2101: Technical Analysis

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KarenRei
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2101: Technical Analysis

Postby KarenRei » Mon Jan 21, 2019 8:50 am UTC

Image

Mouseover: "I [suspect] that we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. I suspect that the immense power of the computer is being harnessed to this 'paper economy', not to do the same transactions more economically but to balloon the quantity and variety of financial exchanges."

A second investment comic in recent weeks. This furthers my theory, set forth in 2094: Short Selling, that Randall is a TSLA investor, or at least has an interest in the stock. His diagram here is actually pretty darn reminiscent of Tesla's stock graph

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rhomboidal
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Re: 2101: Technical Analysis

Postby rhomboidal » Mon Jan 21, 2019 9:01 am UTC

"GAHHHHHHHH!! SNAAAAAAAAKE!!"

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zanglebert
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Re: 2101: Technical Analysis

Postby zanglebert » Mon Jan 21, 2019 10:16 am UTC

I'll just leave this here...

(pretty ancient admittedly... still, one of my absolute favorites. Their methodology is about as rigorous as it gets in the field of finance <-- enter snarky remark about low baseline *here*)

Vroomfundel
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Re: 2101: Technical Analysis

Postby Vroomfundel » Mon Jan 21, 2019 11:39 am UTC

That's exactly how I feel about technical analysis. Every time I read a technical article about an instrument I'm interested in it sounds to me like Turkish coffee fortune telling... and don't get me started on technical analysis of cryptocurrencies.

It always puzzled me how this could work; the wolrd would be a saner places if it turns out that it does not.
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Howzers
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Re: 2101: Technical Analysis

Postby Howzers » Mon Jan 21, 2019 12:19 pm UTC

That alt-text is the crotchetiest thing I've read on this website, and sounds a lot like the kind of 'the state of x nowadays' grumbling that Randall normally takes issue with.

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zanglebert
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Re: 2101: Technical Analysis

Postby zanglebert » Mon Jan 21, 2019 1:04 pm UTC

Howzers wrote:That alt-text is the crotchetiest thing I've read on this website, and sounds a lot like the kind of 'the state of x nowadays' grumbling that Randall normally takes issue with.


It's obviously completely different if it's about finance! /s

KarenRei
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Re: 2101: Technical Analysis

Postby KarenRei » Mon Jan 21, 2019 1:17 pm UTC

Vroomfundel wrote:That's exactly how I feel about technical analysis. Every time I read a technical article about an instrument I'm interested in it sounds to me like Turkish coffee fortune telling... and don't get me started on technical analysis of cryptocurrencies.

It always puzzled me how this could work; the wolrd would be a saner places if it turns out that it does not.


Many people assume that it must have some meaning because they hear some people with lots of money saying that it does.

You can also find plenty of people with lots of money believing in things like lucky objects, astrology, premonitions, etc. Just because a person is wealthy doesn't make them right. Nor is past performance of an individual in the markets an indicator of future success. There will always be a huge number of people who became successful in the market for many years on end purely due to random chance.

IMHO, one of the most ridiculous is Fibonacci Retracement. As if Fibonacci numbers have anything whatsoever to do with the market. They might as well posit some special meaning to when the stock rises or falls by 8% then 6% then 7% then 5% then 3% then 09%. ;)

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Re: 2101: Technical Analysis

Postby rmsgrey » Mon Jan 21, 2019 1:48 pm UTC

So "technical analysis" is a piece of jargon from the world of finance, rather than an English phrase. Okay, I guess The More You Know...

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Re: 2101: Technical Analysis

Postby airdrik » Mon Jan 21, 2019 3:26 pm UTC

"Technical Analysis" in the financial industry means basically this: https://vangogh.teespring.com/shirt_pic ... 2-13-04-12 but using more random number generators.

It's a good thing we have Quantitative Analysis Robin Hood working with us on this!

DavidSh
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Re: 2101: Technical Analysis

Postby DavidSh » Mon Jan 21, 2019 3:39 pm UTC

Mouseover text in the original post should include the citation "James Tobin, July 1984". James Tobin was the 1981 Nobel Prize winner in Economics.

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Re: 2101: Technical Analysis

Postby DanD » Mon Jan 21, 2019 3:42 pm UTC

rmsgrey wrote:So "technical analysis" is a piece of jargon from the world of finance, rather than an English phrase. Okay, I guess The More You Know...


