Technical Analysis doesn't have to be complicated.
One technique is to buy when a moving average (MA) of price crosses below the price line, and sell when the MA crosses above it. This is the technique described by Mebane Faber in his paper, "A Quantitative Approach to Tactical Asset Allocation," with the buy and sell rules on page 21:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461 Another technique (with similar results) is to buy when the slope of your MA turns up, and sell when it turns down. This was described by James Rohrbach in his 2008 article, "Buy and Hold is Dead":
http://www.marketwatch.com/story/the-trend-really-your-friend/print A technique to find a security in an uptrend is to be able to draw a straight line upward through at least 3 of its price lows, preferably using a semi-log chart. For details on drawing trend lines, see
http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:trend_lines"The basic trendline is one of the simplest of the technical tools employed by the chartist, but is also one of the most valuable." and "Very often, the breaking of the trendline is one of the best early warnings of a change in trend." are quotations from the book, "Technical Analysis of the Financial Markets," by John J. Murphy. If you were going to read just one book on technical analysis, that would be the one I'd recommend.
Comments
I believe this technique also holds true on the downside where a downtrend can be identified by this same method.
So,
Three lower lows = a downtrend
Three higher lows = an uptrend
The question is, do you apply this analysis on a daily, weekly, monthly, or yearly basis?
Day traders might say daily. Long term investors might say yearly. I like looking at monthly data using chart sites like M*. By using the YTD chart option a monthly grid display makes end of the month data easy to read.
Here I am connecting "end of the month" data to identify "uptrends" or "downtrends" with respect to "new lows".
Moving in closer to this month's (August) action:
We tend to hear the new cycle report "new highs" when what really is more important is making and holding a "new higher low" since this becomes support and a reference for a change in momentum.
Thanks for this thread.
Thanks for posting the above tips. Please keep'em coming.
Old_Skeet
Regards,
Ted
Derf
I would be interested, and others might too, to know the objective of different technical techniques. For instance, my basic understanding of the MA crossover approach is that it will limit big losses and improve risk adjusted returns. Even though it can outperform a buy and hold at times, it seems over longer periods it tends to be a defensive strategy rather than an aggressive one.
I'm not sure I remember correctly but I think you and Old Skeet were discussing the ADX line previously and that seems like a more aggressive, momentum based strategy that would be at least part of a strategy to outperform on a more regular basis.
I'm not even sure I have the above correct but insights such as this would also be welcome and educational for me.
In the investing world, it is a rock solid guarantee that introducing technical analysis into the discussion will promote a heated debate. The controversy will surely continue beyond our limited exchanges.
Some folks are entirely committed to technical analysis techniques; others rate it as total bunk. The truth is likely to be somewhere in the middle ground. Many year ago I was a committed technical analysis advocate; today I casually look at the charts. These charts are a terrific summary of what has happened and where we are today relative to that historical record. However, they can not be used to reliably forecast the future. Far too many things change, especially in our dynamic marketplace.
The number of folks who rely on technical analysis to make investment decisions have doubled over the past decade or two. It is still a rather small percentage. That cohort probably doesn't include investors like me who only casually examine the charts. Here is a Link to a very serious academic study that examined technical analysis and its advocate's performance:
http://arvidhoffmann.nl/Hoffmann_Shefrin_2014.pdf
It is a very complex and comprehensive study. I have only read its conclusions and reviews of the paper, but not the paper itself. The conclusions reinforce numerous other study outputs that challenge the effectiveness of pure technical analytics. All these academic studies find it difficult to identify positive Alpha contributions.
Of course, the ultimate test is the positive reward performance over market returns that are easily delivered by Index products. Technical analysis demands considerable time to do it properly. Does a payoff exist at the end of that considerable effort and time sink?
My answer is No, but that might just reflect my shortcomings in that arena. It might not be the same answer from informed and dedicated chartists. What works best for each investor varies. We each get to choose our own poison.
By the way, I was an early follower of John Murphy's methods. I own his earliest book and applied some of his recommended methods. My efforts produced dubious outcomes when compared to what the market was generating in that same timeframe. Again that is likely my shortfall. Good luck to all you guys who incorporate significant technical analysis in your investment decision making.
Best Wishes