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The Heretics of Finance: Conversations with Leading Practitioners of Technical Analysis

Book Description

The Heretics of Finance provides extraordinary insight into both the art of technical analysis and the character of the successful trader. Distinguished MIT professor Andrew W. Lo and researcher Jasmina Hasahodzic interviewed thirteen highly successful, award-winning market professionals who credit their substantial achievements to technical analysis. The result is the story of technical analysis in the words of the people who know it best; the lively and candid interviews with these gurus of technical analysis.

The first half of the book focuses on the technicians' careers:

  • How and why they learned technical analysis

  • What market conditions increase their chances of making mistakes

  • What their average workday is like

  • To what extent trading controls their lives

  • Whether they work on their own or with a team

  • How their style of technical analysis is unique

The second half concentrates on technical analysis and addresses questions such as these:

  • Did the lack of validation by academics ever cause you to doubt technical analysis?

  • Can technical analysis be applied to other disciplines?

  • How do you prove the validity of the method?

  • How has computer software influenced the craft?

  • What is the role of luck in technical analysis?

  • Are there laws that underlie market action?

  • What traits characterize a highly successful trader?

  • How do you test patterns before you start using them with real money?

Interviewees include:

Ralph J. Acampora, Laszlo Birinyi, Walter Deemer, Paul Desmond, Gail Dudack, Robert J. Farrell, Ian McAvity, John Murphy, Robert Prechter, Linda Raschke, Alan R. Shaw, Anthony Tabell, Stan Weinstein.