Yeah. It's basically trying to pretend that patterns in a stock price over time mean anything in the long term. (Not simple things like trends over time, but specific patterns like a "head and shoulders", two shallower peaks on either side of a higher peak. I forget what it's supposed to indicate) And, of course, if enough people do it, enough different ways, some of them get rich, and then write books or websites about it, getting more people to do it, in more different ways, etc.

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Re: 2101: Technical Analysis

Postby Vroomfundel » Mon Jan 21, 2019 3:47 pm UTC

Edit: ninja'd on the first paragraph but leaving it in nevertheless.

rmsgrey wrote:So "technical analysis" is a piece of jargon from the world of finance, rather than an English phrase. Okay, I guess The More You Know...


Yes, technical analysis is when you try to predict the future by discerning patterns in the sediment of your Turkish coffee.

Oh, no, sorry, this was Turkish coffee furtune telling, I always get them confused. technical analysis is when you try to predict the future by discerning patterns in the chart of the stock.

I always assummed that it works (by a liberal definition of "works" e.g. that there exist algorithms that manage to consistently generate returns one tenth of a percent better than average) just because that's the conventional wisdom in the industry but as KarenRei said, lots of people believe in astrology and homeopathy for similar reasons. I haven't managed to read zanglebert's article yet but if it demonstrates that technical analysis doesn't work then it will be a victory for common sense.

To be fair, technical analysis at least has a concievable mechanism by which it could work, contrary to the established scams and superstitions. After all, its predictions are done by algorithms after quantitative analyses of the available data, much like how AI recognizes street signs and whatnot; this whole business with the chart patterns is probably just clickbait, the actual meaningful predictions made by algorithms are probably harder to explain than "head-and-shoulders", "rounding bottom" and other cutesy sounding visual references.
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Re: 2101: Technical Analysis

Postby Jorpho » Mon Jan 21, 2019 4:44 pm UTC

rmsgrey wrote:So "technical analysis" is a piece of jargon from the world of finance, rather than an English phrase. Okay, I guess The More You Know...
I had to hit up http://www.explainxkcd.com for this one too.

I thought it might somehow be related to complex analysis. Never got the hang of that.
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rhhardin
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Re: 2101: Technical Analysis

Postby rhhardin » Mon Jan 21, 2019 7:09 pm UTC

Burton G. Malkiel "A Random Walk Down Wall Street" nailed it all in the 70s. I notice there are updated editions, though I don't see how it could be updated.

The graph shown is the hockey stick from climate science, however.

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zanglebert
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Re: 2101: Technical Analysis

Postby zanglebert » Mon Jan 21, 2019 7:49 pm UTC

Vroomfundel wrote:[...] I haven't managed to read zanglebert's article yet but if it demonstrates that technical analysis doesn't work then it will be a victory for common sense.


Their results are more nuanced actually -- which is why I like this one so much. The authors start from the observation that in recent years, the finance literature has proposed a huge number new algorithms (or 'market factors' to be precise). Together with the various biases at play (publication bias, 'algorithmic' survivorship bias and so on), they simply point out the obvious: the usually accepted (and acceptable) significance thresholds don't cut it in this field.

They then derive stricter ones, and again, predictably, a lot of these factors that were 'significant' when published, fail under these stricter thresholds.

So, there's nothing to market analysis? No way to predict the price (other than by fundamentals)? No, because the article also identifies a small subset of these factors that survive even under the new thresholds. In other words, these factors are, in a rigorous statistical sense, non-random predictors of future price based on historic price information.

The most well-known one is momentum (of returns). Not related to the concept in physics to my knowledge, other than by some very vague, informal association. This factor basically corresponds to autocorrelation, of a stock or market, or correlations across different markets. Again, no surprise here for market participants who have a modicum of math background.

(edit) That last line might give the impression that I doubt the math chops of Randall, or those of the esteemed readers of these lines. That's not what I had mind. I'm occasionally frustrated by the relatively low number of people that combine some math-y background and have actively participated in the markets (outside of professional finance). I like to think that's the reason why there can be a tendency of dismissing all forms of technical market analysis, and consequently, dismissing the output of a mature, formally sophisticated academic field. That said, drawing random lines onto charts, or counting waves, isn't part of these methods that I consider valid.
Last edited by zanglebert on Mon Jan 21, 2019 8:58 pm UTC, edited 2 times in total.

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da Doctah
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Re: 2101: Technical Analysis

Postby da Doctah » Mon Jan 21, 2019 8:16 pm UTC

I looked in vain for Billy Keane's progress along this path.

