I was wrong. Technical Analysis is God’s Gift to Humanity

Please completely disregard my last text on technical analysis. Technical Analysis is perfect. I was wrong.

Proof? The following hate mail. Now, very rarely do I receive an e-mail that I consider a masterpiece, but this one is just too good to pass:

You’re an idiot­. I can’t believe someone would be stupid enough to write the stuff you wrote. Just because you are too dumb to use technical analysis correctly doesn’t mean no one will. The worse is that some people will actually read your blog post and won’t use technical analysis and lose money as a result. You should seriously reconsider the things you are posting as they can lose a lot of people a lot of money.

If technical analysis was bullshit as you claim, then why do so many people use it? Almost every serious trader uses it. Every major fund uses it and these funds make much more than you. Look at the list of people who used technical analysis. Many got rich from it:

Top 7 Technical Analysts of All Time Share Their Secrets

I smell some jealousy emanating from your post. Perhaps if you spent half the time you spend writing your crap studying TA instead you would actually make money from the stock market instead of wasting your time spouting nonsense.

Phi

And tell me, Phi, have you made money from the stock market? Surely you can share with us the wonderful technical indicators that you use to print free money, right?

There’s one thing I don’t understand about your e-mail: how can someone lose money from not using technical analysis? I don’t use TA and I consider myself a successful trader, so how exactly is not using technical analysis “losing” me money? Perhaps you are implying I am letting money on the table by not using these “techniques?”

The massive, glaring mistake in that kind of line of reasoning is that it’s complete and utter nonsense. It has nothing to do with anything. Take this, for instance:

  • I am losing money by not drinking a tea before the market opens
  • I am losing money by not praying God before the market opens
  • I am losing money by not summoning the semi-God Alkaijitsu before I start trading
  • I am losing money by not doing the rain dance before the market opens
  • I am losing money by not drawing stupid lines on a graph before I start trading

Do you see what the logical fallacy is? Just because you take two independant elements and try to make them match doesn’t automatically means you can create a causative link. Just because you postulate something necessarily makes it the reality.

Then, you fall into the fallacy of an appeal to the mass: everyone uses technical analysis, so that must mean it works, right? Otherwise, why would people use it?

I’d like you to consider another point, Phi, one that in my mind at least makes far more sense: I’d like you to consider that, perhaps, these people pretend they use technical analysis and then actually do another thing entirely. In other words, when a successful trader has to discuss his methods, instead of revealing his true tricks (which is really insider trading, most of the time), he pretends it’s all thanks to technical analysis. I did mention, in my earlier article, that one of the few advantages of Technical Analysis is that it’s easy to export and, thus, sell to the mass. It’s so ubiquitously easy for someone to pretend he got rich following a couple of nonsensical rules – BE YOUR OWN BOSS TODAY!

Then, you have the nerve to say big funds make more money than me. Of course they do: they manage more money. I’m not sure what point you’re trying to make here: that having access to more capital will earn you more money?

Perhaps you seek to imply these “managers” using the glorious technical analysis earn a higher rate of return. This is incorrect. Did you know that 86% of mutual funds manager failed to beat the S&P500 in 2014? That’s right, these idiots with their stupid charts didn’t stand a chance against “buying and holding” despite all their “reverse bat harmonic indicators” or whatever bullshit is relevant these days. And hedge funds?

Since the bull market began in March 2009, the critics will point out, the average hedge fund in the Credit Suisse Hedge Fund Index has gained an annualized 8.5% through April 30, versus 23% for the S&P 500, assuming dividends were reinvested. Over the past 10 years, even a conservative portfolio that invested just 60% in the S&P 500 and kept 40% in bonds still outperformed the average hedge fund.

http://www.marketwatch.com/story/investing-in-a-hedge-fund-isnt-really-worth-the-bother-2014-05-23

Pretty weird for firms that supposedly use the invincible technique of technical analysis.

