Colin Twiggs closes each e-mail with this refrain which I think is quite honest and relevant.
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Technical Analysis and Predictions
I believe that Technical Analysis should not be used to make predictions because we never know the outcome of a particular pattern or series of events with 100 per cent certainty. The best that we can hope to achieve is a probability of around 80 per cent for any particular outcome: something unexpected will occur at least one in five times.My approach is to assign probabilities to each possible outcome. Assigning actual percentages would imply a degree of precision which, most of the time, is unachievable. Terms used are more general: "this is a strong signal"; "this is likely"; "expect this to follow"; "this is less likely to occur"; "this is unlikely"; and so on. Bear in mind that there are times, especially when the market is in equilibrium, when we may face several scenarios with fairly even probabilities.
Analysis is also separated into three time frames: short, medium and long-term. While one time frame may be clear, another could be uncertain. Obviously, we have the greatest chance of success when all three time frames are clear.
The market is a dynamic system. I often compare trading to a military operation, not because of its' oppositional nature, but because of the complexity, the continual uncertainty created by conflicting intelligence and the element of chance that can disrupt even the best made plans. Prepare thoroughly, but allow for the unexpected. The formula is simple: trade when probabilities are in your favor; apply proper risk (money) management; and you will succeed.
4 comments:
"Technical Analysis should not be used to make predictions because we never know the outcome of a particular pattern"
"The formula is simple: trade when probabilities are in your favor"
Hope you will pardon me if I find Mr. Twigg's logic a little bit circular.
Mr. Twiggs started working in 1985 and went out on his own in 1998 to become a trader. That is a career path that would fit many many individuals, and one that would also span one of the all time great bull markets. In other words, a career that one would be concerned with success via survivor bias rather then actual market timing ability. This is not knock on Mr. Twiggs (he cannot help that he was born in 1947) but it is an issue with many of today's great prognosticators. Including to some degree Mr. Buffet who pulled out before his first big bear market (the early 1970s), but did not in 2001.
Of course Mr. Twiggs offers his exceptional premium charting service at a a very reasonable $12/month fee - You have to love the near zero marginal costs providing internet services.
R-- Circular? Perhaps. I suppose you have to agree on the initial statement, which I understand to be implicit that you don't know with certitude what the outcome will be but there are better probabilities when x happens than with y. (which is was I presume the scientific method would be applied to to make credible statements).
I don't subscribe to his service, but I do get his weekly e-mail. And as I've gone on record here, ALL of the technicians have blown there calls for this market over the past year.
The fact that Mr. Twiggs was able to "ride" the crest of a wave (so to speak) thanks to the accident of getting himself born at the right time -- not to mention going out on his own at reasonably good time -- doesn't detract (in my mind) from any success he may have had.
I know many people who have those advantages in their favor, but have done poorly as traders. Indeed, I'm acquainted with a few that have blown themselves out of the water.
Also, I'm not sure I would call his logic circular. Certain patterns have more likely outcomes (maybe "predictable" is too strong a word) than others. Assigning probabilities makes sense to me. For whatever reason, Twigg's comments don't seem circular.
"I know many people who have those advantages in their favor, but have done poorly as traders".
It is the coin flip game. You start of with a three-thousand traders and tell each one to flip a coin (heads wins). After a series of ten tosses you have two left that have thrown ten heads in a row.
Are they really good at flipping heads?
It becomes even more difficult if you throw into the mix 20 people who for mystical reasons actually are better at throwing heads (say 15% better: 65% chance per toss).
At the end of your tossing contest you still have around two people left and it is likely that your mystical coin flippers are not in the group.
As with many "contests" in life, the winner is not always the best. How many people have ever worked for or known a truly idiotic boss? The advantage of being in the right place at the right time is generally discounted by us, even when we see the effects of it all the time.
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