What is Technical Analysis Really ?

Do you REALLY know what Technical Analysis is in an investment ?  It doesn't matter if you don't know a single thing about it or you have been using it to earn yourself into millionaires.  This is a simple game of 5 pictures to look at and then make your own decision what Technical Analysis is.  Are you ready ? 

Game of Rule : There is a RED line in each chart, its called Moving Average.  The GREEN bars are the prices of the investment vehicle.  Whenever green bars cross above red line, we BUY (long)  and whenever green bars cross below red line, we SELL (short).

Below 5 screens are showing EXACTLY the same investment vehicle, at exactly the same time and the lines mean exactly the same things.  The only difference is the X axis at the bottom.  They range from 1 minute to 1 day.  So in each of the chart below, one green bar of price would mean the price within that particular duration ie. 1 minute, 5 minutes etc.

If you follow up to here, now is the time to look at the graphs.  You should decide to buy or sell when you look into each graph.

1 bar = 1 minute

1 bar = 5 minutes

1 green bar = 1 hour

1 bar = 1 day

1 bar = 1 week

Did you get these ?

1 min : Sell Now

5 mins : Bought and Keep, Not Selling Yet

1 hour : Sold and Keep, Not Buy Back Yet

1 day : Sold, Not Buy Back Yet

1 week: Side Trend, Don't do anything.

( Sell = Short, Buy = Long for this game)

So, what should we do ?  Do we Buy or Sell at this particular instant ?

NextView seminar that may have 70% matches to MalPF ?

NextView has been quite aggresive conducting seminars and trainings. The reason they can attract my attention out of thousands other promotional materials is that NextView's flyer usually catch on some of the key points. The last I talked about them is when they said, "How to Pick the Right Value Stock" with a follow up post on "Why Experts are ALWAYS wrong!"

There are a lot of things on the flyer but below is what caught my attention:

First it implies there are 2 steps of analysis, primary and secondary.

The Primary analysis includes Drawing Lines, Japanese Candlesticks, Some signals are more reliable than others (they will show you 2 most reliable ones, they said), concepts on real time charts ie. x-axis or duration/time is important etc. ...

Then only followed by second stage where Technical Indicators are used including Moving Average and MACD.

This is actually Not that significant unless you also agree with most of what MalPF has been preaching. This FREE seminar seems like having 70% matches with MalPF's teaching on technical analysis topics. So it is my impression that the speakers may be trying to share what goes behind Technical Analysis and how to make them useful. Not like others which are just asking you to follow them.

Seeing that it MAY bring values in some of your investment journey, I thought I would just share it out here. Its one of those events that I wouldn't mind to go.

The seminar is on this Saturday 11 July 9am-4:30pm in Menara Hap Seng, Kuala Lumpur which I will not be able to make it. So if any of you did attend and do not mind spending some time to share your experience, do submit your write up here, that way, others can find out more about this NextView if they have just pull yet another marketing tricks or have some meats afterall.

Bear in mind this is a FREE seminar, so naturally do expect tons of marketing talks. As long as there are some real juices in this preview, then it should be considered as PASS. We cann't expect EVERY and ALL things from a one day FREE seminar, can we ?

detail of the seminar here

Technical Analysis is Rubbish !?

When Technical Analysis first get popular, people would make comments like "Fundamentals are Rubbish". Tons of seminars and training sessions were conducted. 30% of the students haven't even used a computer before, another 50% have NEVER trade in stock market.

Its been a while now, a small group of active traders start to make comments like Technical Analysis is Rubbish now. Usually the smarter traders may find out sooner reality is not exactly as taught in course. However, their smartness stops when they continue to fuss without finding ways to overcome TA, recycle and make use of the 'rubbish'.

Some of the comments also proves how ignorant we still are with regard to Technical Analysis, perhaps also explain why some fail to apply correctly to earn profit.

"If it works here, it should work there too."

"It should work in all conditions or NOT at all!"

Well, that is because most of us HAVE NOT truly understand the topic yet. Here is some reviews ...

First of all, Technial Analysis or short as TA, is a way trying to make senses out of some numbers without the help of any other qualitative information. The most primitif origin of TA is actually gambling. Or TA is basically the science of gambling.

As in any and all forms of gambling, the game is all about finding a win-lost ratio higher than 50%. Through out human history until now, there is no such thing as proven formula where the win ratio is more than 50%. At least not consistently for a period of time. This shouldn't be too hard to comprehend as ALL gamblings are created by man. Man made games like this to earn money as a business, if any game's win ratio is more than 50%, it is NOT a business that will earn.