Then, I looked at your list of “technical analysis gurus,” which pretty much felt like reading the names of lottery winners in a newspaper I have to say. Here’s what I read about the second man on the list, Mark D. Cook:

Lost all his capital several times while learning to trade including one occasion when he lost more than his entire net worth.  In 1982 he sold naked calls on Cities Service that expired deep in the money.  His account dropped from $165,000 to a deficit of $350,000 in a matter of days; a total loss of $815,000 when taking into account for the money that he lost in his family’s accounts.

Oh, he lost his capital several times, but he was learning to trade, guys! Isn’t that convenient? If you buy my system and lose money, well, you are just learning to trade! One day, you will know how it works and you will make a fortune!!

I’ll give him prop for being honest, at least.

Not one to give up, after five years Mark had totally recovered from the losses but vowed never to sell another naked option.  He attributes his turn around in success to the development of what he calls the ‘Cumulative Tick Indicator’.

So this is a guy who went bust a couple of times and finally got lucky. I’m not sure how impressed I’m supposed to be here.

The rest of your list wasn’t all that much more glorious, to be honest. I’m not sure what point you are trying to make here. That there are some people that get lucky? If you develop a system for a slot machine and it just happens to work and you hit a big jackpot, did you earn a lot of money due to  your system or simply because you were lucky?

Let me take another example: say you have cancer and, before every seance of chemotherapy, you eat a pound of carrot. After a year, your cancer is gone. Do carrots cure cancer?

But let’s say I’m wrong. Let’s say these guys did get rich using technical analysis. Let me explain exactly how this goes on in case nothing is clear.

Let’s take 10,000,000 people trading using technical analysis at the beginning of year 1.

On year two, 1,000,000 traders will have tripled their money. The rest will be broke or will have lost a significant portion of their capital

On year three, 100,000 will have tripled their money. The rest, again, lost a large part of their capital and stopped trading.

On year four, 10,000 will have tripled their money.

On year five, 1,000 will have tripled their money.

On year six, 100 will have tripled their money.

On year seven, 10 will have tripled their money.

On year eight, 1 will have tripled their money again. If he started with $10,000, he now has $21.8M dollars

Do you see where I’m going? The one guy at the top ends up in your “list.”

IT’S LUCK

Why is it so hard for people to grasp that simple idea? There are people who became millionaires from playing roulette. Put $100 on a number, guess correctly three times in a row and, congratulations, you just made $4.3M.

Lastly, there was a comment on my Reddit post that was just too good to pass up. Much more eloquently presented than the garbage mail above, it sums up the situation pretty well. Here it this:

You are putting a huge amount of effort trying to protect people from the pitfall of studying and trading based on chart patterns. And, I appreciate the work you’re doing but I would ask you to refute one simple counter argument. I can name several Chartists who have had lifelong careers with average annual returns that beat the market (one example would be Peter Brandt with an average annual gain of 42%). now these are traders, not investors, so they spend some of the profits and don’t just reinvest and reinvest, which is why they don’t become as wealthy as Warren Buffett and why you don’t hear about them, even though they have a higher annual return than he does. You’re saying that these technical traders, like Brandt, blatantly lie and deceive people by saying they are career Chartists when in fact they’re not? Why would they do that? What does Brandt have to gain from lying? He’s already at retirement age and he’s already made his millions. He’s not selling anything. Why wouldn’t you believe him when he says that he made his money using charts?

This:

books-peter-brandt

And this:

 

stock-navigator

Pretty strange for a man who has nothing to sell.  And what do you find from the “Trade Navigator” (nice name, by the way)?

stock-data-scam

Oh. Oh. OH! I guess Peter Brandt does have something to sell after all!

And while you’re at it, might as well throw it all out:

advanced-technical-plugin

That’s just the letter “A.” It goes on, and on, and on, and on. Tens and dozens of those garbage, useless “plugins” not even worth the computer screen they’re printed on. Seriously, there are so many “plugins” on that list it made my internet lag.

