[bsamuels]

People who trade on technical indicators like the author have to consider the market to not be accurately represented by brownian motion.

For technical analysis to be anything other than an abstract form of gambling, the efficient market hypothesis has to be flat out false.

Representing the market using brownian motion only applies in cases where the market is under the weak or strong forms of EMH.

[smabie]

It's well known that returns are both not normally distributed (obviously) and not even log-normally distributed (slightly less obvious, but still readily apparent). Moreover, it's pretty obvious that while markets don't conform to any form of EMH, they often trend towards efficiency over time.

This is easy to see in the massive consolidation in the market making space in traditional finance over the last decade and also you can watch it in real-time right now in the crypto space. Even two years ago, it was pretty trivial to be successful as a market maker using quite naive models and a system glued together in Python in a couple days. Today, things have gotten significantly more competitive: many single man operations have become uncompetitive and even larger (3-10 man) and more sophisticated firms are feeling the heat from behemoths like Susquehanna, Jane St, and Jump Trading.

It's amazing how you can feel the crypto market getting more efficient in front or your eyes. It's like running on a treadmill, and you're always terrified it will start going faster than you and your team can run.

[ezekiel68]

Contrary to popular belief, many growth stocks begin their periods of greatest growth at a time when they have reached an all-time high . This was true of TSLA in April, 2013 and NVDA in April, 2016 (No claim on the significance of April is implied) This observation, along with other technical AND fundamental screening techniques may at least be used to generate a short-list of candidated securities deemed more likely to succeed as investments than others. Yet, none of this negates the responsibility to follow sound portfolio management practices.

(Inventing involves significant risks. You could lose all of your capital. Nothing I've writtend should be construed as investment advice)

[deandree]

People who strongly believe in EMH are usually theorists. There are way too many people who's practical track record is way too good to be attributed to chance. I believe markets are random most of the time, but there are moments when they are not. That's where the best traders place their bets.

Also, here's my favorite counter argument to EMH - https://securityboulevard.com/2020/04/investors-buy-up-the-w...

[apetresc]

Surely even the most ardent EMH opponent would at least agree that information is relevant, even if it hasn't been fully absorbed by the market yet, right? I've never met any proponent of technical analysis who maintains that they can divine patterns purely from the shape of the candles, without knowing what they're trading or what day it is?

That flies right past EMH and into the realm of pure numerology.

[bsamuels]

Honestly, I have no idea. I don't know any proprietary traders who use candlesticks/TA. The one or two people I know who use TA are hobbyists who watched some videos on youtube.

I might be in the wrong here, but all my experience points at TA being something that's used to sell online courses/generate advertising revenue rather than being a legitimate way to trade.

[saltyfamiliar]

> I've never met any proponent of technical analysis who maintains that they can divine patterns purely from the shape of the candles, without knowing what they're trading or what day it is?

I have. The theory is that the fundamentals of the security are reflected in it's price movements, so reading its price action is roughly analogous to reading news relevant to the instrument. Also it's not really about looking at the "shapes of candles." That's a frankly primitive approach to technical analysis, and one of the biggest reasons that people keep drawing comparisons to astrology, numerology, divination, etc..

[na85]

>For technical analysis to be anything other than an abstract form of gambling, the efficient market hypothesis has to be flat out false.

Technical analysis is predicated upon the assumption that the efficient market hypothesis is true, and that all investor sentiment and other relevant information is all already priced in.

Whether TA is actually valid or if it's just drawing random foofy lines on a chart remains up for debate.

[bsamuels]

No, for technical analysis to work, EMH needs to be false.

If EMH is strongly true, then the price of a security will always be priced to the intrinsic value of the underlying. For TA to work, the price needs to be divorced from the intrinsic value because the change in intrinsic value of an asset doesn't follow any pattern.

If EMH is strongly true, even fundamental analysis should yield no alpha since all public information would be integrated into the price. That's why there's a distinction between strong and weak EMH.

https://www.investopedia.com/ask/answers/032615/what-are-dif...

[quantgenius]

Ever wonder why decades after the EMH was postulated it's still a Hypothesis? and not considered a Theory or something stronger? There are far too many people with far too good and consistent a trading record, who's style of trading uses only or primarily price and time data for any reasonable claim that technical analysis doesn't work. This doesn't mean that a typical investor can access investment pools run by these traders, just like the typical investor cannot access the best VC funds or the hottest startups. They typically have tightly binding capacity limits and once the track record is clear, they can pick and choose who to let in.

People pushing technical analysis do believe that it's pointless to look at fundamentals because all (or most) fundamental information is already in the price and hence it's pointless to look at fundamental data. In my opinion this discussion is about as pointless as a religious war.

In the real world specifics and details matter. In general, the weak form of the EMH does hold, as in if you think something is worth twice what the market says it is and you don't have a really good reason why the market doesn't realize this, you are almost certainly wrong. This of course makes a weak form of the claim that all fundamental information is in the price also true.

[na85]

>No, for technical analysis to work, EMH needs to be false.

The way it was explained to me is that if the EMH is true, then looking at fundamentals is pointless because all the fundamentals are already priced-in, which leaves nothing but price and volume data left to analyze.

How could EMH be anything other than true in that case?

I'll note that investopedia is often not a good source. Here's an investopedia article that explicitly supports my position, for example: https://www.investopedia.com/terms/t/technicalanalysis.asp

[apetresc]

> The way it was explained to me is that if the EMH is true, then looking at fundamentals is pointless because all the fundamentals are already priced-in, which leaves nothing but price and volume data left to analyze.

So, TA proponents believe that market forces, economics, political and social trends, etc, are all instantaneously absorbed by the market - but "double tops"[1] and "hanging mans"[2] and "three black crows"[3] are all low-hanging fruit that the elite can take advantage of?

I'm usually pretty open-minded, but I can't make myself see anyone believing this non-ironically.

[1]: https://www.investopedia.com/terms/d/double-top-and-bottom.a... [2]: https://www.investopedia.com/articles/active-trading/040914/... [3]: https://www.investopedia.com/terms/t/three_black_crows.asp

[na85]

I dunno. I think fundamentals move markets and TA is mostly bs so I'm not here to litigate the validity of TA with anyone.

[bsamuels]

The same claims about TA/EMH are made as part of the CFA study materials that are made in the investopedia I linked.

I'm afraid I don't know what else to tell you, there's no public links to CFA Institute study materials and they're a pretty definitive certification authority in finance.