TECHNICAL PATTERNS VS. INDICATORS

A thought piece which may be in the category “What difference does it make?”, or maybe it does help explain some things.  First, I am going to expose my ignorance by saying that I do not make hedging decisions based on fundamentals because I can’t translate all the information that is circulating in a way that supports timely and consistent risk management decisions.  Don’t throw the red flag yet.  I am not talking about a whole marketing plan; I am only talking about “knowing with a high probability” when price risk is turning down, and therefore appropriate to contract local prices or put price protection in place.  By the same token I am not a chartist because I can’t interpret many of the chart patterns much more effectively or consistently than the fundamentals.  I do use charts to monitor what is happening to the quantitative indicators that I have researched, verified, and trust.  Since not everything in this paragraph seems to fit together, where are the missing pieces?

For those of you who have all of this worked out, stop laughing.  Some of us struggle with how complicated marketing decisions are, and how nearly impossible it seems to try to learn to do marketing any different than the traditional way it has been taught and practiced for 50 years.  For me, the game changer was many years ago when I discovered, out of necessity, that there were a few quantitative (rule based) methods that would make a big difference and bypass the attempts to interpret either the fundamentals or technical chart patterns. But I must admit I didn’t stop to ask why was the new approach so much easier.  In fact, it was because I was working with one variable (price) and one indicator (say MAs for example) and not trying to digest hundreds (maybe thousands of pieces of information) or a large number of chart patterns to reach a decision.  I really do work best on a KISS approach to problem solving, with the option to enhance the process by adding one piece at a time.  Most of us learn and retain much better in increments than getting the whole load dumped on us at once.

Jump forward because my learning path is not the point.  I recently stumbled on two articles: 1) Introduction to Technical Analysis Price Patterns, and 2) 10 Trading Indicators Every Trader Should Know.  Bingo!  Be honest.  How many of you distinguished between the use of “patterns” and “indicators” above?  The first article focuses on pennants, flags, wedges, cup & handles, head & shoulders, and double tops/bottoms.  The second focuses on moving averages, exponential moving averages, stochastic oscillator, moving average convergence and divergence, Bollinger bands, relative strength index, Fibonacci retracements, Ichimoku cloud, standard deviation, and average direction index.  Neither of the lists are exhaustive, but it sets the stage.  All of the patterns listed require subjective judgement to identify and interpret what is happening, and most have very specific applications.   In contrast, the indicators each stand alone, are constantly monitoring price/market behavior, and are quantitative so they can be programmed and back tested for performance verification.

I believe it is fair to use “technicals” to talk about either list, but assuming the term is talking about the same tool that does the same things is as bogus as saying fundamentals and technicals are all market indicators so one is the same as the other.  The only thing they have in common is that they all are attempts to better understand what the market is doing or is going to do in the future.  But getting drawn into believing they all do the same thing, or that you have to understand all at once, is like saying a planter and a combine are both farm equipment so it doesn’t matter which one you get out to do today’s task.

Does terminology matter?  No, but understanding what the terminology really means, probably does.  Had I really grasped much earlier what these two articles really brought to light, I would have been much more effective at explaining why I shifted from fundamental analysis to technical analysis, and why it has been much more effective for me.  The path was simple; choose one indicator at a time, convert it to computer language, and let the computer search thousands of set ups in a few seconds to tell which had the highest probability of achieving the goal(s) of the marketing plan.

Give it some thought.  I have put the article together to debunk the myth that marketing is so difficult that it probably is not worth trying to learn about new tools to put in the toolbox.  The discussion is not to encourage anyone to change their marketing plan.  But, recognizing that fundamentals and technical patterns are very subjective and very different from quantitative technical indicators will go a long way to help some folks who are looking for new tools, and to better understand which tools are easiest to use.

Posted by Keith D. Rogers 18 June 2021