why charts dont work

[Ray Zee]

i hate(love) to burst some bubbles here. but charts are only good for wiping you butt with when nothing better is around. they only reflect what happened in the past and give little or no info for the future. thats my opinion. if the charting could work then it would be easy to make a program that took each stock and applied some algorithm to it and find a pattern that could be exploited. it hasnt happened because it doesnt work. so its back to fundamentals which determine what a company will earn in the future.

[scalf]

/forums/images/icons/wink.gif charting...technical analysis...is an art not a science; it's ok by me if you think past volume and price figures can have no meaningfull correlation to future price movements...(essentially that is my succinct interpretation of your outlook ray, correct me if i am wrong)....however, i say there are correlations between past patterns and future price movements...it's just how much and how to apply this info; there is no doubt in my mind that it's hard work, you gotta know how to limit losses, and use good money management...there is no doubt in my mind that when a stock hits a gartley pattern(for example), there is at least a 10-20% ev long term...just like playing a physically altered roulette wheel...it's there...but not every one likes charting...just like ford vs chevy...apple vs ibm clones...pepsi vs coke....fundamental vs technical...jmho..gl /forums/images/icons/grin.gif

[PokerBabe(aka)]

There are "highly correlated" patterns in trading "broad" indices, for sure. However, occassionally, some statistical "anomoly" occurs, blowing your entire model. And THAT is why charting can be deceptive and down right wrong. Over time, however, the bell shaped curve lives and regression analysis overcomes all the variance!. LGPG, Babe

[Mark Heide]

Ray,

I basically agree with you. Using fundamentals and economics can provide the best information for investing. But, charts are useful. For example, look at the S&P 5000 since '97 (here's a link):

http://www.quicken.com/investments/charts/?period=5YEAR&charttype=HIST&big=on&plot=LINE&othe rsym=&mavg=&dji=&sp500=&nasdaq=&p=INDEX%3AINX

If you notice for the Oct to Jan quarters were all gains with the exception of Oct 2000. If you were to just buy the S&P 500 every year at that time you would make money. Futhermore, you would do even better if you only purchased the index when ecomomic and political conditions were favorable.

I hate(love) to burst your bubble, but you still have poor taste when it comes to food. Someday, you may get lucky and come to Chicago and eat a good pizza. /forums/images/icons/grin.gif

GL

Mark

Sorry, Ray, but YOU couldn't be more mistaken. Of course a chart represents the past and you have to trade on the "hard right edge," but what better way is there to identify support and resistance levels while at the same time being able to compare that to the volume.

Fundamentsls, as you say, are all in the chart. News is worthless, because it is in the chart as well. Everything you need to know is in the chart, and you must use several different time frames. Monthly, weekly and daily.

Someday you'll figure it out.

[adios]

I'm not aware of any studies that show that charts are actually predictive of future price movements in a way that you could reliably "beat the market." Not saying that there aren't any, just saying that I'm not aware of any. Also I'm not sure of this either, but I'm fairly certain that studies have shown that support and resistance are basically bogus concepts as well. Perhaps I'm wrong but it seems that for a method to be valid, it's application has to reliably beat the market. Of course the same could be said for fundamental analysis most likely. I'm sure Paul could enlighten us.

[PokerBabe(aka)]

Mark- you are right- the pizza in Chicago is awesome /forums/images/icons/tongue.gif LGEG (look good, eat good). Babe

[Ray Zee]

how about a analogy to poker mark. what if you raised in the dark every time you were going to get a big pair. isnt that like what you just said. picking out winning quarters looking backward and saying if you bought them you would have done well.
see you in chi town pal.:)

[Ray Zee]

babe, the problem lies in that mark cannot find the real good pizza places in chicago. i was going to go there this year to visit him for good eating. but the grapevine told me i would just end up with frozen crusts. the poor guy thinks spagetti o's is a great italian dish.

[PokerBabe(aka)]

Well, tell Mark to do a search for good pizza places on that Quicken program he's always talking about
/forums/images/icons/grin.gif /forums/images/icons/laugh.gif . LGEG, Babe.

[Mark Heide]

Ray,

I believe I know what you are getting at with this analogy. You are trying to say that fundamental analysis is the only valid method, because the result can be measured mathematically. But, you could also chart your results which would generally tell you the same thing. The chart is a reflection of past performance, and an indicator of future performance.

