Making money with technical trading

Being a mathematician, I had a natural interest in technical trading in the financial market using the various forms of signals on charts for stocks and commodities. The signals give indications of when buyers are over whelming sellers and vice versa. The trader can make money rapidly, according to the theory, if he/she reads the signs in the way that is put forward. The rhetoric seems to be plausible from a mathematical point of view.

However, the proponents of this strategy do not address some fundamental issues. They claim the strategy will make money. The first question is who loses that money? The brokers obtain some of the money for providing services. So if an amateur trader acquires say $10,000 over a year, who loses it? Insiders and professional traders using high speed algorithms are in a much better position to make money than an amateur. Of course this discrepancy could be partly explained in the past by the creation by governments of money. However, those days are almost certainly over.

Some traders will doubtless continue to make money by wise selection of stocks, bonds or currencies or by having advantages due to insider knowledge and fast trading software. They will continue to take the cream off the top. The amateur trader using pricing signals on charts will probably still have an advantage over those who invest their savings in managed funds. However, as economic growth transitions to contraction, the useful pricing signals will become scarcer and more signals will be fallacious. Ironically, the amateur trader may well make money as it loses value so their real wealth does not improve. So technical trading is a fascinating game in which there will be more losers than winners as the generation of real wealth in the community dies down.

The philosophy underpinning technical trading is that pricing data provides insight into what buyers and sellers will be doing. The data indicates only what they have done up to the present.Those who believe that this data provides a useful forecast should think about forecasting the toss of a coin. There is no possible way of knowing whether it will end up as a head or tail. This inherent uncertainty about forecasting needs to be borne in mind when vested interests make claims about forecasting.

The common view that it is possible to make money will slowly die as the ability to create it out of thin air declines. Society will have to relearn the value of earning money by making a useful contribution to operations.