Different TA techniques have different strength and reliability. It has to do with how the technique comes into existence at the first place. The originator may be expert on some specific topics, made some assumptions and therefore the technique they come up with may or may not apply to a particular specific market condition. Here are some of the reliable patterns used in candle sticks.

TA has parameters. By using different parameters, different signals will come out. At one instance, it may ask you to buy, on another it may give you a sell signal. Not only the parameters, even simple changes on the X-axis which usually show the duration information, may give opposite signals too. As described in this example

Lets look at 3 examples, Moving Average, MACD and Stochastic.

If you already know how to analyse trends without any tools by connecting the low and high points of a price chart, you are basically making the assumption that the price should come back up from the low points and the price may goes down after reaching the high points. This is called psychological barriers. Moving Average is exactly the same thing but it is drawing the trend systematically without any opinion. It does, however, has ONE parameter called period. Shorter period means higher sensitivity.

Because it is a psychological barrier, it works better when more people are using it. If you are the ONLY ONE using Moving Average then you are forming your own psychological barrier and that may not have much effect to the price movement. On the other hand, if most of the people share the same 'barriers' then chances are they may buy and sell at the same time, causing an effect on the price movement.

A good example is Moving Average 200 days. Almost the whole world is using it to determine if the start/end of bull/bear run has happened, as if it is a definition. This also explains the up swing since May.

The other 2 indicators are meant to track the big guys' movement. MACD signals when the big guys are slowly moving in or out of the market. Stochastic signals when there is an oversell or overbuy condition, ie. when the big guys start selling and causing others to sell too.

A whole book can be written on each indicator. But the key message here is, what do you do when you see such a signal ? Do you just buy and sell as the signal tells you to ? Do you agree that it is an oversell condition now ? Do you buy when the big guys start to move in or should you wait until it is also confirmed by psychological barrier break through ?

What parameters were you using on each indicator ? Are these parameters suitable for this market, this industry and this stock ? Have these parameters been proven in your investment condition ?

Answering above may or may not help you gain some advantages in your investment but understand true TA and apply them correctly definitely help you avoid mistakes caused by ignorance, worst still, without realizing it nor learn anything from it.

2 persons attend the same TA course but may bring out totally different result at the end, here is why.

Related Topics

Learn how to spot the trends without any tools

How to earn in ALL kinds of market conditions

Benny Lee's theory : why Experts are Always Wrong

After banging on how bad he is twisting words (preceived value => value) to sweet talk naive public on a course he promotes, this article is about the good side of Benny Lee.

In the beginning of his FREE seminar, he listed out a series of expert's predictions on what stocks to buy and sell.  Then he shows how badly ALL those predictions fail miserably.

Although one of the reasons he uses is that Fundamental Analysis is useless which malpf disagrees and claims that he got it ALL WRONG where the REAL Fundamental does not change over a short period of time.  It takes a paradigm shift to affect a business's fundamental.  So News like these are NOT part of True Fundamental Analysis.

However, Benny also said it clearly that why an expert made a wrong prediction - because the expert adds his own Opinion when performing the analysis.

Company A is granted with Project X is a fact.  Company A is 'going to' earn Y amount of revenue could also become fact.  But how these news will affect Company A's stock price from RM 2.12 to RM 2.54 is an Opinion!  This is because in his calculation, he will have to make a lot of assumptions on the posible future finance data and those numbers are very opinionated ( different from one analyst to another ).

People who worship Technical Analysis may have heard of Mr. Market's story - that you must follow Mr. Market and not trying to out beat him - by using Technical Analysis ofcourse.  And this concept of Opinion from Benny Lee stick very well to Mr. Market's story.  Also one of the very good reasons why more people earn money using Technical than using their own Opinion = speculation.

Malpf also share that there is a Science part in investment but there is also an Art part.  The Art part malpf talks about is the same as the Opinion Benny talks about.

Some older readers also know the very specific step by step how to evaluate the True value of a business and therefore find out your very personal target buying price.  There are only 2 critically important numbers in that method : EPS and PE.  PE is the number that actually represent Opinion.

However, there is one distinct difference.  Benny claims that Opinion is bad, not reliable and therefore in order to earn money from stock market, you should rely on Technical and Technical never lies (Mr. Market story again)!  

Malpf preaches that Opinion can be dangerous.  But the more you know the better opinion you form.  The more you practise making opinion, analyse the result of your previous opinion and form better ones next time is the whole important process.  At the very end, be it Fundamental or Technical Analysis or any other methods, it all goes back to Opinion - the Art part in investment.  Which is also the part that distinctly draw a difference among all of us.  The tools we use may be the same but we will ALWAYS reach a slightly different opinion eventually.

