Technical Analysis in the Age of Algorithms - Both retail and professional traders have relied on Technical Analysis for some time to gain insight into market behavior. But can technical analysis still be as useful as it used to be, now that trading decisions are increasingly being made by computers? After all, it still reflects human behavior patterns that can be seen in every trade. But what added value does this offer the trader in the face of algorithmic trading? We get to the bottom of this question and let some experts have their say.
According to Daniel Gramza, longtime technical analyst and head of Gramza Capital Management, technical analysis is as relevant today as it has ever been. He even claims that its relevance may have increased. "As long as people are involved in the decision-making process, they will leave their mark. Just because an algorithm triggers a signal and possibly acts accordingly does not change the underlying premise that it can definitely manage to master technical analysis. And that without having to invest large amounts of capital.
John Netto, CEO of "One Shot One Kill Trading" and popular stock market reporter, believes that private investors should perhaps adopt technical analysis even more than in the past. According to him, "the secret of successful traders - whether professional or not - lies in their own inner drive to become better at their business. Keeping up with the times and keeping abreast of the latest developments in technical analysis plays a key role. Technical analysis can help traders decipher market movements."
Interest of Algo Users
A positive development for Technical Analysis is the increased interest from sophisticated trading companies seeking to complement their mathematical models. In trading, one trader only has a lead over another until the masses catch up. And of course this is no different with algorithmic trading. Here, too, more and more stock market players are pushing their way. And because many companies try the same thing, traders have to face the challenge of being even better. In the search for opportunities to gain an edge in the world of algorithmic trading, technical analysis offers itself as a productive source, since it has traditionally not played a major role in algorithms. Worldwide, the application of technical trading strategies is often limited to a few basic techniques. But it is precisely this that can give rise to a possibility from which others in the industry currently do not capitalise.
Ben Van Vliet, lecturer and deputy head of the Master of Science program in Finance at the Illinois Institute of Technology in Chicago, has made a name for himself by highlighting the challenges ahead in the development of algorithmic trading. He believes that tomorrow's leaders are those who proactively and systematically develop and refine new strategies. "Whether technical analysis is part of a profitable trading strategy is a different matter. But for me, the companies or traders who are offensively looking for ways to gain a competitive edge - and technical analysis can be part of that - are the ones who are ahead of the pack in the race for the survival of the most capable". Daniel Gramza has experienced this effort to improve models through new developments at first hand. He notes that the number of demanding participants in his courses has increased. "Worldwide, I see more and more institutional investors and proprietary trading firms involved in algorithmic trading broadening their view of markets and their trading to discover their interest in technical analysis. The tools used in Technical Analysis are gradually being used by these organizations in a way that was not the case in the past.
Special considerations in the age of algorithms
So if the patterns created by algorithms are the same as those of a human trader, are there any differences in the age of the algorithm? John Netto claims that there is at least one important difference: "Today we are seeing the market moving at an incredibly fast pace. And when trading decisions are made in milliseconds, technical indicators have to keep up. I have reduced the time frames I look at and invested in technology to make sure that my charts and studies are made on larger, higher-capacity lines."
No Holy Grail
The experts agree: For retail and professional traders alike, one problem could be that they are looking for a "Holy Grail" in technical analysis. They warn against asking technical indicators to do something that they simply can't do. Gramza has compiled its own blacklist of the most common errors. This allows him to see immediately why a particular method of technical analysis does not meet expectations. "Typically, this is because the trader has not taken the time or understanding to critically review the particular market characteristics, the strengths and weaknesses of the trading strategy, the setting of specific targets and stops, and so on.
The second problem is to know when to trade and when not to trade. Some investors and traders do not consider this aspect at all.
Technical indicators may have value, but it is essential to ask questions that go beyond the typical need for information about returns. Potentially profitable trading strategies are often overlooked because traders simply fail to ask the right questions after analyzing signals. Thus, while technical analysis focuses on human behavior and perception with respect to a particular
market, this behavioural "chronicle" is not at all affected by algorithmic trading. This is good news for all traders because they can continue to rely on technical analysis when looking for signs of market movement.
