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Given the assumptions listed as 1,2 and 3 here https://www.investopedia.com/terms/t/technicalanalysis.asp

What do you think about the idea that old technical patterns/trends should definitely not work any longer given that central banks and passive flows has taken an increasing place in the market?

The basic assumptions are that the market is efficient and the consequences follow trends based on that efficiency and the psychology of the actors. The central banks and passive flows changes this significantly as they have a completely different psychology and disrupt what is generally considered effective due to their different psychology as well as altering the current psychology. Shouldnt this question the relevance ofthe old trends and patterns?

Furthermore the whole market structure must have changed significantly with the introduction of passive and algos etc the "psychology" of these actors is way different then say a fundamental trader from the 70's

Anyone has some thought on this?

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To make it short: technical trading rules work if they are either (A) true or (B) believed to be true by enough traders. If the dominant market belief changes, old beliefs of category (B) should not work anymore.

Technical trading - as I understand it - is based on the assumption that there are certain patterns in stock charts which repeat or indicate price movements in the future, making stock prices (or other values) somewhat predictable. Now, in my opinion this is working because enough traders believe in these patterns and behave accordingly in their trades - generating this exact predicatablility.

So to the extent that technical trading works because of these coherent group beliefs, it only works for the patterns which are currently used by most traders (or at least enough to make a market impact). If no one believes and acts upon outdated or obscure patterns, they will most likely not work.

This said, if there might be patterns which are based on proven aspects of financial markets (such as arbitrage or certain psychological principles) - i.e. they actually reflect the financial reality. These should work in general, if they have a large enough impact.

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  • $\begingroup$ I have to add that the above argument is not fully based on scientific literature, but more upon my experience during employment in the banking sector and discussions with technical traders. Insofar it is more of a reflected opinion $\endgroup$ – Martin Georg Haas Sep 13 '20 at 10:14
  • $\begingroup$ Thanks for your answer. I guess I have first the fundamental question if these patters works at all. And as a thought experiment I considered the changes in market structure which imo should change the patters due to how they are established according to the theory itself. If the market structure and behavior of traders change and not the patterns then they cant be a consequence of the former $\endgroup$ – user123124 Sep 13 '20 at 18:07

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