[Mark1808]

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how about now you deal with benoit mandelbrot...one of the smartest people of the 20th century, friend to and admired by albert einstein for his deep insights...founder of much of the mathematics behind much of chaos theory (fractal geometry)...and creator of the multifractal model of price changes.

it was with that last model that he fooled TAs. how do you explain that his simulations were so good that veteran technical analysts were pointing him towards all o fthe price action you speak of? how, if traders are the ones driving the market in all cases, can their actions be so amazingly closely be described by an entirely random process?


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Barron,

I've googled for some info on benoit mandelbrot and his 'TA trick' but to no avail. If you have a link about this, could you post it? It would be interesting to see.

I remember reading about Mandelbrot & his fractals in a trading book I read some time ago (can't remember which). Ironically perhaps, he was quoted in a book about technical analysis. He sees financial markets like the coastline of a country. No matter whether you view it from space (or view a yearly price chart) or under a microscope (an intra-day chart) they have the same intricate patterns making it difficult to dicypher the distance/time frame without a scale. I've also read briefly about Elliot Wave theory and Fibononacci retracements on price charts which seem to apply complex (and subjective imo) maths to the financial markets.

As for this ongoing squabble between FA and TA...I think it's fruitless. I think you guys should get together and use both disciplines. If an FA guy has an undervalued stock which may increase in value, but may take a few years, then why not use TA to decide when to buy? If you're waiting for a big move then why tie up your money in the meantime?

A good example of this would be William O'Neill. He advocated his CANSLIM method of screening companies using fundamental analysis. It's pretty basic, but the screen when properly done only yields a few companies (sometimes none). Then he uses some chart formations (cup & handle) followed by a breakout (confirmation) as an entry.

I think it's a very elegant use of both FA & TA. He uses FA to find set-ups and TA to pinpoint entries. He obviously leaves out some more important things such as proper decent risk management. He's wasn't a value investor, but would often buy companies trading at or above recent highs.

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If short term market movements are random (as they have proven to be) it wouldn't matter whether you used TA to time your entry or not, it just wouldn't add any value.

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if they (S-T market movements) weren't random and based on psychological factors that drive human decisions, then TA combined w/ FA can provide higher overall returns than either in isolation.

Barron

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I believe the market is driven by psycholigical facors that is why FA can work long term, I just don't believe these psychological factors can be predicted with any sory of reliability near term. It is amazing that when a guy like Warren Buffett, who turned $100,000 in to $50 billion buying stocks, says TA is worthless why that wouldn't carry any weight with people.