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After reading a book and a million articles on the internet, I now know everything there's to know about the most popular technical analysis indicators, at least their theoretical use.

However, when I go to http://stockcharts.com/, go to the year 2012 on some ETF daily chart, plot a few indicators, and start moving slowly to the present, selling and buying when the indicators signal to sell or buy, in the end I end up with lower returns than if I had just held the position the whole time. So, it appears that I'm not using this right.

I need some personal experiences here. If you use technical analysis, what indicators do you mostly use and how do you use them?

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    Why 2012? Why ETF charts? Why daily time frame? You've already introduced a number of constraints with a very limited universe. Try backtesting across multiple instruments. Don't forget survivorship bias. What you need to do is find an "edge" that beats the standard market without introducing curve fitting. What might have worked in one market phase may be terrible in another. Learn how to adapt. Howard Bandy's books have some interesting eye-opening ways of looking at the market. Nick Radge has published many profitable and easily testable trading systems with a TA focus. – Richard at NorgateData May 03 '15 at 11:33
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    I don't really understand the appeal of day trading, and I'll never do. If you want to increase your wealth passively, buy&hold index funds. If you want to increase it actively, get a well paid job. Both options beat day trading when it comes to safety unless you have a PhD on statistics and a huge amount of money to risk on that endeavour. – Calculus Knight May 03 '15 at 15:08
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    @Tachibanaian - who is talking anything about day trading? And what happens with buy and hold if a big crash happens just before you were about to access your money? –  May 03 '15 at 21:18
  • I guess that by that time one probably has a sizeable part of its portfolio in bonds, which tend to go in the opposite direction stocks do. Crashes are scary stuff, but good moments to buy even more stocks. I'm sorry I surely misused the term 'day trading'. I meant actively trading, as in opposite to the buy & hold approach. – Calculus Knight May 03 '15 at 22:13
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    @Tachibanaian, and what happens if the crash occurs just before you were about to move a sizeable part of your portfolio to bonds? And what happens if you want to buy more because prices have fallen by 30% and right after you buy more the price falls another 20%? I know what you would say, buy even more. And then if it falls another 20%? Oh wait no more money to buy more, thank god because it just fell another 20%! –  May 03 '15 at 22:57
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    @MarkDoony You're supposed to rebalance your asset allocation at certain intervals to avoid these surprises. If the stock market falls and keeps falling it simply means a better scenario for buying. Stock prices matter only when you buy and sell. If the price falls, you shouldn't be selling, but buying. During the latest crash, dividends didn't fell as much as stocks, so you'd still have income. Perhaps I'm missing your point. – Calculus Knight May 03 '15 at 23:44
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    @Tachibanaian, so by rebalancing you mean sell the ones that have done well and buy ones that have not done so well. That way you sell something that may have continued going up and buy something that continues to go down. During a crash the ones that are going down already will go so much further down. I mean if they were already heading down during a bull market, imagine how far they will go down during a bear market. –  May 04 '15 at 01:25
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    @MarkDoony I would hope they go as down as they can, as that allows investors to purchase them at a huge discount. Rebalancing is necessary if you want to keep your portfolio's asset allocation unchanged (e.g. 90%stocks 10%bonds). What are you suggesting? To buy more if the price rises and less if it goes down? That's a recipe for buying high and selling low. We're talking high quality index funds here, not penny stocks that will go down and disappear. If an indexed company disappears, it's substituted by another. I think I'm getting closer to understand your POV. – Calculus Knight May 04 '15 at 08:17
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    @Tachibanaian - the point that Mark is trying to make is that buying when something is in a downtrend is dangerous because you don't know when it is going to stop going down. If you learnt about Technical Analysis it could help you determine when a bottom hits and then wait for confirmation to buy as it starts going up. Similarly you could determine when a top is reached and get out before things starts freefalling. TA is not only used for short term trading but can be easily and successfully used to actively manage a long term portfolio. – Victor May 04 '15 at 08:27
  • @MarkDoony "It's falling 30% ... and another 20% ... and another 20% ..." when you need the money soon is exactly what stop loss features are for. A rolling stop loss at a level slightly below your present comfort level, adjusted regularly, will ensure that while you might miss out on a subsequent gain, you don't risk losing a large percentage of the capital at an inopportunate time. – user May 04 '15 at 12:05
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    @MichaelKjörling, well that's what I would do, I would buy when starting to rise and have a trailing stop loss, letting the market take me out if it stops rising and starts falling. I would never however buy while it's on the way down. –  May 04 '15 at 12:53
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    @AxiomaticNexus Try incorporating what you have learned on a real-time chart. You will start seeing why technical analysis can work. – NuWin Apr 25 '16 at 23:10
  • "After reading a book and a million articles on the internet, I now know everything there's to know about the most popular technical analysis indicators, at least their theoretical use."- this one sentence already tells me why "it is not working" for you. Expert in one book and dramatizing likely reading a single blog post. Nope, not how the world works. Back into a safe space. No win for entitlement. – TomTom Oct 16 '20 at 07:33

