I was reading another post on a forum and came across another interesting topic. The guy making the post responded to my piece on the TICKS and said this:
“One big problem with technical analysis and the use of indicators is that it confuses causes and effects. The move of the NASDAQ is the cause, the movement of the indicator is the effect. The NASDAQ doesn’t fall because the indicator says so. The indicator says so because the NASDAQ has fallen (please note the past tense). Nature works in a very predictable way: you cannot manage the effect (investing based on the indicators) without first managing the cause (figuring out why the NASDAQ moves in a certain way).”
Here is how I answered this person:
You are correct that technical analysis is the effect but I am not trying to get in at the bottom or out at the top. I catch the trend and technical analysis will always give you the underlying trend and that is where my money is made.
Using the indicators (lagging or not), I always know the trend and will place my trades with that trend. I am not always right but I use several position sizing strategies to hold my risk to a minimum which allows me to capitalize on my winning trades and cut the losers quickly.
By trading with the trends, I could care less what the “true” cause is for the movement (that is a waste of time). All I need to know is the direction the market is moving in. Nature may be predictable but the market is not so knowing the cause is useless because causes are always priced into a market in advance. I buy the trend and look for the cause in the news in the following days, weeks or even months. In my opinion, causes are old news by the time they become known!
Too many times, I see people think too deeply into the market and always miss the move because they need to know the reason why the market is moving. I don’t care why it is moving, I only care to know if and when it is moving so I can get in or out of my positions. As I said above, I will look for the “cause” or reason when it hits the headlines in the future!
Piranha
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