Tales From A Floor Trader, Or Why The Fundamentals ARE IN The Technicals.
Me: “When you were a floor trader, did you use technical analysis much?”
Nick: “Not really. You couldn’t really look at a chart and trade off that reliably. A lot of it was momentum, though. When it was going up, you had to buy it. We did a lot of spreads. We’d check open interest and figure out what deliveries would look like for each month. Some big institutions with a position of 50,000 contracts would close it in April and then redo it for May. They would roll their positions. So we tried to get in front of that.”
“As far as technical analysis for stocks is concerned… I think the fundamentals are IN THE TECHNICALS. Something wouldn’t be going up if it didn’t have good fundamentals. I know a guy who made $1,000 to $2,000 like nothing just trading moving averages. He’d get a buck out of a $13 stock consistently.”
“I saw that the market was gonna drop this summer. Volume was low on the up days and high on the down days. We were making lower highs and lower lows.”
I have watched traders use technical analysis and I must say I find it all very confusing. I’ve seen really good trades and really bad trades based on chart patterns, and the logic behind the good trades was no more scientific than the logic behind the bad ones.
It could all be noise (i.e. technical trading). For every guy making $1 on $13 stock there may be 10 guys losing $2. But no one talks about them, only about winners. One of the ways to figure out if technical trading works is to do systematic research across all traders. There probably are some studies out there – it may be interesting to see what they say.
Victor Niederhoffer wrote about testing technical analysis in his book Practical Speculation. His main point is that technical indicators are so subjective and open to interpretation that if you asked different technicians you’d often get a different answer.
Now I’m not a proponent of technical trading, but Niederhoffer doesn’t seem to have done enough research on the subject to come to a conclusion. I don’t know how Paul Tudor Jones does it, but he just makes money consistently. He claims it’s due to technical analysis. Someone should really look into what kind of trading Tudor does and figure out what anomalies there are. He is definitely on to something.
One technical pattern I have observed over the years is that after you have a market pullback of at least 8%, you want to be long beta and short alpha. You want to be long the stocks that everyone knows are crap because the short sellers will cover in any rally. The fundamentally good stocks will lag because who needs safety when the market is going up?
Knowing this and trading this are two different things. I should trade this more instead of being cognitively dissonant. I think that’s why lots of traders use computers to execute trades nowadays.