2 Answers2

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You cannot just read one book and some articles on Technical Analysis and some indicators and expect to be an expert and everything to just start falling into place and give you signals that will tell you when to buy and sell with precision and massive profits all the time.

It is like someone reading a book on how to drive a car and then expecting to drive flawlessly the first time they sit in the driver's seat, or someone reading a book on brain surgery and expecting to be able to operate on a live patient the next day.

It looks like you are using 3 or 4 indicators to get daily buy and sell signals on a daily chart for an ETF you're looking to hold for decades. So firstly you are using short term indicators for a long term outlook. You need to decide what timeframe you plan to hold your investments for and use chart periods and indicators that suit that timeframe.

Secondly, each indicator can be used in a number of ways and the settings you use for each indicator can determine whether you get earlier or later signals. Also, you need to work out which indicators work well together and are complementary, compared to those that don't work well together and give conflicting signals.

All this information will come together for you the more you read about and practice the art of Technical Analysis.

If your timeframe is very long-term (decades) I would be using mainly a weekly chart, with a longer period MA, the ROC indicator and possibly some trend lines. Keep it simple. The price itself is very important too. You can determine when a trend is starting or has ended purely using the price. The definition of an uptrend is higher highs and higher lows, so on the weekly chart if there is a lower high followed by a lower low - this could be the end of the uptrend. If we get a lower low followed by a lower high - this again could be the end of the uptrend. These could be a good time to start getting cautious and maybe looking to sell. If you are using stop losses (which I recommend) this may be a good time to tighten your stops.

Similarly, a downtrend is defined as lower lows and lower highs. If we get a higher low followed by a higher high it could be the end of the downtrend and maybe the start of an uptrend. This could be a good time to start getting ready to buy.

You need to learn about how and where to set your buy and sell orders (including stops) and whether you wait for confirmation when you get a signal.

All this takes some time, but the more you read, the more you attend live events and the more you practice the more they will become second nature. In order to get the best out of Technical Analysis you will need to learn, plan, practice and execute.

A good book to help you prepare your trading plan is "Smart Trading Plans" by Justine Pollard. One of my favourite books is "The Complete Trading Course - Price Patterns, Strategies, Setups, and Execution Tactics" by Corey Rosenbloom. And another good book is "Trade your Way to Financial Freedom" by Van Tharp.

Flux
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Victor
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I would echo @Victor's comments. One book and 1000 web pages doesnt make you a good investor/trader.

There are some basic things you should be aware of and read up on

  • risk management and diversification.
  • removing emotion from your trading by having a trading plan. Daryl Guppy's book later is very good on this.
  • choosing sell stops and the criteria by which you change them
  • position size and number of positions
  • entry criteria - technical, fundamental, elliot wave, a mix of all?
  • exit criteria - this is more than just sell stops, you should take into account external market conditions as well.
  • backtesting your trading systems
  • Know your time frame. Are you a investor (trades last years), a trader (trades last weeks-months), a day-trader (you close all your trades at the end of each day. I'm sure there are nuances between those but you will emotionally fit in one of those three.
  • what are the tax implications of your trading, how can you make them the most tax efficient they can be in the country you are tax resident in, work in and live in (which could be three different places!)?
  • Know what you will do with your investment when the stock market is not appropriate for investing. Cash? Bonds? ETFs? Bear ETFs? Short stocks?

There are a few books that I would recommend

I have been trading for over 10 years, my dad for over 30 years and we are both continually learning new things. Don't read one book and assume you know it all. Bear in mind that there are always new indicators being thought up and new ways of using and interpreting the same information, so keep reading and educating yourself.

Flux
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Marcus D
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    +1, in your last point you could also include taking short trades or investing in Bear ETFs. Regarding books, I also like Active Investing by Alan Hull. – Victor Apr 26 '16 at 02:05