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

[IlliniRyRy]

Of course technical analysis is used, just not in mutual funds. Mutual fund anaylsts only use fundamentals to pick their investments. Two words....hedge fund.

[Sniper]

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Of course technical analysis is used, just not in mutual funds. Mutual fund anaylsts only use fundamentals to pick their investments. Two words....hedge fund.

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Technical analysis is most certainly used by traders at mutual funds. Why would you think otherwise? When was the last time you read a fund perspectus?

[DesertCat]

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John W. Henry, owner of the Boston Red Sox, is a long term trend follower. He traded a $16,000 account to over one billion dollars in a twenty year period. He does not use fundamental analysis. There is more than one way to make money in the market.

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That $1B isn't all his money, he's a rich man because he has clients who pay him to trade. Most of his funds are trailing the S&P 500. And what he does is much more sophisticated than TA.

"I don’t believe that I am the only person who cannot predict future prices. No one consistently can predict anything, especially investors.".
John W. Henry"

[DesertCat]

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Cat,

If you really want a comparison to poker...

FA is playing the cards.

TA is playing your opponent.

A smart player in either game knows that both are important.

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Flawed comparison. TA doesn't know your "opponent", because markets are made up of thousands of participants, all with unique goals, motivations and strategies.

The proof is that no TA practitioner can pass a basic test to prove it works. I.e. give a "chartist" a series of charts that have been cut in half, and have them predict the future price action of the stock. They'll do no better than random chance would predict.

I would advise if you think you are good at TA, to have someone give you that test and prove to yourself you know what you are doing, before attempting it with real money.

[Sniper]

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Flawed comparison. TA doesn't know your "opponent", because markets are made up of thousands of participants, all with unique goals, motivations and strategies.


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Not really flawed, that is simply what makes stock trading more complex than playing poker. You need to evaluate what many participants are doing, in the aggregate, rather than what your few opponents are doing in poker.

Your statement also proves out my point, that if you don't even acknowledge the strategies used by many of the market participants, you are playing at a disadvantage.

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The proof is that no TA practitioner can pass a basic test to prove it works. I.e. give a "chartist" a series of charts that have been cut in half, and have them predict the future price action of the stock. They'll do no better than random chance would predict.

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TA is not about having a crystal ball, neither is FA. Its all about putting the odds in your favor and trading appropriately by letting your winners run when the odds work out, and cuttting your losers short when the better hand doesn't work out.

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I would advise if you think you are good at TA, to have someone give you that test and prove to yourself you know what you are doing, before attempting it with real money.

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I've been trading for a long time now, and can say with certainty that TA is clearly a useful tool in my personal experience.

[therockofgibraltar]

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And what he does is much more sophisticated than TA.

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If you are using historical price/volume data to trade, you are doing TA.

It doesn't have to be charts. It could be using cointegration techniques to find deviations from long term equilibrium (stat.arb) or something else. It is still TA, it is just called differently.

At least that is how I see it. Looking at the charts is one way doing TA. Doing very math oriented econometric calculations from historical stats is another way doing it.

If you think it is like that --> there are many very succesful funds using TA.

[therockofgibraltar]

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They'll do no better than random chance would predict.

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That maybe so true, but I am just happy you can make a bundle of money even lower than that via good stops and money management/position sizing algorithms.

[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 !

[Dan Mezick]

The whole idea of predicting accurately poses large problems.

This is part of the thinking behind his comment.

JWH does not predict anything. He simply follows trends.

Most of this thread is about who has the more valid prediction model.

The need to be right (for example being right about a prediction) is a perennial snare that catches many 'traders' and 'investors' and empties their wallets.

It will be interesting to hear from some of the more experienced traders on this topic.

Predicting is not an essential task. What is essential is a willingness to follow a non-discretionary backtested method, long-term, based on expected value.

[Sniper]

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Predicting is not an essential task. What is essential is a willingness to follow a non-discretionary backtested method, long-term, based on expected value.


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Risk/Money management is far more important than any predictive model. Putting the odds in your favor is obviously better than flipping a coin. Proper application of Technical, Fundamental, and Sentiment analysis are all important tools to put the odds in your favor.