Table of Contents

  1. Copyright
  2. Praise for The Heretics of Finance
  3. Acknowledgments
  4. Introduction
    1. The Death of the Random Walk
    2. Cultural Biases
    3. Automating Technical Analysis
    4. What Did We Learn from the Interviews?
    5. A New Beginning
    6. Notes
  5. 1. Ralph J. Acampora
    1. 1.1. What led to your interest in technical analysis?
    2. 1.2. Which mistake taught you the most?
    3. 1.3. Describe your style of technical analysis.
    4. 1.4. In what kind of market conditions do you make the most mistakes?
    5. 1.5. How much of what you do are you willing to share with others?
    6. 1.6. If all patterns/indicators/strategies you use are in the public domain, what is it about the way you use these tools that accounts for your superior success?
    7. 1.7. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    8. 1.8. Is technical analysis more effective when used on its own or when combined with fundamental analysis?
    9. 1.9. So your approach is purely technical. You bring in fundamental analysis only when you're explaining your purely technical approach to a nontechnical audience. Correct?
    10. 1.10. Does political or global analysis influence the decisions you make in your chart room?
    11. 1.11. Why do you eventually share your inventions with others, rather than keeping the edge for yourself?
    12. 1.12. How often do you use the technical tools you developed yourself?
    13. 1.13. Describe your working day.
  6. 2. Laszlo Birinyi Jr.
    1. 2.1. What led to your interest in technical analysis?
    2. 2.2. How did you come to focus on technical analysis as a field?
    3. 2.3. Did someone or something in particular in the field inspire you?
    4. 2.4. Did you learn the craft by studying the literature on your own, or by studying with a teacher?
    5. 2.5. Are there things you learned only after you started applying technical analysis to real markets, things you never saw in the literature?
    6. 2.6. Which mistake taught you the most?
    7. 2.7. Describe your style of technical analysis.
    8. 2.8. How do you go about this dissecting of the market?
    9. 2.9. How much of what you learn from others do you directly apply in your trading?
    10. 2.10. How do you learn what works for you and what does not, without taking big losses?
    11. 2.11. In what kind of market conditions do you make the most mistakes?
    12. 2.12. How much of what you do are you willing to share with others?
    13. 2.13. If all the patterns/indicators/strategies you use are in the public domain, what is it about the way you use these tools that accounts for your superior returns?
    14. 2.14. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    15. 2.15. Is technical analysis more effective when used on its own or when combined with fundamental analysis?
    16. 2.16. What percentage of your analysis is intuitive?
    17. 2.17. What drives your innovative process?
    18. 2.18. Were there times when you felt that relying on classical patterns and indicators was simply insufficient, and that developing new technical tools was necessary?
    19. 2.19. Describe your working day.
    20. 2.20. To what extent does your trading control your life?
  7. 3. Walter Deemer
    1. 3.1. What led to your interest in technical analysis?
    2. 3.2. How is your style of technical analysis distinct?
    3. 3.3. How much of what you learn from others do you directly apply in your analysis?
    4. 3.4. Is technical analysis more effective when done working individually or in teams?
    5. 3.5. Since all the patterns/indicators/strategies you use are in the public domain, what is it about the way you use these tools that accounts for your superior returns?
    6. 3.6. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    7. 3.7. How much of your technical analysis is intuitive?
    8. 3.8. What drives your innovative process?
    9. 3.9. Were there times when you felt that relying on classical patterns and indicators was insufficient, and that developing new technical tools was necessary?
    10. 3.10. Describe your working day.
  8. 4. Paul F. Desmond
    1. 4.1. What led to your interest in technical analysis?
    2. 4.2. Did you learn the craft by studying the literature on your own, or by studying with a teacher?
    3. 4.3. Are there things you learned only after you started applying technical analysis to real markets, things you never saw in the literature?
    4. 4.4. How is your style of technical analysis distinct?
    5. 4.5. Is technical analysis done better working individually or in teams?
    6. 4.6. Are there certain market conditions that increase the likelihood of your making mistakes?
    7. 4.7. If all patterns/indicators/strategies that you use are in the public domain, what is it about the way you use these tools that accounts for your success?
    8. 4.8. Is technical analysis more effective when used on its own or when combined with fundamental analysis?
    9. 4.9. Were there times when you felt that relying on classical patterns and indicators was insufficient and that developing new technical tools was necessary?
    10. 4.10. Describe your working day.
    11. 4.11. To what extent does your work control your life?
  9. 5. Gail M. Dudack
    1. 5.1. What led to your interest in technical analysis?
    2. 5.2. Are there things you learned only after you started applying technical analysis to real markets, things you never saw in the literature?
    3. 5.3. Which mistake taught you the most?
    4. 5.4. How is your style of technical analysis distinct?
    5. 5.5. Are there certain market conditions that increase the likelihood of your making mistakes?
