others. This is where the concept of technical confluence can offer a great
edge. Technical confluence much like a rope consisting of many strands is the
combining and intertwining of multiple technical analysis methods both
Proactive and Reactive to create a ‘community’ view.
So practically what does this mean? Say for example we
analyze a EURUSD chart using a few of these methods and find a 50% Fibonacci
retrace at 1.3543, a price swing low at 1.3545 and a Volume peak at 1.3542.
Based upon the confluence of these methods and the differing trading groups who
will be viewing that area, the odds of a reversal in the 1.3540-1.3545 area are
stacked in our favor.
Why does this work? Combining multiple methods means
combining multiple groups of traders, so more ‘eyes’ on that area. Furthermore
the combination and confirmation from multiple methods helps traders adapt to
changing market phases with more confidence. Probably the most important reason
to use Technical Confluence is the dreaded P-word ‘Psychology’. Technical
confluence as a psychological edge cannot be emphasized enough, if you are
confident and firm in your reasoning for a trade you are much more likely to
manage that trade to fruition.
Provided by Pivotfarm - The Home of Support and Resistance Trading
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Technically Speaking...with Biff Malibu
All Technical Analysis really is, is probabilities. You are saying when this happens, it is somewhat bullish, when this also happens, it is even more bullish, and if this also happens it is really bullish. Is the stock going to automatically go up because your 3 conditions were met? No, of course not. But it is helping to quantify and explain something that is damn near unquantifiable. As for myself, I have studied technical analysis for the last 16 years and lost a shit load of money. I have attended medical school so I am persistent and a good researcher so I have kept at it. This year I have discovered a trading system that averages a >20% rate of return on the S&P 500 since 1984. I have been trading it for the last 4 months and it seems effective. My point is, is that I do believe in technical analysis, but it is a science and it must be studied. You hear "Buy Strength and sell weakness", but you also hear "Buy Low and Sell High". Well what the hell does that mean??? Which do I do. Well you have to know your current economic environment and when the market is in an uptrend and when it is in a downtrend. If you are in a bull market and AAPL drops 10 points, it would probably be a good time to buy. If you are in a bloody bear market and CITI gaps up 5 points, you should short the shit out of that pig.
To shrug off TA completely I believe is an error, even though you are correct in saying it is full of misinformation and contradictions.
AS for fundamental analysis, do yourselves a favor and read the book "The Number
http://www.amazon.com/Number-Quarterly-Earnings-Corrupted-Corporate/dp/0...
it shows how basically all fundamental analysis is probably wrong due to corporations doing anything legal and illegal to cook the books.
The market is a minefield. If you can't handle a few mines blowing off a few of your arms and legs you probably shouldn't be in it. Personally, I think it's a piece of shit scam that almost all of us HAVE to participate in order to save for our retirements.
thank you Tyler Durden and staff for giving us the information we need to fight in this battle.
sorry for all the double post's
Before you ask, yes I've been long and it feels like riding an cheetah backwards, so I'm not comfortable with it but it has worked.
Before you ask, yes I've been long and it feels like riding an cheetah backwards, so I'm not comfortable with it but it has worked.
One more theme and this is nothing to do with Dan's comments. ZH has been complaining about rigged markets for a very long time, so is anyone actually been long? I mean why not? Everyone has been moaning for a long time so why not just buy the thing?
One more theme and this is nothing to do with Dan's comments. ZH has been complaining about rigged markets for a very long time, so is anyone actually been long? I mean why not? Everyone has been moaning for a long time so why not just buy the thing?
thanks pivot farm. you know i have never used TA or thought of it's use. virgin TAer here. appreciate all your time.
Hey Dan, I am a newbie here and appreciate anybody's time and effort to offer some education. Here's one for you, why don't try a little buy & hold salted with some MPT and then get back to me. Alternatively, why don't you elucidate on your very successful methodolgy.
I suggest try to buy/sell and pray hard. When the markets are rigged Lighting Candles etc may work as well as the Japaneses candles or any other method.
Lets go one further Dan Duncan, if anyone was investing based on ZH advice they would be ironed out, margin called and basically broke in the last 12m. However, I still read the site every day and enjoy the articles, so everything has a value - just depends how you use it. TA is just another tool.
DUNKIN DAN,... I think your wrong big time dud,...e. I've used it for years and it works for me I'd say 70 to 80% of the time which, if you are quick about pitching losers and feeding winners (which TA can confirm for the learned trader), it can be quite healthy to ones economic well being. It gives you a serious edge. Of course, if you don't understand it and prefer to ignore it then yes,... I'm sure its a piece of bociferous trash.
DISSECTING POMO
http://williambanzai7.blogspot.com/2010/09/pomo-explained.html
Brewster's Millions says, "This post is bullshit."
