The essence of technical analysis
The essence of the laws summed up by the technical school is the reflection of human thinking and habits in securities trading, the reflection of human nature, and the reflection of natural laws.
For example: In terms of space, if the price has risen for a while, there will be too many profit-making orders, and there will naturally be sells, which will naturally pull back. When the pullback reaches about 60% (golden section), most people will feel that it is almost time to buy the bottom , the price will rebound, which is the golden section retracement level; when the price falls below the consolidation platform, people’s panic will appear, panic selling will make the price fall faster, and the trend will be self-reinforcing, which is the key point of the trend Reversal; In terms of time, people need a process of acceptance of the new price center. When the upward trend is in the process of correction and the time process of consolidation is the process of people psychologically accepting the new price and recognizing the securities trend. Just hit a new high It is expensive at the time, but it may not feel expensive after 2 months, and then new buyers enter the market, pushing the price to continue to rise. Not only that, everything has proportions and cycles. The golden ratio exists in many natural things. Human aesthetic cognition and sense of balance determine its relative effectiveness in the financial market (of course, it cannot be said to be absolute). The self-reinforcing trend of the trend after the breakthrough near the key point includes human herd mentality and the herd effect of excessive optimism and pessimism. Another important feature of technical analysis is group nature. Individual behavior is chaotic and unpredictable, but group behavior is often regular. To use a buzzword, technical analysis is "big data" analysis. For example, the redemption and subscription of Alipay have very strong regularity.
The pitfalls of technical analysis
a. There is a problem with its philosophical foundation: Many people question very much, can past behavior (the most direct is recent behavior) indicate future behavior? Some people think it is ridiculous to use the past to predict the future. Although it is said that "there is nothing new under the sun", what happens every day is still not quite the same. Then use similar patterns and volume-price relationships to infer that the subsequent trend must be the same, and there are many problems. In fact, the issue of price form is similar, but it may be completely different in terms of the macro political environment and the situation of the securities target itself. It is difficult to make analogy and inference purely from the form, and there are methodological problems. And if all information is implied by the price, then the market is perfectly efficient and there cannot be any trading opportunities. Besides, how can past transaction prices imply future information? At best, it can only reflect the expectations of some investors. b. Qualitative judgments are more hindsight, and quantitative judgments are often inaccurate. In qualitative analysis, when the technical analyst confirms the trend, the trend may have been going for a period of time, and the best opportunity to open a position has been missed by this time, but this is how technical analysis can be confirmed. But it is very likely that just after opening a position, the trend reverses again. When technical analysts make quantitative predictions in terms of time and space, they often find that tools such as the golden section are invalid. Even if they are effective, there is often uncertainty about whether it is 38.2%, 50% or 61.2%, and it can only be used as a reference. c. Ignored the violent impact and destruction of many unexpected events and small probability events on the form and trend. There is no way to deal with these shocks and damages with the logic and methods of technical analysis, because this is a completely different category and dimension. A more joking example is that a securities company placed a wrong order on stock index futures, resulting in a false breakthrough, causing countless technical deaths. d. Technical analysis is the analysis of group behavior. Relatively speaking, it is more suitable for analyzing securities products with many participants and huge trading volume, such as stock indexes and foreign exchange, but not suitable for oligopoly markets such as small-cap stocks. e. Many analyzes are ambiguous, and different people may have different results. For example, for the Elliott Wave Theory, the wave pattern of each person may be different, thousands of people have thousands of waves; another example, how to distinguish between the downward flag arrangement and the new downward trend? Many traders like to use purely technical analysis principles to make trading strategies, and I am very opposed to this approach. Whether it is trend analysis, relay pattern analysis or various trend reversal point analysis, there are flaws and special cases. It is dogmatism to think that the financial market fully complies with the technical analysis criteria. It is an unrealistic expectation that guidelines explain and regulate everything. The problem of technical analysis is to explain imperfect and irregular markets in a perfect and regular form. This is indeed a straw that ignorant and small individuals can grasp when they are in darkness and helplessness. This straw is useful, but it cannot be used as a life-saving swimming ring.
When talking about technical analysis, we must talk about fundamental analysis
Fundamental analysts believe that any security has its intrinsic value. If the price of market transactions deviates from this intrinsic value, there will be huge speculation or investment opportunities. Under this logic, the main task of investment transactions is to find Bid value and price deviation. Of course, for interest rate and exchange rate products, fundamental analysis mainly refers to monetary policy trends and supply and demand conditions. Fundamental analysis does not care about recent securities transactions, but only cares about the corresponding value and economic and financial environment behind the securities themselves.