This bring the end of this article to Soros story again.  Although Soros has a strong team behind him to earn money consistently using technical analysis.  But when he forms an Opinion about certain situation, his opinion will Overwrite ALL other opposing signals and it is this type of charismatic move brings him to what he is today.

So who can resist not forming his own opinion hoping to become the top of the world one day ?

An example where Morning Star goes wrong

As far as the Morning Star prediction goes, it DID NOT HAPPEN or the technical reading is WRONG !

In that article, it says that

1) candle stick is one of the 'best' chart format to use

2) Morning Star is one of the most reliable signal in Candle Stick analysis

3) It said KNM will shoot up big time on 20 May onward

But after 2 days of movement, KNM's price has gone down instead.

So if 1) and 2) are right, then technically 3) should be correct too.  While the fact proven it wrong, what has gone wrong ?

These are the possibilities:

1) The technical reading is wrong.

This is one of the simplest indicator you can find.  Any user in technical analysis can comment at first sight if the artcile is right or wrong.  The only part they may disagree is the part that Morning Star is reliable, which is an academic claim.  Practiciant may have their own different personal experience.

2) Relying on ONE signal in technical analysis is just making sense out of a gambling move.

At the same time when KNM is expected to go up due to that Morning Star signal, KLCI is expected to go down technically as well.  But it turns out KNM goes down while KLCI goes up the next day.  

However, in the same article, it did mention some other technical readings that say 'don't buy yet'.  So you may hear some technical gurus always tell you wait until ALL 3 indicators tell you to buy or sell then only you make a move.

Reasoning 2 is usually a better explaination to this 'wrong prediction' example.  However, malpf doesn't think using more indicators will give you more reliable signal.  It is just adding more reasons to one gambling move.  If you use the right reasons, you get what you want.  But when you use the wrong reasons ( wrong indicators, wrong parameters etc ) then you will still get the wrong result.  ( details on danger of TA )

Technical Analysis Example : Morning Star

One of the most popular technical graphs used is candle stick.  One of the problems with technical analysis is that there are too many indicators and it is hard to decide which to use.  However, historically some indicators are obviously stronger than others.  Morning Star is one of the strong ones.

See chart below on the red circle, that is a good example of Morning Star.  So for the next 3 days, KNM should be going UP if this Morning Star is proven correct.

Personally I am NOT buying KNM at this point of time.  Technically I can find an excuse that (1) Stochastic blue line has NOT cross up yet ( it means don't buy yet ).  I also believe I may have better (2) chance to get in later (an emotional opinion).  Most importantly, I am (3) NOT able to follow this stock closely for the next 3 days.  So this speculatable profit is not my rice bowl :D

Earn in ALL market conditions

If you know the trend, you can invest to earn in all conditions including up trend, down trend and even side trend... (tbc)

On an Up Trend, simply buy when the price has rebounced slightly after touching the bottom line - the support.  When the price drops a bit after touching the top line - the ceiling.

One very important reminder is NOT to spot the LOWEST nor the HIGHEST point.  Technical analysis or trend info obtained this way is not the right tool for that.  Indeed, we observe if it rebounce or breach through the expectation to confirm previous trend analysis.  If fail to get confirmation then re-analysis is required.

People who get dissapointed with Technical Analysis are the ones who were trying to use it to spot the Exact points !

On a Down Trend, you may sell first buy later - Short.  Basically it means you promise to sell item A at price A but you don't really have item A yet.  So you would need to buy item A at a later time at price B in order to fullfill your promise earlier.  If price B is lower than price A then it still matches buy low sell high concept.  The only tricky part is buy low later, sell high now.

Performing short in malaysia stock market is not that common.  I am quite sure all online trading accounts wouldn't be able to do that by regulation.  So if you really interest in short, you may need to use an experience agent or broker.  Make sure you enquire the detail process of short and what goes behind it.  Each agent may have slightly different tricks and may affect your shorting strategy.

Without ability to short, you may still do long during a down trend with higher risk.  For this scenario - do long during a down trend - you may need to learn a few more methods to identify fake and real rebounce.

Most people know how to trade during up trend.  Some people knows how to trade during down trends.  Almost no one would advise you how to trade in a side trend.  That is because when the trend goes side way, it is as good as gambling.  ( don't forget the mother of technical analysis comes from gambling methodologies )

So the best you can do is to apply some strategies on your investments.  Below is one example.

At any point of time during a confirmed side trend, do both long and short at the same time.  Short position should be higher than long position.  If the trend goes up, you can close your long position to take profit.  Keep the short position until the trend goes down, then close the short position to take profit.  Earn twice in a side trend, one sooner than another !