    6. 5.6. If all the patterns/indicators/strategies that you use are in the public domain, what is it about the way you use these tools that accounts for your superior success?
    7. 5.7. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    8. 5.8. What percentage of your analysis is intuitive?
    9. 5.9. Why do you share your inventions with others rather than keeping the edge for yourself?
    10. 5.10. Is it possible for you to completely stop thinking about the market?
  10. 6. Robert J. Farrell
    1. 6.1. What led to your interest in technical analysis?
    2. 6.2. Did you learn technical analysis mostly on your own or with a teacher?
    3. 6.3. Are there things you learned only after you started applying technical analysis to real markets, things you never saw in the literature?
    4. 6.4. Which mistake has taught you the most?
    5. 6.5. How is your style of technical analysis distinct?
    6. 6.6. In what kind of market conditions do you make the most mistakes?
    7. 6.7. Are all the indicators/strategies you use in the public domain? And if so, what is it about the way you use these tools that accounts for your superior returns?
    8. 6.8. Is technical analysis more effective used on its own or combined with fundamental analysis?
    9. 6.9. How much of your technical analysis is intuitive?
    10. 6.10. What drives your innovative process?
    11. 6.11. Were there times when you felt that relying on classical patterns and indicators was insufficient, and that developing new technical tools was necessary?
    12. 6.12. Why have you shared your inventions with others rather than keeping the edge just for yourself?
    13. 6.13. Is your confidence in the ability of technical analysis to forecast future price moves strong enough to relieve you of stress?
  11. 7. Ian McAvity
    1. 7.1. What led to your interest in technical analysis?
    2. 7.2. Are there things you learned only after you started applying technical analysis to real markets, things you never saw in literature?
    3. 7.3. Which mistake taught you the most?
    4. 7.4. If all patterns/indicators/strategies that you use are in the public domain, what is it about the way you use these tools that accounts for your superior returns?
    5. 7.5. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    6. 7.6. How much of your technical analysis is intuitive?
    7. 7.7. What drives your innovative process?
    8. 7.8. Were there times when you felt that relying on classical patterns and indicators was insufficient, and that developing new technical tools was necessary?
    9. 7.9. Why do you share your inventions with others, rather than keeping the edge just for yourself?
    10. 7.10. Is your confidence in the ability of technical analysis to forecast future price moves strong enough to relieve you of stress?
    11. 7.11. To what extent does your trading control your life?
    12. 7.12. Describe your working day.
  12. 8. John J. Murphy
    1. 8.1. What led to your interest in technical analysis?
    2. 8.2. Did you learn the craft by studying the literature on your own, or by studying with a teacher?
    3. 8.3. What were some of the first things you learned when you started working as a technical analyst?
    4. 8.4. Which mistake taught you the most?
    5. 8.5. How is your style of technical analysis distinct?
    6. 8.6. Describe your approach to the practice of technical analysis.
    7. 8.7. Is your analysis more effective when you're working by yourself or when you're working with others?
    8. 8.8. In what kind of market conditions do you make the most mistakes?
    9. 8.9. If all patterns/indicators/strategies you use are in the public domain, what is it about the way you use these tools that accounts for your superior returns?
    10. 8.10. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    11. 8.11. Is technical analysis more effective when used on its own or when combined with fundamental analysis?
    12. 8.12. How much of your technical analysis is intuitive?
    13. 8.13. At this point in your career, would you say that classical technical tools are sufficient?
    14. 8.14. How soon after you develop a particular technical tool do you make it accessible to the public? Why do you share your inventions with others, rather than keeping the edge just for yourself?
    15. 8.15. So there are tools that you've developed but never shared with the rest of the world?
    16. 8.16. Describe your working day.
    17. 8.17. Is your confidence in the ability of technical analysis to forecast future price moves strong enough to relieve you of stress?
    18. 8.18. Did the market have a strong hold on your life in the beginning of your career?
  13. 9. Robert R. Prechter Jr.
    1. 9.1. When did you first get interested in technical analysis?
    2. 9.2. Did a mentor play a role in your development as a technical analyst?
    3. 9.3. Did you learn the craft by studying the literature on your own, or by studying with a teacher?
    4. 9.4. Are there things you learned only after you started applying technical analysis to real markets, things you never saw in the literature?
    5. 9.5. Which mistake taught you the most?
    6. 9.6. How is your style of technical analysis distinct?
    7. 9.7. Is technical analysis better done working individually or in teams?
    8. 9.8. How much of your approach to analysis are you willing to share with others?
    9. 9.9. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    10. 9.10. Is technical analysis more effective when applied on its own or when combined with fundamental analysis?
    11. 9.11. How much of your technical analysis is intuitive?
