Reading the Tea Leaves—Technical Analysis
Technical analysis and quantitative systems do not provide the holy grail to trading-investing success. They do, however, provide key input as part of an overall strategy and methodology.
I use technical analysis in the same way that I use intermarket analysis, fundamental analysis, and a psychological read of the market—as one part of the bigger-picture puzzle.
The beauty of technical analysis is similar to the beauty of macrofundamental analysis. You can observe the market in multiple time frames, much as you can observe the trend of macrodata changes, at various rates, over various time frames, to get a more in-depth, micro-to-macro overview.
I apply the same thought process to technical analysis, observing a wide variety of indicators over various time frames, looking for certain setups that have proven time and again to indicate high-probability odds that a significant, sustainable price trend is developing.
Indicators can be used in different ways. The same indicator can be used to determine a price top or bottom and, under different conditions, to imply that a full-blown macrotrend is in place, or that a countertrend move is becoming more likely.
I try to keep all my technical indicators as robust as possible. I don’t want to overoptimize by fitting each indicator to each market sector, attempting to find the most efficient indicators over whatever time frame might be back-tested or simulated. I much prefer to use the ...