Investing beginners and veterans alike are constantly looking for the best tool to give them that ever-elusive investment edge.
Bollinger Bands, one of many technical indicators.
Technical Analysis is the practice of using statistical analysis of historical price and volume data to forecast future movements of a security. Technical Analysis is typically employed in market timing, and runs somewhat contrary to the Efficient Market Hypothesis (see Investopedia article here) and Fundamental Analysis.
Even so, Technical Analysis is a popular method used by investors to determine entry and exit points for stock trading. Technical Analysis compares certain historical data with a more current, specific period of time in order to forecast upward or downward movement of a stock’s price. An important assumption for Technical Analysis is the old adage, “history repeats itself,” in that market responses to certain factors will be similar across periods.
In this series of articles, I will describe the most popular technical indicators in detail.
First, though, a word on the merits of Technical Analysis. It is important to note that this approach differs significantly from what is called “Fundamental Analysis”, or analysis based on the merits of the company itself, including revenues, product quality, research and development, and more. Though traditional thought would tell us that it is important to consider Technical Analysis AND Fundamental Analysis together in order to come to an informed decision about a stock, many hardcore Technical Analysts refute this notion, saying that the fundamentals of the company itself, as well as anything else that could affect the company, is already reflected in the stock price (StockCharts.com Chart School, link here).
To proponents of the Fundamental Analysis approach, however, this is a faulty approach. The notion that the price takes into account all of these factors, they say, seems be the very reason that we study and take those factors into account. If the price is made up of certain parts, wouldn’t it make sense to study those parts and thereby understand the whole? Scholars have debated this for some time.
In any event, we will focus on the Technical side in this first round of articles. We will cover Fundamental Factors later. There are a number of mathematical and statistical resources we use within Technical Analysis, called Technical Indicators, that help us to achieve accurate stock prediction. If Technical Analysis is the toolbox, then the indicators are the tools, and certain tools are used for certain situations. For our purposes, Technical Indicators will be grouped into categories based on similarities in what kind of results they predict (i.e. volatility, price changes, etc.). Thus, without further ado, we hope you enjoy our analysis of the Technical Indicators!
To know values is to know the meaning of the market
– Charles Dow of Dow Jones & Company, considered the “Father of Technical Analysis”
More at http://www.businessinsider.com/10-great-quotes-about-the-market-2011-6?op=1#ixzz1wO48pvqU
anon
June 1, 2012
I am not a big believer in TA. Tucker I thought you were a serious quant!
anon
June 1, 2012
Predicting volatility are you referring to GARCH or something else?
Tucker Balch
June 1, 2012
Hello Anon (if that really is your name!)
The post is by Jordan Katz, a new contributor. Welcome Jordan. Anyhow, back to your question, Anon. We’re using technical indicators as input to machine learning and discovering that they provide predictive value. Other sorts of information (such as news) can also be very useful as well.
Jordan is going to follow up with additional articles that will provide more detail about specific technical indicators.
Tucker
anon
June 2, 2012
Hi thanks anon is not my real name. I saw a paper from berkely that tried to do this with svms and hidden markov models. Did you read that paper and how are you going to make it different. I have mainly been a fan of regression as my backbone not TA. Best of luck though. Also in regards to news have you tried using something like intrade they have a good api. Signed -pop (that is closer to my real name!)
Dallas Johnston
December 25, 2012
I believe TA works because I have seen it in action. The Bible of TA is Technical Analysis of Stock Trends by Edwards and Magee (6th ed. only). I know people who have traded with little variation on these simple techniques for 40 years and have made themselves extremely wealthy.
Coming from an engineering background, I have to admit that TA appeared to me counterintuitive due to my perception of the randomness in price movement. However, the book does a very convincing job of emphasising the influence of human behaviour and psychology in supply and demand, which ultimately determines price movement: something the EM school neglects entirely. One must admit that even hardcore quants have to depend on models that are not necessarily truly random in the end.
This being said, it is up for debate as to whether or not these patterns can be captured programmatically due to the literally infinite permutations they take on. I tend to believe there is huge opportunity for applications of artificial evolutionary biology universes generating flexible, smarter neural networks than exist today that can be utilised in pattern recognition for such supply/demand-based price prediction. This is something I am personally setting out to develop. ;-)
Tucker Balch
January 1, 2013
Thanks Dallas.
bob
February 4, 2013
im following an algorithm provided by marketlogicdatacorp.com So far so good!!!
arun
March 6, 2013
Still looking forward to the ML implementation of TA indicators.