    12. 9.12. Some technicians believe that structures such as the Elliott wave, Gann's natural order postulates, Fibonacci numbers, etc., underlie market action. What is your opinion?
    13. 9.13. Is your confidence in the ability of technical analysis to forecast future price moves strong enough to relieve you of stress?
  14. 10. Linda Bradford Raschke
    1. 10.1. What led to your interest in technical analysis?
    2. 10.2. Did you have a mentor?
    3. 10.3. Was experience your teacher because you could not rely on the information you found in the literature?
    4. 10.4. How is your style of technical analysis distinct?
    5. 10.5. How much of what you learn from others do you directly apply in your trading?
    6. 10.6. Is your analysis more effective when you're working by yourself or when you're working with others?
    7. 10.7. In what kind of market conditions do you make the most mistakes?
    8. 10.8. Which mistake has taught you the most?
    9. 10.9. How much of what you do are you willing to share with others?
    10. 10.10. If all patterns/indicators/strategies that you use are in the public domain, what is it about the way you use these tools that accounts for your superior returns?
    11. 10.11. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    12. 10.12. Is technical analysis more effective when used on its own or when combined with fundamental analysis?
    13. 10.13. What drives your innovative process?
    14. 10.14. Were there moments when you felt that relying on classical patterns and indicators was simply insufficient, and that developing new technical tools was necessary?
    15. 10.15. Are there things that you developed but never shared?
    16. 10.16. Describe your working day.
    17. 10.17. To what extent does your trading control your life?
  15. 11. Alan R. Shaw
    1. 11.1. What led to your interest in technical analysis?
    2. 11.2. How is your style of technical analysis distinct?
    3. 11.3. Is your approach to technical analysis both art and science?
    4. 11.4. How much of what you do are you willing to share with others?
    5. 11.5. If all patterns/indicators/strategies that you use are in the public domain, what is it about the way you use these tools that accounts for your superior success?
    6. 11.6. When you encounter a classical indicator that's no longer working, do you try to change your interpretation of it, or do you discard it and invent something new?
    7. 11.7. Describe what your typical working day was like before you retired.
  16. 12. Anthony W. Tabell
    1. 12.1. What led to your interest in technical analysis?
    2. 12.2. Are there things you learned only after you started applying technical analysis to real markets, things you never saw in the literature or heard from your father?
    3. 12.3. Has your practice of technical analysis changed significantly since the death of your father?
    4. 12.4. How is your style of technical analysis distinct?
    5. 12.5. Is your analysis more effective when you're working by yourself or when you're working with others?
    6. 12.6. In what kind of market conditions do you make the most mistakes?
    7. 12.7. If all patterns/indicators/strategies that you use are in the public domain, what is it about the way you use these tools that accounts for your superior returns?
    8. 12.8. Is technical analysis more effective when used on its own, or when combined with fundamental or other kinds of analysis?
    9. 12.9. How much of your technical analysis is intuitive?
    10. 12.10. Were there times when you felt that relying on classical patterns and indicators was insufficient and that developing new technical tools was necessary?
    11. 12.11. Is your confidence in the ability of technical analysis to forecast future price moves strong enough to relieve you of stress?
  17. 13. Stan Weinstein
    1. 13.1. What led to your interest in technical analysis?
    2. 13.2. Are there things you learned only after you started applying technical analysis to real markets, things you never saw in the literature?
    3. 13.3. Which mistake taught you the most?
    4. 13.4. How is your style of technical analysis distinct?
    5. 13.5. Is technical analysis more effective when practiced individually or in teams?
    6. 13.6. How do you deal with the problem of the tradeoff between early signal detection and sensitivity to random noise?
    7. 13.7. Is technical analysis more effective when used on its own or when combined with fundamental analysis?
    8. 13.8. How much of your technical analysis is intuitive?
    9. 13.9. What drives your innovative process?
    10. 13.10. To what extent do you share your inventions with others?
    11. 13.11. Why do you share your inventions with others rather than keeping the edge just for yourself?
    12. 13.12. Is your confidence in the ability of technical analysis to forecast future price moves strong enough to relieve you of stress?
    13. 13.13. Did you always have the balance in your life, or did you have to work at it?
  18. 14. Conviction: Countering the Skeptics and the Scoundrels
    1. 14.1. Have you always been convinced of the validity of technical analysis? Have you become more or less convinced since you first started?
    2. 14.2. Did the lack of credit many academics gave to technical analysis during the early days of your career ever discourage you or make you doubt the validity of technical analysis?
    3. 14.3. Has a big loss ever made you doubt the validity of technical analysis?
      1. 14.3.1. You doubted the validity of technical analysis?
    4. 14.4. Have you found that your experience with technical analysis contradicts statements made in books? And has that discouraged you?