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fr00t
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Re: 2101: Technical Analysis

Postby fr00t » Mon Jan 21, 2019 8:49 pm UTC

The suggestion is that since equities trading is zero sum, sophisticated trading mechanisms merely waste resources in the aggregate. But if that's true, why does such economic activity proliferate? I don't think the market is some magical omniscient force for good or anything, but I do think it pushes actors towards locally efficient outcomes. It's not at all clear to me how statistically unproductive activity can continue when ostensibly these smart people could be pursuing "actually productive" endeavors instead.

I tend to think that financial analysts are doing *some* useful economic activity in terms of creating market signals (aka prediction market), but even still it still seems hard to swallow that so much effort is justified.

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Re: 2101: Technical Analysis

Postby Heimhenge » Mon Jan 21, 2019 10:51 pm UTC

I'm no financial analyst, but I really can't see AI discovering useful trends from a single stock's graph. Looking for correlations across multiple markets and indicators ... yeah, there could be something there that would take AI to spot. And I suspect it would find correlations across a spectrum of frequencies (to use a Fourier analogy). What happened two weeks ago in pork belly futures might presage a spike in Denny's stock valuation next week.

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Re: 2101: Technical Analysis

Postby qvxb » Tue Jan 22, 2019 12:12 am UTC


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zanglebert
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Re: 2101: Technical Analysis

Postby zanglebert » Tue Jan 22, 2019 12:18 am UTC

@Heimhenge I personally wouldn't dismiss analysis of individual trends completely, but yeah you're on point here, cross-section of returns is pretty much the bread and butter of this field.

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Re: 2101: Technical Analysis

Postby Mikeski » Tue Jan 22, 2019 12:39 am UTC

"Technical analysis" in the stock market is a literal case of "if you believe it, it's true." If enough people* trade based on the technical analysis, the stock will be priced as though the technical analysis were correct, regardless of actual market reality.

Right up to the point that someone says "hey, isn't this all bullshit?"... then it collapses back to reality.

In my technical analysis, you want to be the first guy to call bullshit.

* - "people", in this case, includes speed-trading algorithms. In fact, it mostly includes speed-trading algorithms.

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Re: 2101: Technical Analysis

Postby kdb » Tue Jan 22, 2019 9:10 am UTC

fr00t wrote:The suggestion is that since equities trading is zero sum, sophisticated trading mechanisms merely waste resources in the aggregate. But if that's true, why does such economic activity proliferate? I don't think the market is some magical omniscient force for good or anything, but I do think it pushes actors towards locally efficient outcomes. It's not at all clear to me how statistically unproductive activity can continue when ostensibly these smart people could be pursuing "actually productive" endeavors instead.


It is roughly like bureaucracy: Having it helps run things more smoothly and avoid wasting resources, until the regulatory mechanisms it provides start eating too many resources. Yet, for those running the bureaucracy having more of it improves the result locally, at the cost of wasting resources for the overall system.

Finance is similar; Money lending, insurances, combiations thereof... All perfectly valid businesses, that help other fields to take off in the first place. Even speculation has its place, as a mechanism of evening out pricing levels. But only as long, as the resources used for providing the financial side are in reasonable proportion to what they enable. Currently, I'd argue this relation is quite out of balance.

It would probably help to introduce rules that make high-frequency trading and/or derivatives of derivatives of derivatives unattractive (e.g. small non-refundable fees calculated based on the purchase value on EVERY transaction), but that would require an unlikely level of international cooperation.
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rhhardin
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Re: 2101: Technical Analysis

Postby rhhardin » Tue Jan 22, 2019 12:48 pm UTC

If anyone is curious, the value of a stock is the present value of all the earnings it will ever have. Or, what is the same, the present value of all the dividends it will ever pay.

It's a little uncertain what the future earnings will be, and how to discount them to the present. But if you can do that, you can make money trading when the market price isn't that value.

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Re: 2101: Technical Analysis

Postby speising » Tue Jan 22, 2019 1:56 pm UTC

rhhardin wrote:If anyone is curious, the value of a stock is the present value of all the earnings it will ever have. Or, what is the same, the present value of all the dividends it will ever pay.

It's a little uncertain what the future earnings will be, and how to discount them to the present. But if you can do that, you can make money trading when the market price isn't that value.

fundamentally, yes.

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Re: 2101: Technical Analysis

Postby kdb » Tue Jan 22, 2019 3:02 pm UTC

rhhardin wrote:If anyone is curious, the value of a stock is the present value of all the earnings it will ever have. Or, what is the same, the present value of all the dividends it will ever pay.

It's a little uncertain what the future earnings will be, and how to discount them to the present. But if you can do that, you can make money trading when the market price isn't that value.


