Portfolio Boss

Good TA vs Bad TA

Corona Del Mar, CA


Howdy Friend,


There's a 3rd rail of technical analysis that you absolutely must avoid if you want to make it in this business.


You have to understand the difference between subjective and objective analysis.


Objective techniques in technical analysis generally involve numerical or algorithmic calculations and interpretations that do not change based on the analyst's personal bias. These include:


1. Moving averages: These are calculated using specific periods of time and specific closing prices, creating an objective measure

2. Technical indicators: These are mathematical calculations based on price, volume, or open interest. Examples include the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Bollinger Bands.

3. Statistical measures: These include calculations such as standard deviation or variance, which are objective and consistent.

4. Alternative data: This includes little-used data sources such as short interest, COT, T.A.P, and ETF fund flows...to which you apply mathematical formulas. (This is our specialty and is why our members have been building strategies that run circles around traditional trading techniques relying on price analysis).
On the other hand, subjective techniques in technical analysis involve a degree of personal interpretation and judgment. These include:


  1. Trend lines: While the concept of a trend line is straightforward, the points used to draw the line can be subjectively chosen by the analyst.

  2. Chart patterns: The identification of patterns like head and shoulders, double tops and bottoms, or various types of triangles depends on the analyst's interpretation. Different analysts might disagree on whether a specific pattern has formed.

  3. Support and resistance levels: These are levels where the price has historically had trouble moving beyond. Identifying these levels often involves a degree of subjective judgment.

  4. Elliott Wave Theory: This is a method of technical analysis that looks for recurring long-term price patterns related to persistent changes in investor sentiment and psychology. The wave count is often a matter of personal interpretation.

The simple heuristic is that anything that you have to do manually is subjective and should be avoided.


Subjective = pseudoscience because it's not precisely repeatable by others.


Take a look at this chart:

Subjective TA practitioners would tell you that the stock was in an uptrend, but is now trading in a channel.


I remember an advisory service something like 20 years ago that would try to find these channeling stocks so you could buy when the stock is at "support" and sell at "resistance." While that's kind on the right track for mean reversion trades (which does work in stocks), you're still winging it and leaving tons of money on the table.


If you haven't figured it out yet, "TRDX" is a made up ticker symbol. The chart above was created with a random number generator. Random numbers can not make you money because there is zero signal...it's all noise like when your old school TV was tuned to the wrong channel.


It sure looks like a real chart though right? One last thought...where are all the trend line billionaires?


I can look at funds like Jim Simon's Ren Tech that rely on algorithmic trading making billions swing trading with A.I. I can see Ken Griffon's Citadel cleaning up with billions in profits. Subjective TA has been around for over 100 years. In all that time, none have made it to the top of any list I've ever seen.


Looking for an objective strategy that beats the market?


Here's one that's only 7-lines of code:



Trade smart,

Dan "Prince of Proof" Murphy


Disclaimer: The results listed herein are based on hypothetical trades. Plainly speaking, these trades were not actually executed. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under (or over) compensated for the impact, if any, of certain market factors such as lack of liquidity. You may have done better or worse than the results portrayed.

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