Don't get too excited yet if this is new to you.  If reverse trend earning method is complicated (as shown in down trend example above), then ofcourse this side way so called gambling methodology would have much more dangers hidden in it.

Anyway, the idea is not to limit yourself in investment.  You can almost always earn money in all conditions if given the right tools and methods.

Now, lets finish the first sentence of this article.

If you know the trend, you can invest to earn in all conditions including up trend, down trend and even side trend... if  the trend continues.

Know the Trends

Anything that has the posibility of repeating pattern has a trend.

A trend analysis is trying to determine what pattern will occur next base on historical occurance.  Sounds familiar ?  Indeed it is, historical records do NOT guarantee future result.

Performing simple trend analysis is simple and straight forward :

First plot the pattern in a graph,

Then try to connect all the low points using a straight line,

Likewise do the same with all the high points.

Not ALL points can be connected perfectly.  You will have to use your judgement to 'best match' them.

Do not make guesses or judgement when drawing these 2 lines.  ONLY connect all the LOW and HIGH points, no other adjustment is needed ( at least not for now ).

So by drawing these 2 lines, you can tell if it is in ;

UP Trend

Down Trend 

Trend Sideway or 

No Trends

When you are having a tough time to draw any of the line following above method.  Then its a No Trend iendified condition.

Once you know the trends, you can 

chase the up and down trends

trade with care on side trends and

do NOT trade in no trends

Chasing up trend is also called Long where you buy now sell later which is what normally stock investment is.

Chasing down trend is Short : sell now buy later, usually used more in derivative market.

How to Gamble to Win !

One of the most common things we do during Chinese New Year is gambling.  As a matter of fact its part of Chinese culture for good or bad.  The bad is gamblers always lost more than they can affort.  The good is the casino owner earns enough to do charity for the society.

Usually gambling is consider a bad thing, especially in finance planning.  However, it is NOT all Evil in this finance blog.  Lets look into gambling and see what it is and what we can do with it, just like any other potential finance tools we come across.  We will analyse the mathematical way, the finance methods WITHOUT the emotion factor.

For the simplicity of this write up, lets assume the type of gambling we talk about here is a 50-50 chance game, like flipping of a coin.  Its either Head or Word, all other occurances are considered void and demand a replay until a Head or Word shows up.  This chances of winning is called probability.  Bear in mind that ALL games in casino are NOT fair chance in real life.  

Method 1 : Doubling Up

Start bet with the smallest betting unit ie. $1.  If you win, bet again with $1.  If you lose, double up your bet to $2, $4, $8 etc.

In this method, you are almost guarantee to win back your initial $1 in one last win even after losing in a long series.  However, in that situation, you would win back 1 unit while risking losing 2 ^ n.  

For example, at the 4th bet, you put down $8.  If you win, you get $16 back minus out your previous bets $ 15 ( 1 + 2 + 4 + 8 ), your net win is $1.  But if you lose, you will lose the whole of $8 or a sum of $15.  Subsequently to win back your $1, your cost is $31, $63, $127 ... Imagine you are using $127 to earn just $1 only at the 8th round ...

So with this method, if you have unlimited capital and the environment allows you to make unlimited betting amount, then this method will eventually help you grow your capital one step by one step.  This method is using unlimited capital to earn one single unit of increment in each series.

If you do not have such capital and if there is a limit of betting amount, this method will mostly cause you to lose because the risk and reward are just not balance.

Win Lose ratio is 1 : 1

Risk Reward ratio is unlimited : 1

This also says : The more you use this method, the longer you use it, the worst it will get.

There is really no good way to mitigate this risk.  The best you can do is to start with a fix amount of money that you plan to give away anyway.  Then divide this money into a series of fix amount.  

For example, start with $100 and set each day limit as $8.  That way, if you lose continously for 4 times in a day, you lose all your day limit and you should stop.  Start the next day with $1 again.  This way, you can bet for 8 days in worst case scenarios.  On good days, you stop after you win $8.  What you are doing here is using the money that is not to be kept anyway and buy some experiences with it before losing them all.  If practise exactly as describe above, it may take much longer than you think before you lose all capital.  Hence its relatively a not so bad way to kill time if your other habits cost more (reminder : only when emotion is not a factor ie. you are a robot).

Method 2 : Follow Last Result

Start with a fix amount of capital, determine the smallest bet unit and each time bet on the last result.

For example, start with $100 and bet each time with $1.  So you can bet at least 100 times.  If the last result is Head, then this time you bet on Head.  If last result is Word, then you bet on Word this time.  Like wise, this time result will decide what you bet on the next time.