"Odds stacked in your favor"...Please. I guarantee that you have absolutely no idea as to how often trading a "swing low in conjunction with a 50% Fib retrace" results in a favorable outcome. None. Yet you throw out nonsense like "odds should be stacked in your favor".
As to the legitimacy of Technical Analysis:
One way to tell the difference between a game of chance and a game of skill is can a participant purposefully lose? Even without taking into account money management, I can purposefully lose at poker...but not roulette. Over many hands/trades, poker is a game of skill. Roulette, on the other hand, is pure chance. [And by "losing" at roulette, I mean losing more than the 18/38 odds would suggest.]
So...
Spare me the bullshit about TA is "more art than science". [Or, my favorite, "Technical Analysis is like the trader's toolbox."] This turgid nonsense is all over the place.
Instead, let's make it interesting.
If TA is legit, one should be able to "fail miserably" at its application.
What is the worst thing an aspiring TA Trader might do? Is it possible to purposefully fail at Technical Analysis? If so, how would this failure be achieved? [Who knows? Maybe, TA might then actually be put to good use and one could simply do the opposite.]
What if a trader decided to "live on the edge" and actually buy the Death Cross? Ooohhh, scary!
"I'm feeling self destructive today, Jim. Think I'll go out and short MSFT when RSI crosses ABOVE 75!"
Technical Analysis is so impotent it can't even help a trader lose money, let alone make it. All it does it incur transaction fees and subcription revenue to the charlatans peddling this garbage.
The following trading methods are....
Buy and hold, Bullshit
Fundamental Analysis, Bullshit
Technical Analysis, Bullshit
High Frequency Trading, Bullshit
The following trading methods are....
Buy and hold, Excellent
Fundamental Analysis, Excellent
Technical Analysis, Excellent
High Frequency Trading, Excellent
There will be hundreds if not thousands of people that will agree/disagree with each of these statements.
What matters is what puts money in your pocket, food on the table, your kids through school.
For me that's Technical Analysis.
Nate Hagens over at The Oil Drum posted an interesting piece 9/26/2010 titled "Clown Fest". Interesting reading I thougt, especially in light of TD piece on Barry R. I suggest you read it, and come back and let us know just what your thoughts are on the ideas presented.
I have been a regular attendee at this site since I first found a link to TD's initial reporting on the huge volume reported in the markets, generated by the principle trading desks at the big dealers, and a member for well over a year. I seldom post, but sometimes I am over whelmed by anger at the noise generated by the Clowns posting here, and at other sites I enjoy and respect and study.
I really want to swear, or use a colorful metaphor to describe your response to Pivotfarm... but I won't. I feel better just taking the time to let you know that I do not like, nor respect your cheap attack. It is merely another example of deteriotating discourse in this polarized country, whether it is Guns, God, Gays, Abortion, Fossil Fuels, Politics, Environment.. or even Technical Analyis.
You are correct. I should not have used "charlatan" and that wasn't fair to Pivot Farm. So...Pivot Farm, please accept my apologies, and I mean it sincerely.
Having said that:
Please allow me to clarifiy. When I refer to TA, I am referring to "Retail TA", not high-end quant fund TA.
As to my point: Just as it's easier to fail at an endeavor of skill than it is to suceed, if Technical Analysis is anything more than a ruse perpetrated by OTHER charlatans, than it should be easier to fail at it than to succeed.
But it's not.
Neither you, nor Pivot Farm can come up with a coherent "poor practice" inherent in TA which is likely to bring failure. Take any, and I mean ANY, TA suggestion, do it's opposite and you are just as likely to win or lose money. It is no easier to fail at TA than it is to succeed at it.
It does not work.
Give me a currency instrument and a time frame and let's check the efficacy of Pivot Points, MA crossovers, MACD, RSI or any of the other BS and check. You want confluence, we'll combine two of them. Sorry, but it's all bullshit.
Now, TA may not have been wasn't bullshit when, say for example Edwards and Magee came out with a MA in the 1940s. Then, it was cutting edge. But all the juice has been squeezed from that kind of Retail TA--which includes Pivot Points, Fib Retracements or support/resistance lines.
While my tone was too strident (OK, assholish), I get annoyed with Retail TA proponents (who are always selling something) who put out unsubstantiated statements. Again, how can Pivot Farm make the statement that "buying a swing low in conjunction with Fib Retracement should put the odds in your favor". Even if it was a "throw-away" statement made in support of a very general thesis, it's still irresponsible and verges on bullshit. And he has nothing to back up this claim.
And that's just it with Retail Technical Analysis: It is utterly un-falsifiable. It's the astrology of speculation.
That was a Fantastic, Easy Read... Something Technical made Easy, You could write a "Technical Confluence for Dummies" Book. I think anyone who shares information, who educates freely and I might add to their own personal expense... is someone who contributes more than they take out of this World. And Good Sir "Pivotfarm" that makes You one in a Billion on this Planet. Thank You for Sharing.