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Years ago I composed an experiment that seemed to show patterns in charts where their were none by creating two charts. One was random but in relationship to the last price action of the last bar and one was from a real stock. I showed it to a couple of technical traders who prided themselves in their craft. It was interesting to find that they couldn't tell the difference between the real and the fake and made the wrong choice of what was real and what was not more often than not and then matched their favorite indicators with the random chart. Check out these two test in the attached CSV files (in OHLC format). I have since lost the charts for them, but the software that I had at the time could create the charts. Now I can't even remember what it might be. Suggestions? Oh, Excel has one... so I added them for test2 and test3.
1: A LOT of traders are looking at lines - including the smart money. 2: Especially the OBVIOUS ones - the ones that connect the first two highs or lows in a move. New lines can be drawn in smaller and bigger timeframes to reveal what various traders are seeing. 3: Price comes back to these lines and re-tests in what appears to be rather predictable fashions. 4: Price movement does over time create trend channels that after some time gets broken and support becomes resistance and vice versa.
My question is then:
As much as this is an interesting experiment and philosophical debate around if it is real or not - and I know it is an experiment - my pragmatic point of view is:
How can it even be up to debate (it is, all the time on this site..) that trendlines and s/r lines are useful or not to include in ones analysis when taking the 4 points above in mind? If the market (traders!) respect the lines (does not IGNORE them), they matter.
If they did not, the lines that are obvious to draw according to commonly agreed upon ways to draw them (i.e. connecting higher highs) would NEVER "work".
And not do they only work - they make it easier for our poor minds to see what pattern is developing and will eventually change into something else.
Is there any disagreement here that these lines are useful in trading?
The message of Random Line Theory is simple and important - 'random lines on a chart can wrongly appear to be meaningful'.
The conclusion of Random Line Theory is a complete logical fallacy - 'therefore all lines on a chart are meaningless'.
Without understanding and accepting that, there is little scope for any sensible discussion.
There are thousands of models in physics that are capable of generating 'correct maths'. Only some of them have the faintest chance of actually being related to reality - of both the the physical and the perceived worlds. Likewise in the markets - what underlying model could account for any lines or levels? and could it be an aspect of a deeper reality or not?
The brain goes to the utmost ends to find meaning in all aspects of life, it rarely exists yet we create it. It's an existential choice to adopt a nihilist approach to charts or life. Just make the choice, then live and let live.
This is an interesting thread, and thanks to all that have contributed, here's my two cents.
What happens is just what happens. True in trading and life in general. The mind then assigns meaning to all that is experienced, good/bad etc. But regardless of the value that the mind assigns, a thing/experience is always only what it is. The value assigned won't change it, it's happened already. Looking out a window a bird flies past, 'oh I didn't want to see a bird', too late, already happened, so value assignment and feelings about it are now responding to a memory.
We often require an illusion of control and planning to feel comfortable, but who plans the fender bender on the way to the store, a sudden illness, bumping into an old friend and having a great conversation, an unexpected world event that moves markets, and on and on. It just happens, it all just happens. So probabilities to me are really only possibilities. Perhaps it seems more likely than something else, but at any moment in time any market can go up or down, a little or a lot.
In my trading this was critical to really 'get' because once a trade is entered I can only manage what happens next. Sure trading plans, stops and targets are great, I would submit even required to win in the long run. But in any given trade the market will do what it does, and imposing too strong an opinion on what 'should' happen has often been costly. Moving stops to the 'next level that will surely hold', letting profits evaporate or losses grow due to many types of belief based actions rather than just observing the market. Risk/trade management is what determines profitability, not necessarily better entries, IMO.
So the question of randomness is largely irrelevant to me, (although it does seem so in the bigger picture) where the more important question becomes ones response to what's actually happening as it is happening. For instance the freedom to be on the wrong side of a market move without becoming 'wrong' emotionally allows the new information to be informative/directive toward a new assessment of next steps. Very limited expectations, seeing that while a probability seems to exist, in this trade it's only a possibility allows a more neutral stance and better agility.
Not that occupation of this place is a constant here, but when it is, greener days occur more frequently.
May your losses be small, your winners large, your feet dry, and your belly full.
Thanks for sending out the email today to bring my attention to this older thread. I'm pretty new here and this older thread is a gem that I might have otherwise missed.
I follow sloping trendlines quite a bit and I'd previously noticed that I could often place a parallel line just about anywhere on the chart that intersected price action and then my mind would be able to "see" how that parallel line was acting as support and resistance.
This is not to say that I think sloping trendlines never "work". I think they often do, perhaps because they are being followed by enough other traders.
Anyway, like I said, I'm new to the forum. So this thread makes me wonder what methodology(s) you tend to use Big Mike? Sorry if this is a FAQ, I just couldn't resist asking (and didn't quickly find an answer when I searched).
I stumbled on to the same observation as the initial post when I started out experimenting with line generating indicators, specifically the 1hr initial balance with fib extensions. I was amazed at seeing at the end of the day how price reacted to some of the levels. Real time I could not predict how price would react to these levels tho. Price may or may not react to these levels. This "indicator" produced many lines too, so the chart had a minimum of 8 lines (levels). Which ones would be the significant ones that day, at that moment of touch? At the end of the day it is obvious but during the day it is not. I got the idea of drawing the same number of lines but randomly for the day, also extending them the whole week; for kicks and giggles to see what would happen. I then saw price react to these lines! After that I would draw any line... and eventually price would appear to react to it.
I still occasionally draw trendlines as guidelines. They help me visualize direction on the market, but I don't see them as anything written in stones. When I look at a naked chart I feel lost, without points of reference. The random lines provide me with points of reference, so I use them as a visualization tool. Since I believe they are random or 50/50 I don't always draw them or keep down significantly the number of trendlines I draw.
To me lines and indicators are self fulfilling, depending on the number of market participants using them, seeing the same thing. Two persons can look at a photograph and see different things. With charts there are so many different variables there is no one photograph. There are different timeframes & chart styles that change the data points used to draw lines. If they would behave the same way over 50% of the time consistently they could probably be automated and we could all be rich. To think that the market and trendlines are random can probably be distressing, leading to disbelief. There is comfort in believing one can predict the market with trendlines or indicators.
Tastytrade has some interesting videos on random walk. This one has a good discussion with the resident math genius about his opinion on support & resistance levels (random lines):
I used to have exactly the same point of view that you expressed, in both parts:
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The message of Random Line Theory is simple and important - 'random lines on a chart can wrongly appear to be meaningful'.
The conclusion of Random Line Theory is a complete logical fallacy - 'therefore all lines on a chart are meaningless'.
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I now believe that the conclusion of the experiment is not at all that all lines on a chart are meaningless. That's why I made that post; and I included an example (either VWAP or volume profile -- both of which I think are valid and useful) to illustrate the point. I don't think all lines on a chart are meaningless, either.
I think that the experiment shows that we clearly find significance in lines (and perhaps other things) that cannot have significance due to how they were generated. It does not make any conclusions that all lines have no significance; it does suggest that, even when they have, there is also a component that we bring into the picture, just as we do when they don't have any significance. That's about all it says. I think this is not controversial, and it is important.
It is not a matter of what is objectively there; that is there, regardless of how we see it. But one person will see one thing, another will see another; one may take advantage of the opportunity, another may not; one may fail, one may succeed. All using the same charts and the same methods, but not "seeing" the same things. That's the element that makes the difference. That's why a particular method can work very well for one person, but not for another. So you need to find what works for you, not look for "the answer" somewhere else.
I put that as well as I could in my post. Now, it might not be right, and my interpretation may not be right. It would not be the first time .