Technical Analysis: Predictive Versus Reactive

This is a great example of predictive technical analysis. That means language like:

The market just failed a test by breaking down out of the triangle formation, but the technical damage is not serious, and a decline to the 1175 area to clear intermediate-term overbought conditions could be absorbed without major technical damage being done. On the other hand, if the ultra-short-term oversold spikes have produced sufficient internal compression, yesterday’s breakdown could prove to be the final shakeout preceeding a new rally. In any case I view the recent decline as a correction within the rally that began in October.

Trend following is not that. It is reactive technical analysis.

Big difference?

One attempts to predict (impossibly unreliable) price moves and the other reacts to and follows price moves (decades of proof). What will you choose?

More here:

8 thoughts on “Technical Analysis: Predictive Versus Reactive

  1. I choose to react to and follow price moves;)

    But to their defence, I see this is from Decisionpoint, they do use a strictly and simple trend-following model on which they issue buy, neutral and sell signals. The rest is just a discussion and learning process in order to try and understand the market better. When it comes to decisions, however, that is determined solely on the mechanical model. They frequently point out the benefits of this.

    Why they bother to discuss the markets is another question. Perhaps they feel they have to give something more to their paying subscribers than simply signals. After all, humans love discussions and predictions…

  2. Anybody heard of Vantagepoint software that uses ‘neural networks’ which predict markets one day in advance.

    They say this has been tested and verified by a Phd Professor as being 80% accurate and has worked since the early nineties?!?!

  3. @Nick
    Percent accuracy is irrelevant in trading. A positive expectancy, a system you trust and understand, and proper money management will lead to profitability. I personally know a trader who makes millions per year and is “right” 32% of the time, on average.

    I’m familar with VP…let me ask you, “If YOU invented software that was 80% accurate on the markets, would YOU flog it to amateurs for $3000 a pop, or would you keep your golden goose a secret and become the world’s richest investor??”

    Casinos are multi-billion-dollar operations built on a 2% – 8% advantage to the house. If you could be guaranteed 80% accuracy in the markets, you would rule the world.

    The world’s best traders have all tried everything out there to determine its effectiveness…and branded all of it virtually useless (See interviews with Eckhardt, as example).

    i.e. save your money and work on the emotinal side of trading; that’s where the money’s made and/or lost.


  4. @DGDye

    I agree, these systems presentations are so slick these days, they look extremely tempting even at $3000!!!

    I hear where your coming from, I think I need a new email address, as I’m bombarded on a daily basis by these system’s pedlars.

    Mental strength is required here and in my trading, it is very hard work – the name of the game!

  5. It’s human nature to see a loss as a mistake, and to immediately be drawn to something that appears to offer a solution.

    However, once you say to yourself, “Today I will lose $x,” you’ll be on your way to profitability.

    It’s a paradox of trading: you can’t make money when you’re afraid of losing money.

    Take my friend who’s right 32% of the time. That means for every 100 trades he makes, 68 of them are wrong. Most people can’t handle that because they’re afraid of losing. Consequently, they never hit the big trends, but instead stand on the sidelines because they were conditioned into a state of fear and can’t commit money when their system tells them to.

    I mean, if you hit your head against a brick wall 10 times in a row, it takes a lot of faith to believe that the next hit isn’t going to hurt. That’s the #1 traders’ problem.


  6. @DGDye,

    Very well put.

    “You can’t win until you’re not afraid to lose,” – Lyrics from Bon Jovi’s ‘Just Older’

  7. People that try to predict price moment, especially on spikes up or down play a losing game in my opinion. I think they do so out of the desire to catch the absolute bottom or top and trade the ‘full move’.

    As a professional trader I have learned (through error and mistakes) that it is a far better strategy to adapt a reactive strategy and use some form of confirmation when entering a position. You don’t catch the entire move and you don’t catch the absolute bottom or top, but the probability of the trade being a a success increases incredibly. Over the long term this will lead to a higher P/L compared to all the times you get chopped up trying to catch bottoms and tops.

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