Another analogy to poker. If you track your wins and losses from tournaments, limit hold'em, 7-card stud, omaha 8b, and chart them you would get an indication based on past history of what you did well at, and if you did not do well you could research and possibly find the answers to improve your results, or even quit playing a particular game to increase profits.

Here's a stock a poster indicated they invested in recently.

http://www.quicken.com/investments/charts/?period=5YEAR&charttype=HIST&big=on&plot=LINE&othe rsym=&mavg=&dji=&sp500=&nasdaq=&p=ALLY

Here's a perfect example of the usefulness of a chart. If you look at it's five year history, you would want to find out why the company did so well in the last two years compared to three years prior, you would want to investigate what economic conditions brought about the dramatic gains. Just looking at this companies P/E and it's intrinsic value would be a mistake. Here's an analysis using Robert Hagstorm's The Warren Buffet Way analysis using charts to illistrate important points:

http://www.quicken.com/investments/strategies/?p=ALLY&strategy=hagstrom&recstrat=fool

GL

Mark "The Bear"

[Mark Heide]

PokerBabe,

Don't believe a single thing that Ray tells you. If you ate one of Ray's Pizzas you would rather have a can a Spam.
Here's his receipe: Matso cracker, topped with ketchup, a slice of american cheese, and instead of sausage, Ray cuts up a tufo hotdog and sprinkles it on top. Yuk!!!!!!!!!!! /forums/images/icons/tongue.gif

GL

Mark

[PokerBabe(aka)]

YUCKY-POOOO indeed. /forums/images/icons/frown.gif LGEG, Babe /forums/images/icons/tongue.gif

[Ray Zee]

yes you can makeup charts that will give a good idea of what action they may take in the future based on past actions. although you may not need a chart to do that. but no chart will give you any help in what the price of the stock will be in the future. that is the point.

[crazy canuck]

Most traders do not base their trading decisions on charts...they only use charts to re-inforce their decisions.
I just read in Option Market Making that most directional traders using Tech. An. can not beat the market consistently.

[Warren Whitmore]

"they only reflect what happened in the past and give little or no info for the future." The past is the only thing that gives anyone any information about anything.

I don't see any computer programs making money on fundamental data either.

[Ray Zee]

Babe, the zee is known far and wide for his taste and ability to find the absolute best places to eat. i find a line of cars behind me following me when i go out to eat. i even see lots of cars behind me wherever i go, so they must be thinking i am going to a restaurant. as for as pizza, the best pizza in the world is made by the famous Ray's pizza in new york. this proves my point.:) /forums/images/icons/grin.gif

and sorry to you mark too. /forums/images/icons/grin.gif

[HDPM]

In NY last May I did sample a lot of Ray's pizza. It was excellent. Almost as good as Chicago pizza. /forums/images/icons/laugh.gif

<<but no chart will give you any help in what the price of the stock will be in the future. that is the point.>>

This is simply wrong.

[Mark Heide]

PokerBabe,

Don't believe what Ray tell's you. He just gets in line before everyone else. Long lines do not indicate that the food is good, it only indicates that people are hungry. Just look at all the long lines in Vegas casinos for the buffets. I hate /forums/images/icons/grin.gif to burst his bubble, but Ray just does not have any taste /forums/images/icons/grin.gif

GL

Mark "The Bear"

[Mark Heide]

HDPM,

I lived out east during the '80s for three years, and could only find pizza places that were good at thin crust pizza. I believe Ray has eaten too many frozen pizzas made in Montana that say "Chicago Style" on the box.

GL

Mark

[Mark Heide]

Ray,

A stock chart may not indicate the exact price it will be in the future, but it will help you to determine where it is going. If you use the charts previous history and combine that with the economic data, you should be able to figure out where it is most likely headed. Just like in poker you use combinations to figure out your opponents most likely hand.

Let's end this debate now, unless you can prove me wrong with my S&P 500 chart. Just to restate it, you can bet on upward movement in the Oct to Jan quarter. The movement in the chart reflects economic data, and that upward movement is not a random event. It is almost always a bulls market.

GL

Mark

[David Steele]

As Ray said, if the charts worked you could build
a money making machine. The math would be so easy.

One factor is that any 2 dimensional graph is either going up or down, so it is not too smart to get
hyper and declare BULL or BEAR, what else can it do?
It could serve to predict if it wasnt a random walk
though. Too bad, no easy money.



I don't think fundementals work either in most cases.

You need a situation like in Sklansky's
"Fundemental Theorem of Investing" article to have
any chance.

D.