This way you will win if the pattern repeats no matter Head of Word.  However, you will lose if the pattern Never repeats.  Each time the chance to win is 50-50.  If you win, you earn $1 and if you lose, you lost $1.

Win Lose ratio is 1 : 1

Risk Reward ratio is 1 : 1

Since you have initially set minimum bet amount as $1 with $100 capital, then the worst case scenario is when the pattern continues to switch 100 times then you would lose all in 100 times.

Since what you want is 'repeat patterns' and avoid 'switching patterns'.  Then what you can do is to analyse previous patterns before starting your bets.  

For example, every time the pattern switches, you stop betting.  If the pattern repeat once then you follow in 2nd repeats instead of the 1st one.  This is one method of 'predicting' the pattern but you may eventually find it work sometimes and NOT working for other times.  So eventually you may need to come up with many different analysis methods in different situation if possible at all.

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Just in case you still think this is just a gambling talk, I have already implicitly cover the concepts of Money Management, Stop Lose, Profit Target Setting, Trending and Technical Analysis ...

Fundamentals are Noises ?

Very frequently investors who believe in Technical Analysis say that Fundamentals are useless and they treat them as noises !

Actually they are refering to Published News which they think are fundamentals but actually NOT.

Usually this group of people thought a good figure report should bring the price up but realized it did not and caused them to lose money.  Thats why they decided 'fundamentals' are noises.

Put aside speculation and rumors, it is a fact that sometimes Official Published Info does NOT affect the market price the way it should ... and this is why.

The fundamental of a business does not change Instantly.  Before the official report is published, the person who run the business already know the 'health' of his business.  Even people who work in that company would have an idea how the business is doing without any reports.  Suppliers, customers, contractors would also know something too although at different context and extend.  All these form an Expectation !  

Fundamental of price movement is Supply and Demand.  When the Published News exceed the Expectation, Demand will rise.  Like wise when the report did not meet the Expectation, demand falls.

So if you only look at and wait for a report to be published without first understanding what the expectations were, you really need to learn more fundamentals.  Else no matter how good your technical analysis is, it may harm you as much as you think it helps you.

The real Fundamentals are;

1. What is the business doing and why can it be success for another 10 years ?
2. Who is running the business that you have confident in ?
3. How much is this business worth, its real value ?
4. etc.

Fundamentals don't change just because of one announcement but can be observed through a series of events.

An example of fundamental analysis is When to Buy at What Price.

Technical Analysis - Candle Stick

I brieftly mentioned Technical Analysis vs Fundamentals before, I also mention the #1 danger of using Technical Analysis, now lets look at one of the most common Technical Analysis -> Candle Stick and what you can get out of it ...

First of all, lets take a look at candle stick definition !

if the color of the bar is white, then the top of the bar refers to closing price.

if the color of the bar is black, the top of the bar refers to opening price.

this is because white refers to up trend and black refers to down trend

Sometimes different colors are used to represend the trend too.  For example, red refers to down trend and blue refers to up trend etc.

When a few of these candle sticks align to each other, certain patterns will form.  Some patterns can help you predict what will come next.

However, bear in mind that NOT all prediction are Equal.  Some are more reliable than another.

After studying all the basic candle stick patterns, these are the few ones with High Reliability.

When you see these patterns, it is almost guarantee the trend is going UP next !

      or          

Morning Star above indicate an upcoming UP trend while Even Star predict Down trend.  Other down trend patterns are as follows.

       or        

Once getting used to these patterns, it can help you to identify the right timing to enter or exit an invesment.

One point to emphasize is make sure you are very clear about the X axis.  For example, speculator may want to use 1 or 5 minutes candle sticks to obtain daily income.  On the other hand, a daily candle stick may be used to obtain weekly or monthly income.

Danger of Technical Analysis

If you know charts, then you probably should know there is a X and Y axis.

In technical charting, X axis is usually Time.  The Time can be month, week, day or even minutes.

Understanding the reasons behind technical chart is tough, but using it is very simple.

For example, chart below has 3 graphs in it.

1.  the top graph show the price info, its called candle stick ( don't worry, will be shared more later )

2.  The below 2 graphs are analysis telling you when to buy and when to sell

3.  when the red line cross above, BUY.  when the red line cross below, SELL.

Now back to the danger part.  Below chart is shown in a 5 minutes X axis.  Both signals are asking you to BUY

However, below is another chart showing exactly the same stock but in 1 minute duration.  In this chart, the signal is telling you to SELL !


Although this may be confusing but even the best Technical Analyst in the market sometimes make mistake forgeting to counter check the X axis and recommend wrongly.