The pitfalls of fundamental analysis
a. Fundamental analysis can only qualitatively give overestimates or underestimates, but there is no way to give precise buying and selling points. The entry point cannot be given, and there is no way to give the exit point when the value is corrected.
b. Fundamental analysis also has the risk of information asymmetry. Analysts assume that they know all the real information behind the securities and give valuation conclusions, which are often wrong, because a lot of information is not fully disclosed, or obtained under moral hazard. is false information. In this case, the early action of the information superior will cause huge losses to the fundamental analysts who think they are correct. As far as the country is concerned, even President Hoover and his Federal Reserve officials, who stood at the highest level, caused the Great Depression in the United States in the 1930s because of their misjudgment of the economic situation; Misjudgment of the prospects of the enterprise may lead to bankruptcy. How can traders, researchers, and fund managers who are bystanders ensure that their fundamental analysis does not make mistakes?
c. It takes time for the value of securities tokens to be recognized and recognized by the market, and this time scale cannot be controlled.
My understanding of speculative trading is this
Of course, any trader does analysis for profit, not for analysis, not for prediction. So the most important thing is trading strategy, as well as a correct understanding of trading and financial markets. My understanding of speculative trading is this: in a market with asymmetric (or incomplete) information (all participants can only grasp part of the information),
pass:
a. Variety selection,
b. Timing selection,
c. Position control,
d. Stop-loss and take-profit strategies to maintain long-term, high-probability profitable behavior.
Therefore, any analysis method is to solve the above four problems.
Have a correct understanding of the financial market and yourself
Accept uncertainty: The financial market is an uncertain market, in which there is no Newton's law, only the principle of uncertainty. In terms of transaction price, it is determined by the uncertain behavior of many participants. In terms of its fundamentals, it is also affected by the macroeconomic environment, industry trends, competition in the same industry, and the national political policy environment. So there is no way to use a logic to give a deterministic conclusion at a point in time. Unless it's self-deception. Admit ignorance: Anyone's cognition of a security is one-sided and not completely clear. You must admit your ignorance, but you cannot completely deny yourself in the event of a loss.
Use probabilistic thinking to formulate trading strategies and make decisions
After acknowledging and accepting the uncertainty of the market and the one-sidedness of cognition, all strategies and decisions are to find high-winning strategies in the probability space. All methods are designed to increase the winning rate, not to guarantee absolute profitability. Traders have to accept the loss caused by the odds, and accepting the loss is the prerequisite for profit. Under the condition of incomplete information (just like Texas Hold'em always has cards that have not been turned over), excellent traders are people who judge the odds extremely accurately, and have clear strategic thinking, and can enter the market decisively and stop loss and profit , so from a long-term perspective, it must be profitable. The difference between people is mainly here. Bet big if you have a high winning rate, bet small or fold if your winning rate is low. Those who know when to quit and not play are the ones who make a lot of money.
The market is a complex system influenced by many factors
The market is a complex system influenced by multiple factors. If none of the various factors is particularly strong, then its trend must be chaotic. Only when one or more factors have the same impact can the magnificent market situation be produced. The task of the trader is to catch the signs of this impact factor, build a position at the first time and leave the market when the factor's influence decays. Whether it is technical analysis, fundamental analysis, or other analysis methods, it is a method to find out the leading factors. The way and thinking of explaining and analyzing the market must not be single. Excellent traders must accurately judge the dominant factors in the first stage to make correct decisions, and always only do high-probability events.
According to different shock factors, several classic trading strategies are
a. Reversal or drastic changes in fundamentals: For example, the profits of companies with continuous losses and the rise in stock prices caused by the successful transformation; the deterioration of the macroeconomic environment caused the expectations and realization of interest rate cuts and RRR cuts, which eventually caused bond prices to rise. b. Impact of events: For example, the rise in oil prices caused by the war in the Middle East; the decline in bank stocks and the broader market caused by the money shortage last year (the rumor of a huge default by a certain bank), etc.; the abnormal statements of central bank officials caused exchange rate fluctuations. c. Technical trading opportunities: In the absence of other major changes and shocks in fundamentals, buying at key support levels and shorting at pressure levels, or the formation of trends at key points (breakthrough tactics).
Of course, if there is a trading opportunity that resonates in the above three aspects, then why hesitate?