<pre><font class="small">code:</font><hr>Hi Ray,
I agree that charts are past info. And that a model that says time N-1 is the
model for time N is likely to get whacked at some point. What chartist might
call a breakout or whatnot. Don't know all the charting terminology.
.
Can we agree however, that any market position taken is essentially a bet
on some future prediction? Futher, that through the use of underlying
securities and derivatives... you can create a position to profit from
just about any prediction?
.
So therefore the real need is for a model that accurately predicts the
probability of success and the payoff... so that the EV can be know?
.
Given that agreement... it's interesting to note that the Black-Scholes
formula worked pretty good for a while... Heck... a Nobel Prize was awarded
for that formulat! Then.... "volatility smiles" started to be noticed.

Hmm.... could it be... that just like when card counting was found to
be effective... that the rules of blackjack were changed (6-deck etc.)?
.
So that just maybe... when "The Street" found out someone had a line
on thier action... they changed the game?
.
Every big player on the street has a trading department... and a department
of Quants... who spend thier lives trying to model... Take a look at some of that
calculus some time... and not only that... they have preferred access to the floor
and can move the markets to some degree...
.
And then we have to ask, "How do the street players build thier positions
against the rest of us?" Is there any doubt that these firms trade against
thier own customer?
.
So in effect they are the Poker Pro's of the street... and guess who the suckers
are??? The small investor maybe? Oh... excuse me that's "Liquidity to trade against"!!!
.
Can anyone see the parallel between house rake and commission?
.
The solution is real simple... the Street shouldn't get a dime unless the customer's
profit. Remove the conflict of interest... the drive or commisions... or fleecing
the investors on the trading floor. The market should not be a casino... when I
pay a Wall Street firm... they should be looking out for me... not otherwise.
.
Ask yourself... the last time the market was doing poorly... what was the profit
of the trading department of your favorite brokerage?!?!
.
Anyway... find a model that give accurate probabilities of any market action at all
and you can profit from it.
.
Sincerely,
Frank</pre><hr>

[Ray Zee]

sure Frank, but all models only work until the market corrects for it. just like the dogs of the dow. it wseemed to work for awhile but all the fools jumped on the bandwagon and then it got reversed and they got wacked. just as well with the janurary effect. too many people played it and it move back till it hit october. then its gone. that one had a good theory behind it though and it is still valid.(tax selling and buying). but if every one know it then you cant profit from it any longer.
black and sholes came out with their models it must be 20 years ago by now. so they can no longer work, but they really were good when they first played them.
the real secret is to buy and hold for a period of time and then you really cant get screwed as then you dont get caught in any switches buying and selling. you just pay the commision for handling your transaction, as thats all it is really, and you sell at the fair market value.

