Technical analysis problems
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Problems of classical technical analysis
In the investment environment there is a perception that technical analysis belongs to the arts rather than science. Indeed, even such authority as John Murphy agree with this statement. Give two technical analysts to chart the same security, the same indicators, and they will likely make very different predictions. Indeed, in many respects technical analysis is the offspring of who practice it.
There are three different approaches to the analysis of graphs, the first - surface (subjective), based mainly on intuition. It requires no justification, therefore, the majority of traders are working on this elementary level. The second approach - is associated with the creation of market-based indicators to help identify oversold and overbought. Many traders, at least partially using this type of analysis is usually limited to the best known indicators and follow conventional methods of interpretation. They do not try to create your own indicators or improve the existing ones. In addition, these indicators are linked too high expectations and ignore their flaws.
The most effective approach is the third - the development of systems capable of generating signals for buying and selling. However, not all analysts possess a sufficient level of education, experience and the desire to constantly hone their skills.
The need for a scientific approach to technical analysis is long overdue. One of the pillars of the scientific approach is considered to be Thomas De Mark, whose consulting services for over twenty years, enjoyed major investment institutions. The fruits of their many years of research, Mark De outlined in the book "Technical Analysis - a new science."
It is worth noting that one scientific approach is not enough to succeed in the market. In the preface to his book De Mark cautions readers looking at the scientific method panacea for errors. As much as we tried not to enlighten the trader, giving it the most important information, it will inevitably be disappointed, all forgotten, or he just did not have the strength of will to use it all in practice.
Chaos theory is a branch of mathematics or the doctrine of the complex and linear dynamical systems. The behavior of such systems is characterized by a strong sensitivity to initial conditions, it seems random, even if the model describes the system quite definable. Examples of such systems is the atmosphere turbulence, biological populations, society as a communications system and its subsystems - economic, political and other social systems. And yet, all these mathematical systems, seemingly random behavior are subject to certain strict law and in a sense, are ordered.
In fact, almost any chaotic system can be modeled. Securities market, for example, generates curves that can be easily analyzed.
The first elements of the "chaos theory" appeared in the 19th century, but the true scientific development of this theory was in the second half of the 20th century, along with the works of Edward Lawrence of Massachusetts Institute of Technology and the Franco-American mathematician Benoit Mandelbrot. Edward Lawrence has done research in the field of weather forecasting. Simulated his system on the computer, he found the cause of her chaotic behavior, "the difference in the initial conditions." Even microscopic initial deviation between the two systems in the process of evolution has led to an increasing accumulation of errors and massive discrepancy.
What, then, has the tools of chaos theory?
First of all, it attractors and fractals.
Attractor - is something to aspire to reach the system and what it is attracted. Its dimension is a statistical measure of chaos.
Fractal same geometrical figure, some of which is repeated again and again, shown here is one of the properties of fractal "self-similarity". Another property of fractals granularity, which is a reflection of a mathematical fractal measure irregularities.
We can say that the fractal is the opposite of chaos. As yet there is no precise mathematical apparatus application of chaos theory to the study of market prices, so hurry to the application of knowledge about the chaos can not be at the same time, it really is the most perspective direction of modern mathematics in terms of applied research in financial markets.
Promoter and enthusiast application of chaos theory to the analysis of the market has become Bill Williams, the author of the well-known book "Trading Chaos" in narrow circles. According to Williams, the chaos - it is a higher degree of order, which is organizing the functioning haphazard and chance as opposed to the cause-effect relationships. Chaos is permanent, temporary stability. Financial markets are causing chaos. In the linear world of cause and effect are predictable in a nonlinear real world no. Chaos theory denies that on which technical analysis is based (future behavior of the market like the past), so in terms of Williams the investor who is repelled by the linear perspective, will never see the real market. Traders lose in the market, because too rely on various types of analyzes, which in reality do not work, and therefore useless, and even dangerous, it is the opinion of Williams.
Automation of trading systems
Recently trader work done deal, seriously complicated. The fact that there are many ways of making a deal and find the relevant counterparty. New trading opportunities occur very quickly, as well as new algorithms. So recently I started using automated algorithms. Trade with automatic strategies based on mathematical methods rapidly gaining popularity as a means of execution of orders, which increases the efficiency of transactions, which is not surprising.
Automatic unlike man devoid of emotion, it is no secret that the emotional factor is most often a negative impact on trading results. machine undeniable advantage in terms of efficiency. One automatic strategy can produce from 100 to 1000 trades a day, working on small fluctuations of the market, it is virtually impossible in the implementation of human trafficking.
One of the Boston consulting company, whose main activity, strategic consulting in the financial sector, has published a report on the prospects for the development of automatic algorithms for trading on international markets. According to the report, by the end of 2006 the volume of trade in the financial markets with the use of automated algorithms to reach 33% of the total, and only 53% by the end of 2010.
Automatic trading system, can not forget, late, confused, she strictly follows the set course. In fact, it's a robot, but the robot is created by people who tend to err. Thomas De Mark, develop and apply a lot of trading systems recalls the case - once he and his partners found that virtually all of their systems have become simultaneously output the same signals, excited, they anticipated future payoff, but it all started with a small profit, and ended with a record for all their years of practice losses. Alas, there is no universal way of dressing, and is unlikely to ever be. Remember the old joke? Bought once a novelty for police (robot catcher of thieves), 15 minutes after commissioning the robot was stolen by someone.
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