Soros's reflexivity theory worth mentioning
The main point of the reflexive theory put forward by Soros is that the financial market is very different from other objective things. The difference is that the observers of the financial market will affect the market, and the reaction of the market will in turn affect the judgment and behavior of the observer; and The operation of other things in nature is not affected by the observer. In simple terms, financial markets are self-reinforcing and self-fulfilling. Undoubtedly, countless financial asset bubbles in history and the subsequent Great Crash and Depression have all confirmed his theory. Classified by faction, because Soros puts great emphasis on the research and game of human psychology, so this can be regarded as the category of behavioral finance. But the self-reinforcement and self-realization of the trend he mentioned is similar to the point of view that the breakthrough of key points often mentioned by the technical school leads to the formation of new trends and the acceleration of trends. In the actual transaction process, Soros has investigated the fundamentals of the securities in advance. For example, before attacking the British pound, he has figured out that the British trade deficit continues to expand and foreign exchange reserves are very low. After finding out the family background, he himself just made a tipping point, spreading rumors after building a position, affecting investor psychology, and accelerating the self-realization of the trend. Therefore, from the perspective of the above aspects, in actual operation, he is a master of the technical school, the fundamental school, and the behavioral finance school. Let me talk about my views on several issues that are often debated, and explain the essence of transactions from different aspects.
The relationship between technical analysis and fundamentals
Technical analysis recognizes the securities target itself by recognizing the behavior of investors (past transaction information), and fundamental analysis recognizes the price of the securities target itself. Due to the different ways of cognition, both have flaws, which have been explained above. Both of them only focus on one factor affecting the price, and they cannot be complete. Qualified traders must fully grasp the guidance provided by the two, combine the market situation, find out the dominant factors (or deal with short positions when there are no dominant factors), and make optimal decisions. In fact, I think that only the opportunity for the two to confirm each other is an excellent opportunity. The best cooperation is to choose varieties for fundamentals and price for technical aspects.
The relationship between bargain hunting and stop loss
When the price of securities falls and leads to floating losses, countless textbooks will say that you must stop the loss and don't buy the bottom to spread the cost, which is very dangerous. is it right? What I want to say is that under any circumstances, it is never wrong to get a cheap price, but you must think clearly that the downward trend may last longer than your imagination. Can you bear it? On the basis of affordability, if you really have a deep knowledge and understanding of the target itself, under an extreme price condition, you can buy more and more as it falls. It can even be said that the larger the capital, the more this method should be adopted. Chasing ups and downs is definitely not an excellent strategy. There are many practical problems in the actual operation of the operation method of waiting for the trend to form before entering the market. Whether it is the price impact, the time to open a position, or the amount of chips collected, there are many restrictions. Especially for fixed-income products, the rate of return is often in place in one step, and there is no chance to build a position at all. Shouldn't it be bought more and more as it falls? Of course, this is qualitative. Quantitatively speaking, how far to enter the market and what percentage of positions are used are all comprehensively judged in combination with other factors. Regarding the problem of stop loss, I think that usually the only reason for stop loss is that the previous argumentation basis for entering the market no longer exists, or I can no longer recognize the high winning rate of the transaction. Of course, each institution has its own stop loss limit, and traders can only open positions based on their own judgments on the winning odds.
The relationship between buying bottom and chasing up
Should I buy bottoms or chase ups? This topic has also been debated for a long time. I think there is me in you and you in me in these two things. In a major trend, one may be buying bottoms, while in a minor trend one may be chasing up; and vice versa. The major trend is to chase the rise, and the minor trend is to buy the bottom. The so-called general trend means that the securities subject has reached the inflection point of the macro environment, monetary policy views, performance inflection point, business form or business model inflection point, and has basically been recognized by investors, and there are already signs of rising.
In technical terms, the downtrend has been broken and reversed. But for a small trend, you can buy during a short-term callback, which is a bottom-buying. Or in the words of the technical school, this is the second buying point. So, the two are mixed. Everyone wants their own cost to be low, but one-sided pursuit of low cost will cause great uncertainty (halfway up the mountain), or long-term consolidation, waiting for a long period of time for market confirmation, or pursuit of low cost will result in no opportunity to buy at all. If one-sided pursuit of certainty does not dare to take risks and gamble, the cost of building a position will be too high. Weigh these two points by yourself, there is no conclusion. All masters are masters of balance, even extreme ones are not acceptable.
