If Technical Analysis works, why isn't there a mutual fund for it?

I've thought about that, and I can't rule that theory out entirely. The problem with it is, whatever effect occurs should be predicted and pre-empted by sharp traders. Let's say a cup-and-handle pattern really does predict future prices, and everybody buys around the 5th day of the handle, causing the price to go up. Well, after I figure that out, I'll start buying on the 4th day of the handle, before the price goes up. Pretty soon everybody'll start doing that, and I'll have to start buying on the 3rd, and so on until there's no handle anymore.

The more predictive these patterns are, the greater the pressure to exploit them earlier and earlier, until the patterns are no longer predictive.

[bobman0330]

A good point. How about this:

TA is basically parasitism on the trading actions of more informed investors. For example, the cup and handle pattern (I assume) results as an undervalued stock recovers. The really smart investors start buying when the stock is at the bottom of the cup, driving the price up. Once the price makes a minor recovery, investors who have been in the stock for a while and got "trapped" by the decline in price get out, causing a slight decrease in price, after which the company's strong fundamentals move the price ever upward.

Even if you lack the skill or information to target an undervalued stock, the information to spot a recovery pattern is helpfully assembled for you by the market.

I suppose this theory suffers from a lot of the same preemption problems as the last. Maybe the answer is just that dumb traders outnumber the sharp ones?

[tek]

[ QUOTE ]
If TA is as widely accepted as has been claimed, there could be something of an "Emperor's New Clothes" phenomenon at work. If Stock X exhibits a cup and handle pattern, everyone "knows" that it will be rising soon, so everyone buys it... lo and behold, it goes up.

[/ QUOTE ]

TA has been around since the 1880's, except for many decades practicioners had to use pencil and paper to draw charts and more importantly calculate technical indicators if they so chose.

Also, many "tape-readers" of the late 19th and early to mid 20th centuries were using a mental short-hand for TA, in a manner of speaking. Similar to keeping track of players' tendencies at a live poker table versus using pokertracker at an online table...

TA and tape-reading worked before any bandwagon possibilities existed. However, the modern TA may have a bandwagon influence insofar as actively traded issues are concerned. A chart and it's technical indicators will be more reliable in a high volume issue than a low volume because of the momentum and non-TA general market crowd psychology factors.

[wildwood]

[ QUOTE ]
You recently told someone in another thread:
goog formed a head and shoulders on the daily and broke the neckline on the downside yesterday. Caution is warranted. The chart trend is down unless it it can close above 300 to negate the pattern.

[/ QUOTE ]

Someone asked for advice on google. I don't follow the fundamentals of that company, so I gave them some technical advice on the chart pattern. It looked to me like the trend is down with the stock making lower highs and lower lows. (which would be negated on a close over 300) I don't know for sure where the stock will go, but I stated my opinion that I wouldn't own it here.

I think you put me in a TA box because of that post.

[ QUOTE ]
Ignore the technical analysis crap.

[/ QUOTE ] If you continue to post comments like this, then I'm not likely to have much respect for anything you have to say.

[Dan Mezick]

There may not be a mutual fund dedicated to techical trading systems. This does not prove anything about prediction of prices. The best technical system traders are typically trend followers. Many of them run hedge funds and are commodity trading advisors (CTAs).

You might consider John W Henry, owner of the Boston Red Sox, in your argument. He seems to invalidate it. Here is a place where Accredited Investors can actually expose money to systematic technical trading systems that seem to work.

Let's focus the discussion on John W Henry. Let's discuss his philosophy and results. Is he a freak of nature? Is his system simply lucky? No one wants to discuss the results of John W Henry. It's clear why.

I notice his approach does not attempt to predict anything at all.

John W Henry

[Dan Mezick]

I notice that the author of the thread does not comment on John W Henry, at least not in this section of the thread.

JWH is a long-term trend follower using TA as the basis of his method. Did I mention he paid $700 million for the Red Sox some time ago?

The existence of JWH and JWH success and the success of others like him does need to be addressed as part of any argument which states TA is invalid.

I notice I can invest in JWH's TA-based funds, just like any mutual fund.

JWH is very successful over a very long period of time. There is really no debate about the validity of his approach, which is systematic, long-term trend following based on TA.

Go Red Sox !

[DesertCat]

[ QUOTE ]


JWH is very successful over a very long period of time. There is really no debate about the validity of his approach, which is systematic, long-term trend following based on TA.



[/ QUOTE ]

Most of his funds trail the S&P 500, it looks like what he is most successful at is keeping his investor's money despite his poor performance.

Trend following also worked great during the internet bubble, momentum guys bought what was going up and it kept going up. The problem is when it stopped, they were out of business.

Oh, and Henry had a 40%+ loss at one point last year. When the trend turns, it can really hurt, esp. if you are leveraged up.

Victor Neiderhoffer was one of the most successful traders, worked for Soros for many years with a strategy that produced consistant results year after year, until it blew up and he went broke (twice!).

Some of these strategies are like picking up nickels in front of bulldozers, easy money until the inevitable rolls over you. Stop losses don't work in a panicked market.

[ QUOTE ]

Go Red Sox !

[/ QUOTE ]

Well I can agree with that!

[therockofgibraltar]

[ QUOTE ]
Victor Neiderhoffer was one of the most successful traders, worked for Soros for many years with a strategy that produced consistant results year after year, until it blew up and he went broke (twice!).


[/ QUOTE ]

He was also stupid [img]/images/graemlins/smile.gif[/img]

Soros told him a couple of times that he will eventually go broke, Victor didn't believe him and went broke.

HIs strategy was to sell huge amounts of deep OTM-option --> you make money like 99 % of the time but you still have negative expectancy because when you are wrong, you are [censored].

I love those fat tail distributions [img]/images/graemlins/grin.gif[/img]

BTW, Nassim Taleb has a opposite view. He likes to buy those. Usually you are wrong but when you are right, you win big time. The markets has to move greatly for you to make a profit with this system BUT they usually move further than everybody seems to believe --> you have positive expectancy because of this.

[lastsamurai]

google search paul tudor jones.

Alot of mutual fund managers use a combo of technical and fundamental analysis...

[Dan Mezick]

I'm glad someone mentioned how VN went broke.

He continues to demonize trend following.