$250 for a “advanced traders library I Plugin?” What a bargain! “Alexander Elder Plugin!” Who is Alexander Elder? Well, he’s another of those quacks who has even more garbage to sell:

another-stupid-technical-analyst-scam

That comes out to $1,075 per day, by the way. And what do you learn in that “seminar”?

another-stupid-technical-analyst-scam

Hahahahahahahahahahahaha! I have to thank everyone for seriously making me laugh here.

Here’s how I view Mr. Alexander Elder:

alexander-elder

http://www.greenbookblog.org/2015/03/11/of-innovation-and-snake-oil/

But you know what? Tell me: why would a man who made “millions” trading stock bother to sell $30 monthly packages, $250 useless “plugin” or even a $4,200 seminar (but don’t worry, it includes free beer at meals! “You’ll never get your wallet out from the moment you get off the plane!”).

In other words, why would Mr. Pro here spend 4 days teaching personality or whatever when he could be trading and earning far much more? In fact, let me ask another question:

If our man here had really developed a system to beat the market, why in the love of God would he want to share it with anyone?

If I ever developed a new mathematical model that allowed me to print free money trading stocks, I’d never share it with anyone. In fact, I would probably devote a large portion of my time towards keeping it secret. So why does this man offer seminars about it? This is about the least logical thing you can do.

You know what? Let me save you some time (and, most importantly, money) by summarizing up what you will learn during that five day seminar:

DAY 1: Market Psychology 101

  1. It’s all about your “attitude.” If you want to win, you can! (1h intro)
  2. Some vague report about his portfolio returns and how amazing our head speaker is (1h where he boasts about how godly he is)
  3. YOU CAN DO IT TOO! You can be your own boss work when you want where you want… (Another 1h of motivation garbage)
  4. Some vague motivational advice taken mostly from self-help books (“You are your own worst enemy!” “Do not be afraid of success!” 1h)
  5. PAUSE: A dinner, where our charismatic leader drinks a beer with you and chitchat, giving “various tips” (another 1h of hearing about talk about himself. “When I started, blah blah blah…”)
  6. Keep a positive attitude (2h, with a “guest speaker” who once appeared on CNN)
  7. Develop a personality for success. See: amazon.com/self-help for a summary about that. (2h)

DAY 2: Introduction to Trading & Risk Management

  1. Be constant and consistent in your trading (2h where he repeats that over and over)
  2. Let go of losers. Hold onto your winners (another 2h to basically say that in every way you can conceive it. Don’t cling to the past, forget your bad trades, learn from your mistakes, blah, blah blah)
  3. PAUSE: Some vague Q&A session where he tries to dodge every serious question and tells you “you don’t have a mind for trading” if you manage to corner him (1h)
  4. An unpromising and senseless session about risk management. “Traders who go broke do so because they didn’t manage the risk. Manage your risk” (4h, rest of the day)

DAY 3: Technical Analysis Demystified

  1. You can make money whether the market goes up or down (2h)
  2. Follow the trend (2h)
  3. PAUSE: Another dinner that is “paid by the speaker” although you just spent $4,200 for a five day trip that didn’t even include the plane flight) (1h)
  4. A ten minute introduction to “technical analysis” along with a few graphs to support the idea technical analysis work (1h)
  5. “We have a surprise guest. We weren’t sure he could be here today due to time constraints. In fact, he made the trip expressively for us. Please give a warm welcome to the man who taught me everything. A master chartist and technical analyst expert, my personal mentor, blah blah blah” (3h)

DAY 4: Advanced Trading Strategies

  1. Don’t average down losers (2h. A pretty long 2h)
  2. Take your profits, cut your losses (2h. “Try to sell positions at a gain”)
  3. PAUSE: Some dinner where he reveals some secrets he never revealed before (1h).
  4. “System” (2h)
  5. BUY OUR NEW SEMINAR IN HONG KONG HALF PRICE OFF TODAY ONLY RESERVE YOUR PLACE TODAY LEARN ADVANCED BLAH BLAH BLAH (2h of pure marketing that would be timeshare companies look merciful in comparison)

That’s it. The same old rehashed self-help bullshit coupled with a few trading clichés, repeated over a four day period. Insert a couple of cherry-picked graphs and a few outright lies for a full bullshit seminar where you learn absolutely nothing.

