Technical analysis
What can a price chart tell you, what can it not, and what does the evidence actually say?
10 of 10 chapters published
Chapters
Beginner
- What a chart actually showsA price chart is a record of transactions that already happened. Technical analysis is the attempt to forecast from that record — and the first honest step is being precise about what the record contains and what it omits.
- Price, volume and timeThe three raw columns. Which price you mean, what volume counts, and what the choice of time interval does to everything downstream — including the fact that it is a choice at all.
- Trend, support and resistanceThree of the oldest ideas in the field, and three that are defined loosely enough to be unfalsifiable. Stating them precisely is what reveals how much work the observer is doing.
Intermediate
- Candlesticks, and what a candle cannot tell youA candlestick is a drawing of four numbers. It is a genuinely good piece of visual design and it contains no more information than the four numbers — which matters, because the named patterns imply it does.
- Moving averagesAn average of the last n closes, recomputed each period. It smooths, and smoothing costs lag — the two are the same operation seen from opposite sides, and no choice of n escapes the trade-off.
- Momentum: RSI and MACDTwo of the best-known indicators, defined exactly. Both are deterministic functions of past closes, which means neither contains information the closes did not already hold — and both carry parameters nobody derived.
- Volume, open interest and participationThe third input, and the one that is genuinely different. Open interest counts contracts outstanding rather than contracts traded — and unlike every indicator so far, it is not a function of price.
Advanced
- Patterns, and the hindsight problemNamed chart formations are identified by looking back at charts where they worked. That single fact about how they are discovered explains most of what is wrong with the evidence for them.
- What the evidence says about technical tradingMany studies found profits. The profits declined over time and the early ones largely disappeared in later data. And the reason academics discount the positive findings is methodological rather than ideological.
- Where it is genuinely used: execution, stops and sizingThe last chapter of the subject. Price data has real uses that do not require it to forecast anything — deciding how to execute a decision already made, bounding a loss, and sizing a position to volatility.