Following from Marcus Padley website a few years back
"Clean up that mess!!
One of the biggest traps anyone new to TA will find themselves caught in is over analysis.
The psychology goes something like this; if I use a simple average then I can find a trend, if I use another average then I can get an entry and exit point. Wow this is cool, it works!! I can make it better if I use a stoch there, I’ll put an ADR there, CCI to that, wait, volume, yep got that covered with OBV, oh my god I’ve found the holy grail !!! Nope, doesn’t work after all, but I’m so close, I can feel it. Lets go to one of these online chart sites, I found one the other day with fifty four thousand indicators (slight exaggeration), there must be something there that will work. Before you know it you’ve made such a mess of the chart that you can’t even see price or volume anymore, just this screen of lines with the odd piece of white showing through where the chart used to be. Don’t laugh; it happens, all the time. Unfortunately many find themselves trapped in this mindset for years.
I’ve been guilty myself of many nights up at 4:00 am only to have my wife behind me asking if I’m ever coming to bed. ‘I’m working’ I’ll say, ‘but it looks like an etchasketch’ she’ll say.
Now I’m going to tell you what technical analysis is and try and save you three years of work finding this out for yourself. You ready? Technical analysis = money flow psychology.
There I’ve said it, that’s the big secret revealed. Technical analysis has one purpose, to understand the psychology of those participants that are trading or investing in it. Bottom line is it’s my job to get inside your head. Now what is it that a chart evolves around, the one core element that without it TA doesn’t exist? Ahhhhhh Price I hear you all mumble. Well done all those that said price, you’ve all just made the same mistake 99.99% of those that have anything to do with TA make. Noooooooo it’s VOLUME. I’ll say it again, V O L U M E. Write this on your mirror so you’re reminded every morning.
I always have a little grin when I’m reading one of the many articles that are critical of technical analysis. Almost all of them base their criticism around their belief that technical analysis is based around price. AI Review wrote an article last year and used a re-write of the coin toss argument. I don’t have a copy of the article anymore but basically it suggested that a technical analyst would look at 10 coin tosses, and then with that information make a decision on whether the next toss would be heads or tails. My view is that a technical analysts would look at the history and take that into account, he’d then want the velocity of the arm movement, the weight of the coin, the force behind the toss, the windspeed, gravity measurement, velocity of oxygen inhaled by those around the coin, heat generated by lighting and so on, he’d then take all that data and spend three hours to reach the conclusion that the risk/reward level is too high and walk away.
Anyway, back to the topic, VOLUME. The stock market doesn’t care if you use an 8/13 ema cross, it doesn’t care if you use ATR or stochs. I was at a seminar years ago for the star trader software (we all need a little humour in our lives) which is owned by Tomato technologies. Suddenly while tuning out I hear the words, and I’ll quote as accurately as I can “and as you can see here quite clearly the price moved sharply against (insert indicator of choice here) giving XYZ return”. I swear it was a reflex action but without thinking my hand went up and out came the words “how did the share price know the line would be there?”. Credit to the speaker, it only took him 10 seconds to utter his initial shocked response of “um, well, it didn’t”. I have another good story about that night but I’ll save it for later.
There is no holy grail. The problem with every single indicator you’ll use is that they need historical data to create their value, ie: they react to the price, not the other way around. Show me an indicator that uses tomorrows data and I’m there. But then of course who would need the indicator anyway.
Do the following exercise over the next six months. Strip your charts of everything except price and volume. Spend endless hours studying these without using a single tool. Feel free to enlarge volume, my opinion is the volume data should be the large frame and price the smaller frame. Now after you’ve studied them write up or down on the chart and don’t look at them for the next month. Most of you will be between 20-50% accurate. Your homework for the next two years is to consistently achieve 80% accuracy. This is the core of everything you do and remember, price reacts to volume always. In time I’ll go quite deep into volume and explain it in far more detail."