But F.S., he’s a doctor!

And probably a very good doctor. Seriously, he’s probably a very good psychiatrist. If he manages to coax people that well to sell useless drivel for a thousand dollars a day, I’m certain he’s an excellent salesman. I’m absolutely not saying he turned to selling quacky seminars because he sucked as a doctor. In fact, he probably turned to selling quacky seminars because he realized he could make more money that way. That’s his right, by the way, just as it’s my right to call him a quack and a fraud.

“But F.S., you are wrong: there are guys consistently beat the market!

They sure do, but not a risk-adjusted basis. I can earn 100% a year too – if I am willing to take a 30% chance to lose my entire networth (which I am not). Think I’m bluffing?

http://www.businessinsider.com/r-large-everest-capital-hedge-fund-closing-after-swiss-franc-losses-bloomberg-2015-1

http://hf-implode.com/

http://www.wsj.com/articles/heather-capital-how-a-600-million-hedge-fund-disappeared-1418360402

Big hedge fund goes bust, $830 million loss on Swiss franc trade

http://www.businessinsider.com/r-large-everest-capital-hedge-fund-closing-after-swiss-franc-losses-bloomberg-2015-1

Do I need to keep going?

Yes, there are people who beat the market. There are also people who go broke every day. In fact, look at http://hf-implode.com/ (a website that would make zerohedge look proud) which covers busts JUST from 2006 to 2009. Sure, you can probably pick the one hedge fund that managed to get the best return since 2006, but you just as well pick one that go broke.

Welcome to the casino, my dear sir! Pick a hedge fund to begin!

It’s stupid. It’s retarded. It’s a waste of money. There are so many fallacies, logical mistakes and outright lies when it comes to technical analysis that I almost feel overwhelmed. Today, I was looking at my favorite subreddit when I found yet another “proof” that technical analysis works:

ztk9Ajw

Even if the chart above was true, not cherrypicked to fit your narrative and actually designed correctly (No dates? No comparison to benchmark? No definition of what “technical analysts” are?), what does it prove? That someone managed to find one single period in all the history of Wall Street where a group of “analysts” outperformed another? We don’t even know what are the dates on this graph, nor do we know if the author cut the data after 190 days or so because it no longeer fit its pre-conceived idea that technical analysis is God’s gift to humanity and nor do we know how each analyst was listed in each group. This isn’t even Middle School statistics 101 worthy.

But let’s assume the chart above was 100% right and statistically valid (it is not). What does it prove? Does it prove that technical analysis actually works or that “strong buys” on CNBC/Yahoo’s Numbers are crap?

This, my friends, is how vapid the field of TA is. This is the kind of graph you’d see at those kind of “seminars.”

But that still doesn’t explain why some some traders have been consistently beating the market for years

It does. These people take excessive risk. Want to do the same? Go on margin, get a 2:1 leverage and put it all in the S&P500. As long as the S&P 500 is going up (and as long as your interest rate is not crazy), you will crush the general market. If it goes down, well, GG.

Look at what happened in China recently. Some people had a 3:1 leverage on stocks. If stocks went up 10%, they made 30%. But the stock market declined 33%, leading to a 100% loss. GG, wiped out in a month.

Okay, maybe 90% of technical analysis is crap, but the 10% that remains is good!

NO!

This is another one that I hear often. “You are right, F.S. Comeau, 90% of  technical analysis is worthless, like the cup and handle thing… BUT THE TRIANGLES! THE TRIANGLES MUST WORK!!!”