That seems incomplete.

As stated, I would invest money into a stock, only to get the same amount of money back over time. As stated, it wouldn't even contain compensation for inflation.

It also neglects, that a stock would still have value if no dividends are paid at all, based on the companies sellable physical and intellectual property, and expectations of the future change thereof.
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Re: 2101: Technical Analysis

Postby DavidSh » Tue Jan 22, 2019 3:36 pm UTC

kdb wrote:
As stated, I would invest money into a stock, only to get the same amount of money back over time. As stated, it wouldn't even contain compensation for inflation.


I think you are missing the technical definition of "present value". The present value of a payment one year from now of $1.00 is less than $1.00, by a factor known as a "discount rate". This is usually, but not necessarily, coupled to interest rates.

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Re: 2101: Technical Analysis

Postby rmsgrey » Tue Jan 22, 2019 6:49 pm UTC

It's also possible to extract value from a stock independent of its actual value, provided enough other people consider its value to be high enough. The long term value of a stock is only relevant to whoever ends up holding it long-term - for short-term purposes, it's only the currently perceived value that matters. That may correlate with the actual long-term value, but, as every bubble demonstrates, it can also be decoupled from it by current trading activity.

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Re: 2101: Technical Analysis

Postby ucim » Tue Jan 22, 2019 11:47 pm UTC

rmsgrey wrote:It's also possible to extract value from a stock independent of its actual value
Arguably you're not extracting value from the stock, but from the sucker who will overpay you later. You've making a profit (or loss) based on the difference between your perception and the next/previous person's perception. But the ultimate value of a company (and thus its stock) is by definition a long term thing. Profit or loss outside of this value is not due to the value of the company, but of the perception of the company.

Now granted, perception itself has value - the power of being able to get a better deal for yourself. And if two companies battle it out, the only reason they'd do so is that they don't know who the winner will be. If the future were known, the past would be different.

Therefore, since stock is not the same as the company, but rather, is the vehicle by which its long term value is converted to short term opportunity, for the purpose of allowing that long term value to be realized in the first place, it's actually not so accurate to smugly say that the value of a company is the value (vs price) of the stock.

To be clearer, reverse the equation. The company exists in an environment (economic, political, ecological, social...) without which the company would have no value. Perhaps we should assign a value to that environment, rather than the company?

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Re: 2101: Technical Analysis

Postby Cougar Allen » Wed Jan 23, 2019 2:33 am UTC

kdb wrote:
fr00t wrote:It would probably help to introduce rules that make high-frequency trading and/or derivatives of derivatives of derivatives unattractive (e.g. small non-refundable fees calculated based on the purchase value on EVERY transaction), but that would require an unlikely level of international cooperation.

As I understand it, radical changes in market rules and trading fees were needed to make high-frequency trading viable. If you have an enormous amount of money and you're willing to invest some of it in persuading people to make the changes you want, you can get cooperation.

Changing the rules and fee structure back to the way it used to be would require an even larger investment ... from somebody....

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Re: 2101: Technical Analysis

Postby aljohnso » Wed Jan 23, 2019 4:22 am UTC

Back when I was learning the biz, and learning that i didn't like the biz, I made certain realizations for my own use:

1. Discount rate is relative - real discount rate is associated with your ability to hedge, from the perspective of a derivatives trader.

2. Honesty in the markets is also relative - you can make the markets do anything, if you are willing to pay the price (see "mark to market"). Is the cost worth the pickle? Yes, if you have a very large hedge fund and an honest price on the market would put you out of business.

3. Technical analysis is self fulfilling, except when it isn't. If you look at the shapes the gnomes are fascinated with in the context of function fitting, then interesting insights seem possible.

Randall may have been tempted, or eaten, by the beast, and these 'tunes may be his cry for help... or just irony.

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Re: 2101: Technical Analysis

Postby eviloatmeal » Wed Jan 23, 2019 3:08 pm UTC

DanD wrote:"head and shoulders", two shallower peaks on either side of a higher peak. I forget what it's supposed to indicate)

Reversal.

Wait. Why in the world do I know that?! I spend way too much time learning about disparate esoteric crap...
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Re: 2101: Technical Analysis

Postby rhhardin » Wed Jan 23, 2019 8:22 pm UTC

In the 50s, secret filters were used to detect cycles, so as to anticipate moves and act ahead of time on them.

In the 60s, people would compute the cycles that the filters were bound to find, in their class on stationary time series.

White noise in, cycle out.


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