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

Let us suppose that there are a set of price patterns which can predict future stock prices. For example, if we see a "cup and handle" a stock will go up in the near future, and if we see a "head and shoulders" a stock will go down. If someone understood how these price patterns worked, why wouldn't they start an investment vehicle to exploit them?

Let's say this strategy can return 20%/year. If you limit yourself to investing with your own money, you're limited to 20%/year. If you start a fund (mutual fund, hedge fund, etc.), you can charge fees on other people's money and earn 20% on your own money and 2-10% on their money. If the fund consistently returns 20%, it would be flooded with hundreds of millions of dollars, resulting in enormous management fees.

So why aren't there dozens or hundreds of funds which exploit technical analysis to beat the market? There may be some funds which claim to invest on the basis of technical analysis, but to my knowledge none have consistently beaten the market in the way that Warren Buffett or Peter Lynch have. Anyone care to enlighten me?

[wildwood]

Fundamental vs. Technical Analysis

Two comments:
1. Minds are like parachutes, they work better when open.
2. These forums are better served when we respect each other's opinions even if we don't agree with them.

I read over the post you linked to. You name John Murphy as a technical trader you admire. Apparently he wrote a book in 1986 that is one of the classics of technical analysis. More recently, he started a mutual fund that engaged in technical-based trading. I can't find performance data on that fund because earlier this year, it merged with another fund. I can only assume that this was due to poor performance--successful funds don't merge. The fund it merged with, ETFCX, has underperformed the S&P500 by about 10% before fees since inception. That's not encouraging.

I'm trying to be open-minded about this, and if technical analysis works, I want to get in on it. It just seems like there's no empirical evidence that it can predict future prices.

[Sniper]

Your post demostrates that you have no knowledge of how the market works. A large percentage of all trades made every day are based on technical considerations. The majority of funds and all the market makers are trading based on technical patterns. Program trades are triggered by technical patterns.

Fundamental analysis can not be used to explain daily and intraday price fluctuations.

I have no doubt that the market is influenced by technical considerations. All day long in all different stocks, there's someone identifying the 200-50 moving average convergence/divergence patterns, and someone else finding narrowing trendlines approaching breakout, and all of them basing their trades on this.

What I doubt is that any of this is useful in predicting the future price of anything. So, please, answer the question in my original post: why don't we see one (or many) funds which strictly exploit technical analysis?

Certain trading strategies which do not depend on fundamental analysis may be able to be successful. However, these strategies depend on knowledge of how other major actors in the market will behave, or on very rapidly identifying arbitrage opportunities. None of them explicitly base their decisions on rules such as avoiding stocks below their 200-day moving averages, or shorting stocks which have broken the neckline on a head-and-shoulders pattern.

[DesertCat]

[ QUOTE ]
Your post demostrates that you have no knowledge of how the market works. A large percentage of all trades made every day are based on technical considerations. The majority of funds and all the market makers are trading based on technical patterns. Program trades are triggered by technical patterns.

Fundamental analysis can not be used to explain daily and intraday price fluctuations.

[/ QUOTE ]

Only the last part of your statement is true. Fundamental analysis cannot explain price fluctuations, and neither can anything else, including technical analysis.

Warren Buffett has studied the stock market for almost 60 years ago, and tried almost every approach when starting out. Arguably, he's the most successful investor of all time. His conclusion is that technical analysis is hooey.

Personally, I don't doubt there are traders successful over the long term. And I don't doubt that they use technical analysis. But I doubt that TA helps them one iota, i.e. I'm betting their success is based on information they glean outside of TA.

[wildwood]

If TA doesn't work for you, don't use it. It's that simple. This issue obviously pushes some hot buttons for you, something you may want to take a look at. It's not my goal to convince you or anyone else to use TA. As I said in my earlier thread, I use both TA and FA.

What is your goal here? Do you want TA banned completely? Shall we allow only those who believe in the fundamental doctrine to post here?

[ QUOTE ]
It's not my goal to convince you or anyone else to use TA.

[/ QUOTE ] [ QUOTE ]
What is your goal here? Do you want TA banned completely? Shall we allow only those who believe in the fundamental doctrine to post here?

[/ QUOTE ]
You recently told someone in another thread: [ QUOTE ]
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 ]
I want to have a debate about whether this is valid advice. If I told someone in a poker thread that they should always fold AA because Party is rigged to make them lose, I'd be called out on it. Same here--it sure looks to me like that's bad advice, and my original post gave an empirical reason why people should be skeptical of technical analysis.

[bobman0330]

This is something of an ill-informed theory, so take it for what it's worth.

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. Reverse it for the head and shoulders pattern. But if everyone "knew" that a head and shoulders pattern meant a stock would rise, then it probably would rise.

In effect, it's a mini-bubble or a mini-selloff. TA experts gain some at the expense of people who ignore the theory or people who are too slow to buy or sell. Long term price movements are of course determined by fundamentals.

[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.