The relationship between stop loss and take profit
Regarding the relationship between stop loss and stop profit, it can be summed up in one word: how much stop loss and how much stop profit do you want to use? This is a question of comparing the size of losses and gains, and of course there is a question of probability. All technical analysts say: "cut losses and let profits run". But it's not easy to do. Value analysts have earnings expectations and reasonable P/E valuations. I just want to remind the fundamental analysts that the market may be more crazy than most people imagine. Fundamentalists need to see if the sentiment is still frenzied, if everyone is still talking about the security, and to see if the general trend is intact. I also want to remind the technical school: the trend has fallen below, which does not necessarily mean that the market is over. The technical school should check whether the target has reached the theoretical price expected by the fundamental analysis, or whether it is overestimated, whether people's psychological expectations have changed, and whether the hot spots have changed. The problem of stop profit should be the most difficult. The classic technical analysis school is like this, after falling below the trend, the back draw cannot make a new high, and then leave the market. There are also people who want to leave the market after breaking through the head platform, that is, breaking through the M-shaped top, head-and-shoulders top, and so on. But there are also many problems here. What is the judgment range of the breakout, 3% or 5% (the Turtle Tactics calculates the historical volatility as the breakout scale), how long the breakout lasts, whether it is based on the intraday price or the closing price price? There is also no reverse draw at all, and the spire falls down.
Faced with these many problems, you should ask yourself whether the reason for opening the position in the first place still exists, whether you are willing to take the exposure under the current market conditions, and whether the exposure has a more significant winning rate than other opportunities in this position? Or ask a clearer question, assuming the current position is still short, are you willing to buy at this point? I am more opposed to the mechanical technical analysis trading system (generally enter the market at the support level, or enter the market at the breakthrough level, and leave the market when the trend breaks). Of course, I cannot prove that this type of system is invalid. I just think that the market will not use such a single schema explained. There are many unprovable and falsifiable things in the world. I can only say that epistemologically, this is a kind of belief. In other words, I am opposed to mechanical stop profit or stop loss, but if you really don't have any other clues to judge, you can only do so. Of course, some technical schools believe that once you start to put aside market transactions and make subjective judgments, you will enter a trap, because market transactions are more real and effective than personal judgments. In other words, you should stop the loss if it breaks, because there must be bad things that you don't know about. This mechanical technical analysis strategy is fascinating in its theoretical simplicity. But the reality is not like this. I don't think we should think about things in this way. If people don't think independently, there is no difference between sheep and sheep. It’s just that you have a clear understanding of the reverse force and time of the market, and investigate as soon as possible to see if there is a major problem with the target. I have also chatted with some futures traders, and there are also those who purely use breakthrough tactics to continue to make profits, but when I asked about the stop loss range, the answer was flexible. In any case, for this mechanical method of trading, humans have no advantage over computers. So, I don't think this is the route a trader should take. The problem of stop loss is the same. I think it is mainly to see if you can bear the loss expansion, whether the reason for opening a position is still valid, whether there is a trading opportunity with a higher winning rate, and whether you are willing to open a position at this price. So, after all, it is still a matter of judging a probability. Of course, this probability is obtained by various analysis methods.
short-term and long-term relationships
If the cycle is too short, the trend of securities will be chaotic and meaningless to analyze. If the cycle is too long, there is no way to give a correct judgment. Of course, each product is different. I personally think that if you do a fundamental reversal strategy, you can look at exchange rates and bond products for 3 to 6 months; for stocks (listed companies), you can look at 1 to 2 years. Of course, if it is an event impact transaction, it may be on the order of a day. Traders can roughly know how long a price trend cycle is based on the historical situation of their own varieties, so as to find their own analysis and trading time scale. Finally, let’s put aside technical issues and talk about my personal understanding of trading: the basis of investment and trading is epistemology, and people must realize the defects of their own cognitive ability and cognitive methods to ensure that they will not suffer big losses. Soldiers are impermanent, water is impermanent, and any cognitive method is one-sided, and we cannot stick to one. Of course, the result is often like this, how you look at the world, the world becomes what it is, because you will selectively ignore other aspects. The technical school will draw 100 different lines to prove that there is indeed a support for a rebound level; the fundamentalist school will think that it is the announcement of new good news that caused the reversal; There will also be people manipulating, falling is washing the market, rising is cheating. Technical analysis is just a way of cognition. We must break the barriers between different cognition methods, abandon mechanism and dogmatism, and be a master. Traders must continue to improve their cognitive ability, recognize the psychology of leaders, recognize the habits of the central bank, recognize the external situation and impact, recognize the prejudice and blind obedience of participants, recognize the internal structure and problems of securities entities, The trend and evolution of the cognitive society, the change of the cognitive business form, the impact of the cognitive price form on the market mentality, and the reflection of the recent market mentality. . . etc. There is only one root cause of loss: ignorance! But when your cognition is deep and comprehensive, you will definitely get the highest winning rate and profit.
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