<pre><font class="small">code:</font><hr>Hi Ray,
Yes I agree buy and hold is probably the only low stress method. But you still have to
watch over it, as even a holder if IBM stock might tell you these days.
.
Before I get going... take a look at the P.P.S. at the bottom... there's a question there
I'd really like to know the answer to...
.
I was being somewhat cynical in a dark humor sense in the prior post.
.
The main point was that the big players on the street are taking on the
Casino role, and the rest of us, card counter role. When Black Scholes was found to
be effective... and too widely know... the game was changed. Ever seen a
Wall Street firm go under?
.
Further, that the big players Quantitave departments, and trading departments
are analgous to successful poker pros in that they manipulate the small players
to thier advantage. Another point being that The Streets Quants are going to have
better, more current models than we'd have. Consider that they recruit the best
Ivy Leaguers. But the bottom line is still, "If you can't determine Prob of Success, and
payoff... thus EV... and your model has a -EV... you will eventually go broke... whether
you know it at the moment or not!"
.
Essentially what happens to people when they try to apply money managament to
craps and roulette, to draw a parallel.
.
Bottom line, if you can't prove your method has a +EV, you're guessing... even with
buy and hold.... after all it's just a longer term bet... and the model is... "time N-1 to N is
the model for N to N+1". I.E... "The market as averaged 10% annually since way back...
so a long term bet to the future is a good one."
.
So it's still a model with a built in assumption that the past does indicate the future.
(Perhaps a good assumption in this case... but not neccesarily a "sure thing".)
.
Also, no doubt that the institutional traders are able to make plenty good use of
"volatility" and "liquidity to trade against".... better info etc. is available to them.
.
I suspect "Buy and Hold" works... unless you have some Lucent, etc...
.
:-)
.
The declines since second quarter 2000 could have a lot of folks wondering if buy and hold
is a good idea at all times.
.
Anyway, since Keynes (I think) said 'A little inflation is good... if you own what the price
is going up on"... I can see where market prices would go up in pace with the inflation
of corp. assets at the very least.
.
But you see... that's how the whole game is engineered for the upper echelons...
.
It's called "inflationary" when we get near full employment and worker bees can
exert upward pressure on wages... so Greenspan "cools" the economy.... but when
the price of the things the upper eschelon or *selling* to all of *us* go up... well
that's just "supply and demand".
.
Bottom line being that the whole thing is engineered to send money one way... up
the class ladder.
.
For example... since "productivity" has been increased over the last xx decades... how
come it now takes *two* full time incomes to buy a house in a nice neighborhood rather
than one 20 hour income?.... Well... because the additional profits went upward...
.
I suspect the market is run no differently.
.
There's definitely one thing I learned wandering the Vegas Strip for two years...
"Those who *play* the game (or have to... workers) are exploited by those who
*run* the game." At least that's where pit games lead. But then I can't see
playing any -EV game.
.
One last rhetorical question... If we're a democracy... and the majority are workers...
why is the system tilted to the rich? Answer: Becuase we're really a Federal Republic....
At least that's what the CIA World Book has us listed as.
.
So once you see through all that BS the only question really becomes... how can you jump
over the class barrier and become rich, autonomous and separate from the rat race...
without having to cheat, lie, kiss ass, or hurt anyone else? (Well guess that leaves out all
the traditional methods except "born rich").
.
I mean to say, isn't happiness really on the other side of autonomy? Isn't that what
most people are attracted to by the idea of professional gambling? No boss, no
subordinates, no time clock...??? (That's what I wanted out of my shot at trying to
be a poker pro... I figured that even if I could only make an average living at it, there'd
be no one to have to answer to for anything whatsoever. Well, in the time I had to
devote to it I was only break even at best. IBM in CO gave me a call and I went
back to corp. life. But to be honest, Vegas isn't the greatest place to live anyway. Had
2 vehicles stolen or broken into in 2 years time, just for starters. Was out there originally
to work a Citicorp's data center there on West Sahara. Perhaps that'd gone differently
if I'd have felt I could've afforded Dave S.'s hourly rates for lessons? Who can say?)
.
I only know of two ways to exiting the rat race. Getting rich... or dropping out and being a bum. Most of us
aren't socialized to go the bum route... so that live the other route. But the pre-existing
wealthies... have engineered it the keep themselves on top, wouldn't you say. Consider
the housing price example above, again, and apply it to other areas.
.
Anyways... how many women do you know who'd prefer the automous bum to the
wealthy bum?
.
:-)
.
C'mon... the ideal is to be young, good looking and rich. The twin pillars of american
culture are Wall Street (money) and Hollywood (looks).
.
If you don't get those three things in your life (looks, wealth, while you're young) you will
end up compromising and settling somewhere... whether it's your address, choice of mate.
etc. Something will suffer, simply because that's the way people and prices are.
.
Well, just my observations after 20+ years in being in fortune 500's and *not* being rich
or having juicy stock options thrown at me.
.
Sincerely,
Frank
.
P.S. Just as an aside, it would be interesting... if I had life to do over... to actually
go be an institutional trader and see just what the real deal is to making it there.
.
P.P.S By the way... ever heard of a player named Rick Greider? He claims to have
"taught all the famous pros"... that "Caro is about a $3 an hour winner" etc. Even puts
"Teacher to the Poker Stars" on his business card. Any truth to all that?</pre><hr>

Hmm, let see.. wall street firms which have blown up include LTCM(where Merton, Scholes and other prominent "geniuses of finance" worked), Drexel after Milken, Barings Bank thanks to Leeson and countless hedge funds large and small.

Everyone still uses the basic Black-Scholes framework. There have been lots of modifications and improvements in option pricing but i would say its because of the tremendous growth in new and more exotic option structures, not because people learned how to use the BS model and the market became efficient.

Regarding quant models, every investment bank has them but they're not used as much as most people think. There are some hedge funds which specialize in doing pure model based trading but most trading is not solely based on models.

<pre><font class="small">code:</font><hr>Hi Javelin,
True enough, there have been failures. As have casino's folded. Was just ranting
some.
.
But I think the basic idea that the Street (and FED) operate the system at an edge,
against the rest of us seems true enough.
.
Sincerely,
Frank</pre><hr>