As long as you remained attached to the idea that you can look at a chart, draw a few lines and seriously think to yourself, “I know where the stock is heading,” you will fail. Period. If you seriously look at this chart

S&P wehre

 

 

and actually start thinking like that:

TA S&P500

 

Then you are doomed to fail. Period.

Even IF TA was BS, so many people trade based on TA that it becomes self-fulfilled.

This is also a fallacy that I hear all the time. Typically, after realizing technical analysis is a bunch of garbage, people will end up saying, “Well, so many people trade with technical analysis that it becomes true.” In other words, so many people trade using moving averages that if the 50-days SMA cross the 200-day SMA upwards, then many people will buy. This one is slightly harder to refute because the proof against it is more complex.

The truth is that you have no idea which indicator these people are using and the way they are using it. Furthermore, you have no idea how many people go “against the herd.” In other words, you don’t know if anyone is going to anticipate the move.

Say the 50-day moving average is dropping quickly and is about to touch the 200-day moving average, for example. In fact, you expect it to happen in about 7 days. What can do? You’re going to short the market, then cover right as the 50-day moving average is about to touch the 200-day moving average. Why? Because you expect people to “push” the stock down so the moving average cross so that they get their nice little signal. Why do you cover right as they are about to cross? Because you know very well the crossing thing is bullshit and at best a complete gamble; what if the signal happens but the market reacts in the opposite way? This is just as likely as a crash (more likely, in fact) because TA is bullshit.

Now, let’s say someone anticipates your 14 days move. In other words, he expects you to start shorting 7 days from moving averages crossing. He starts shorting 14 days in advance, expecting the you to start shorting “shortly.” He wait for you to go short and he covers his position to earn a quick profit.

And then comes the 21 days guy. And the 28 day guys. And so on.

Do you see where I’m going? Again, you are not facing a team of drunktards on sleeping pills: you are facing some of the smartest minds in the world. These people know how the market work far better than you ever will. They’re expert at market psychology and understanding the minds of traders. They can anticipate your moves (not yours specifically, but all traders together) and benefit from idiots from think TA is valid.

Still not convinced? Look at this:

As we explained earlier, day-trading is one of the dumbest jobs there is: According to one academic study, 4 out of 5 people who do it lose money and only 1 in 100 do it well enough to be described as “predictably profitable.”

http://www.businessinsider.com/henry-blodget-heres-what-day-traders-dont-get-2010-3

While the number do seem high to me (IMO, of those who don’t go broke, it’s closer to 4/7), I have to say the majority of traders do lose money. A decently-sized number of daytraders go bust.

 The authors sifted through tens of millions of trades, from 1992 to 2006, and found that 80 percent of active traders lost money.

http://www.businessinsider.com/henry-blodget-biggest-bull-market-sign-yet-day-trading-is-cool-again-2010-3#ixzz3kJRiDcYk

Look, I’m not sure what you expect from me, people. To outright lie? To tell you that you with your computer can make money by finding triangle patterns on your screen?

YOU CAN’T

Why is that so hard to accept for people? Why is it such a statistical improbability for people to understand that looking at a chart and thinking, “Wow, this one is sure going up” is the modern day equivalent of looking at the sky and thinking, “Wow, this looks like a giant crab”?

Stop sending me hate mail, people. I do realize I went down against one of your most cherished and intimately-held convictions (I can be rich by recognizing patterns on charts! Damn, I lost money again, but it’s only because I’m not good enough at recognizing patterns – yet!) by attacking technical analysis, but look: I started my career as a trader as technical analysis believing exactly like you and, very honestly, today, I am ashamed of it. Ashamed of myself for buying into it like a compulsive gambler buys into Herbalife. I didn’t trade on TA, but the only fact I seriously considered so was enough to seriously shake me off. “C’mon, F.S., you’re not that dumb!”

Technical analysis doesn’t work. It’s a scam and these people are charlatans. You’ll lose money.

Read my article “Wall Street Explained in 5 minutes”