| The title of this article may be somewhat strong but | | | | clear and concise. |
| it is important for Forex traders to know if their | | | | 2. An objective system can look at statistical data |
| technical analysis is subjective or objective. David | | | | from the past and help in decision making for the |
| Aronson, author of, Evidence-Based Technical | | | | future. |
| Analysis says that there are two kinds of technical | | | | 3. The results of an objective trading system can be |
| analysis, subjective and objective. Here is what he | | | | recorded much like the batting averages of baseball |
| says about both: | | | | players so that the trader knows exactly what to |
| "Objective TA methods are well-defined repeatable | | | | expect. |
| procedures that issue unambiguous signals. This allows | | | | Regardless of what we think, technical analysis may |
| them to be implemented as computerized algorithms | | | | or may not lead to solid trading results. Price spikes |
| and back-tested on historical data. | | | | created by noise from smallish price positions can |
| Subjective TA methods are not well-defined analysis | | | | move markets and create uncertainty thereby |
| procedures. Because of their vagueness, an analysts | | | | rendering many day trading or scalping systems, |
| private interpretations are required. This thwarts | | | | including automated trading systems useless. Richard |
| computerization, back testing, and objective | | | | Olsen, Ltd has written about this as have I. |
| performance." | | | | Bernard Mandelbrot, Professor Emeritus of |
| In other words, anytime a trade signal is | | | | Mathematical Sciences at Yale University, the inventor |
| interpretative or leaves in question the direction of | | | | of fractal geometry, believes that technical analysis is |
| the trade, the exit or the entry; the technical analysis | | | | financial astrology. |
| is subjective and in my words, worthless. | | | | He may be right. If so and if there is money to be |
| Many traders will argue that this is not true but take | | | | made in the Forex market, how would we trade |
| for example Elliot Wave Theory. This has been | | | | successfully? |
| around for a long time and makes claims that if true | | | | There are several things the trader must do: |
| would be the perfect way to trade. Elliot Wave | | | | 1. Understand price theory and how it affects the |
| Theorists for example, don't feel using indicators are | | | | trading method that they employ. This is true of |
| valid methods of trading because they don't | | | | scalpers, day traders, short term traders and long |
| determine the direction of a trend and how long it will | | | | term traders. If you misunderstand price theory in |
| last. | | | | conjunction with your trading method you will not be |
| Assuming they are correct, the Elliot Wave Theory | | | | as profitable as if you did. |
| can be refuted by asking if it is formulated and | | | | 2. Understand how and who trades in the currency |
| computerized in a way that the results can be | | | | market and how size of currency positions can |
| tested. So far, to my knowledge it hasn't. Indicators | | | | affect the currency pair you are trading in. |
| on the other hand can be so formulated and | | | | 3. Understand when the market has the greatest |
| therefore the results do not have to be | | | | chance to be vulnerable. It is at these moments |
| interpretative. | | | | when you must be ready to pounce. |
| Elliot Wave Theory along with other theories of | | | | 4. In so much as technical analysis may be a reliable |
| trading are subjective and require interpretation. | | | | source of trading, incorporate a system that is |
| Aronson goes on to say that, "... subjective TA | | | | algorithmic and provides precise entry and exits. A |
| cannot be called wrong, because to call it wrong | | | | system that can be analyzed statically to give you |
| implies it has been tested and contradicted by | | | | information about future trading and the ability to |
| objective evidence. Subjective TA is immune to | | | | record your results. |
| empirical challenge because it is untestable. Thus it is | | | | Technical analysis maybe financial astrology however |
| worse than wrong; it is meaningless." | | | | some of the hocus pocus can be removed by |
| The point here is not to pummel EWT but for | | | | making certain that the TA you are using is objective |
| traders to analyze their individual trading systems as | | | | and not subjective. If it is, then use the data that |
| to whether they are objective or subjective. | | | | can be pulled from it to help you make better trading |
| The importance of an objective trading system are | | | | decisions in the future. Just remember to use your |
| threefold: | | | | mind and look for those moments where the market |
| 1. Signals that come from an algorithmic formula are | | | | is vulnerable and then pounce. |