Cap's Log - 10/30/05
LOL, I knew what you were referring to, but this board is open to any trading philosophy including ones that say that TA is just witchcraft. As long as people don't attack each other here it's fine with me (I go to the politics board for that kind of fun...).
Anyway, this post has become long enough to qualify for a full log entry, so here it is!
I'm completely with you on the TA thing. I think it has value as well because the signals that appear on a chart are directly related to mass psychology in a market. But that interplay of fear and greed is a non-linear dynamic system with emergent properties (a little chaos theory with your coffee?), and I think we've only scratched the surface in trying to understand its "laws". I think TA works better for more heavily traded securities and currencies for that reason; there are more participants and the price action is "smoother" I guess. Or something.
Your comments about how FA and TA interract reminded me of an old idea I had about how economic news affects the broader market indices like the Dow and OEX. It used to bug me how a piece of surprise positive news would fail to turn a bear market around or how a bad report wouldn't cause an immediate collapse. In other words, how come the market would respond to some piece of economic data sometimes, but just shrug it off at other times?
So I came up with kind of a model in my mind of how it works.
I think the ultimate determinant of market direction is the economic outlook, which in turn is just determined by the sum total of all the little news items, 8:30 stats, and editorials, etc. This "outlook" in turn determines the overall market "bias" (up, down or sideways) at any given time. However, there is a lag there, because this "bias" is like an ocean liner (or a Galaxy Class Starship); you can't just turn it around on a dime.
So on the one hand, you have a kind of "wave" which describes the preponderance of economic news over time. This "economic outlook" can be neutral, weakly bearish, strongly bearish, weakly bullish or strongly bullish at any given time, and it is changing. On the other hand, you have a "wave" which describes the market's "bias". The economic outlook wave moves the market bias wave, but not immediately; there is a lag. So the "waves" might be out of sync, and they probably usually are.
For example, the economic outlook wave might be rising out of a trough due to a bunch of good news over the past couple of weeks. So why is the market still dropping? Because the market bias wave is still responding to the period when the economic outlook wave was falling.
Also, if the market bias is strong, this is why the market might shrug off a single news item easily. However, if the market bias is at a neutral point, a single news item might have a LOT more effect, because the market "bias" is like a ship that's just sitting there and not moving. It's not hard to change its direction because it has no direction.
Anyway, that's the best way I can think of to explain how it may work. One of these years I may be able to do some kind of formal study on it, but at the moment I'm still doing statistical testing of very short term trading patterns. I'm currently in the middle of a VERY time consuming final set of expermiments on one model, so don't worry about chewing my ear off; it gives me a good break from this tedious cutting and pasting I'm doing in Excel right now, lol.
EDIT: I think I define market "bias" like this: If the market reacts to bullish news but just shrugs off bearish news, the "bias" is positive and vice-versa. Also, the market itself might be going in a different direction from its "bias" but if so, it's probably not doing it easily; clawing and scraping with heavy volume for every point.
Out here...
Cap
AI