    5. 14.5. Does the absence of hard-and-fast rules or proven theories in technical analysis ever bother you?
    6. 14.6. Do you believe that technical analysis works even when applied to data other than the market-action data—for example, the weather or river flow data?
    7. 14.7. What do you believe is the best proof of the validity of technical analysis?
  19. 15. The Evolution of Technical Analysis
    1. 15.1. How has the craft evolved since you first started this work?
    2. 15.2. As the field evolves, new indicators and patterns are being introduced. Do you try to stay on top by familiarizing yourself with the new inventions?
    3. 15.3. To what extent has the introduction of the variety of computer software aided the craft?
    4. 15.4. To what extent do you rely on computer-generated signals? And what are the advantages and disadvantages of doing so?
    5. 15.5. Would you recommend that people construct their own charts by hand? And should they do so throughout their careers?
  20. 16. Luck, Astrology, and Other Unsanctioned Signs
    1. 16.1. What is the role of luck in technical analysis?
      1. 16.1.1. You've mentioned how certain people go through periods of being tremendously precise [cf. Chapter 17]. How is that possible? Is that luck?
      2. 16.1.2. So these techniques work very well over certain short periods of time. What exactly makes them fail other times?
    2. 16.2. Do you think that the inclusion of astrology in technical analysis undermines the credibility of the craft?
    3. 16.3. Some prominent technicians believe that structures, such as the Elliott wave, Gann's natural order postulates, Fibonacci numbers, etc., are the laws that underlie market action. What is your opinion?
      1. 16.3.1. Do you believe that these structures underlie the market action, that they are the governing principles?
      2. 16.3.2. Are you convinced that these theories are the underlying laws of the market?
  21. 17. Creativity, Talent, and the Art of the Craft
    1. 17.1. What role does creativity play in technical analysis? Can this creativity be learned?
    2. 17.2. Is there such a thing as a talent for technical analysis? And can you define it?
      1. 17.2.1. Do people drawn to technical analysis tend to have a more developed analytical side or a stronger creative side?
    3. 17.3. What personality traits characterize a highly successful trader?
    4. 17.4. Can the absence of talent or favorable personality traits be compensated by hard work and dedication?
    5. 17.5. If technical analysis is partly art, then it's subject to many interpretations. Does that validate the idea that "technical analysis is what you want it to be"?
      1. 17.5.1. What do you mean by guessing?
  22. 18. The Challenge of Emotions
    1. 18.1. How did you feel when you first lost a lot of money? Did it become easier to lose as you became more experienced?
    2. 18.2. To what extent, if any, do your emotions interfere with your craft?
    3. 18.3. Is the ability to separate emotions from the work of technical analysis an inherent trait, or can it be learned?
      1. 18.3.1. Are there people who just cannot conquer their emotions and reverse their positions when the time comes, no matter how much advance planning they do?
  23. 19. The Path to Success
    1. 19.1. What kind of formal education is the best preparation for the profession of technical analysis?
      1. 19.1.1. What do you look for in people when hiring?
      2. 19.1.2. Does being aggressive and pushy help in this business?
      3. 19.1.3. Can formal education enhance the creativity required in the practice of technical analysis?
      4. 19.1.4. Are verbal skills and communication skills important to work on?
      5. 19.1.5. In terms of formal education, what would be the best subject to major in?
      6. 19.1.6. You mentioned the importance of a good teacher when you're studying technical analysis. When you were studying, did you have a teacher or a mentor?
    2. 19.2. Do you believe artificial intelligence will ever be sophisticated enough to replace a human technical analyst?
    3. 19.3. What advice would you give to students of technical analysis? What is the key to success?
  24. 20. Favorite Patterns and Indicators
    1. 20.1. Which technical indicators do you consider to be the most and the least reliable?
      1. 20.1.1. Are the indicative indicators generally more useful than the descriptive ones? Is there a particular indicative indicator that you like to use?
      2. 20.1.2. Are there indicators that are completely useless both from the descriptive and indicative standpoints?
      3. 20.1.3. Do you also look at classic continuation and reversal chart patterns, such as, for example, the head-and-shoulders pattern?
      4. 20.1.4. What do you think of the classic continuation and reversal patterns, such as, for example, the head-and-shoulders pattern?
    2. 20.2. How do you test patterns or indicators before you start using them with real money? Do you ask for other people's opinion when you're making such decisions?
      1. 20.2.1. How do you test some of the more readily quantifiable indicators?
    3. 20.3. Have you encountered patterns or indicators that generally work well but become misleading under certain market conditions?
      1. 20.3.1. Could you give me an example of a pattern or an indicator that is particularly sensitive to such changes in the environment?
    4. 20.4. Is the number of indicators you follow greater when the amount of money involved is larger?
  25. References
  26. About the Authors
  27. About Bloomberg