Okey, I’ll try to be productive for you TA believers here:
Trend/resistance lines, patterns, momentums, averages and even the Elliot Waves “Theory”… They are all variations of the very same thing. They basically assume that prices move in a regular sinus wave (and sinus waves overlaid on each other). Try your TA tools on a sinus wave, and after tuning the “signals” according to the period length and amplitude of the sinus wave, you’ll have perfect trades all the time!
The more prices look like a sinus wave, or a set of sinus waves, with or without some underlying linear trend, and the better you tune in on the periodicity of those waves, the better all technical analysis will work. The less prices move like a sinus wave, the worse result they’ll give. If one thinks that TA works, then one don’t need any TA tool. One can actually see it with bare eyes on the raw price chart directly! If the sinus pattern isn’t clear enough for you to see it intuitively, then TA calculations won’t work either.
Nor those simple calculations of momentums and averages (which can be made in many unimportant variations), nor those strange “head-and-shoulder”-patterns et cetera, add anything magical. They are just formalizations of the assumption that prices will move somewhat like a sinus curve. Your brain intuitively sees such patterns much easier than those formulas do, so if you want to TA, look and feel, don’t calculate. That’d only give you false confidence and remove you from understanding what’s going on.
When applied on a sinus wave, the moving averages and momentums will be sinus waves too! Only, they’ll be offset backwards and forwards in time respectively. From that comes the interpretation of them, such as there being a sell signal when prices cross moving average from above. Now imagine that prices are moving as a sinus curve, that they’ve just peaked and started to go down:
Moving averages will be lower than the price, since most recent prices on which they average have been lower than current price, but it will be rising because new high prices are substituted into its calculation while older lower prices are removed from it. The price will therefor cut down across the still rising moving average. That is why this phenomena is interpreted as a sell signal.
Momentum will be at its highest when prices rise the most steepest. When prices are at the top of their sinus wave, momentum will already be on its way down. That is why momentum falling down from a high level is interpreted as a sell signal.
What parameters to choose for the TA indicators (such as 14 days or 200 days), depend on your assumption of the periodicity of the sinus wave in the prices. 1/4 of the period length probably gives the best signals.
Betting that an existing trend will continue is such an obvious and simple concept that I wouldn’t even call it TA. TA is to bet that the existing wave pattern will continue. It’s as simple as that.
If you want to play around with TA, then at least try to understand what they actually represent. Don’t let a black box tell you how to spend your money! (The only catch with TA is that prices don’t move much like sinus waves at all…)
