The essence and correct usage of technical indicator analysis

Technical analysis of indicators does not predict the market by nature. It belongs to the category of statistics and provides only a probabilistic analysis. That is to say, technical indicators can only give us buy and sell signals, not tell us what must happen in the market. This is a simple introduction to technical analysis. Technical indicators, viewed from a broad perspective, are nothing more than two completely opposite ideas: one is the trend idea, and the other is the finishing idea. The former buys because it goes up, and the latter buys because it goes down. The former uses the "Directional Movement Index" headed by the moving average system, and the latter uses the "overbought and oversold" indicator headed by the KDJ indicator. The key to using technical indicators is to find the technical indicators suitable for the analytical scale in a particular market, or to find the market scale suitable for a certain indicator.

In the weekly or daily line of the Shanghai Composite Index, we can find obvious trend characteristics, but in the monthly line we can see obvious cyclical consolidation characteristics; and in the monthly line of London copper, we can find obvious trend characteristics, but in the annual line It shows cyclical consolidation characteristics. Any market will show two characteristics of trend and consolidation on different scales, and the market itself is the unity of these two contradictions. Technical analysis is actually that simple. On the market scale with obvious trend characteristics, the moving average system is used to grasp the trend market; on the market scale with obvious consolidation characteristics, the KDJ-like indicators are used for cycle analysis and stage analysis. The obvious trend characteristics here are not absolute. At different stages, the market will also exhibit consolidation characteristics, but the trend characteristics are much higher than the consolidation characteristics.

The simple meaning of technical analysis is: choose the scale and bear the stage. Choose the scale with obvious characteristics and bear the cost of the opposite characteristics in a small range (stage). This is also the reason why technical analysis necessarily has "defects" or costs, which cannot be avoided. Technical analysis is actually not mysterious. It is so simple that two lines and up to three lines can be used to send clear buy and sell signals. It is so simple that only two indicators can be used to analyze the market. The most classic two technical indicator systems can be found in any stock software. From the perspective of Anzo foreign exchange, the moving average system has extremely important use value in the analysis of the medium-term market of the Chinese stock market. It is not impossible to change the trend characteristics of the Shanghai Composite Index weekly or daily line, but it will never change easily for a long time. Since the truth is at the bottom of the computer screen, why are many small and medium-sized investors struggling to achieve profits, or even serious losses? What is the problem? I hope you will seriously consider a question: Can anyone use the EXPMA indicator in the Shanghai Composite Index daily line as their only operating system and stick to it for several years?

It has been said from the beginning that technical indicators belong to the category of statistics and only give us probabilistic analysis. So technical indicators cannot tell us how the market will be. This means that any technical indicator has an inherent "defect", that is, cost. The problem may lie here: investors cannot tolerate this defect in technical indicators and always try to pursue perfection. Perhaps it is in the process of pursuing perfection that they are getting farther and farther from success. They always think of "better", "better", "more perfect". When a investor sells a stock through a technical indicator, he is already 20% away from the highest point, so he starts to adjust the indicator parameters; when he encounters a false signal, he continues to modify the parameters. They don't understand that adjusting the sensitivity often has gains and losses. Even some investors completely deny the value of this technical indicator after experiencing several false signals, so they give up completely and look for a more perfect indicator.

Perhaps human nature is the pursuit of perfection. However, experts in technical analysis have long stopped struggling in these two vicious circles, and they have begun to pursue perfection in other ways, such as finding more sampling features to expand the analysis of technical indicators. Some add volume, some add fundamental information, and even some experts start grafting different technical indicators to achieve higher accuracy. Fortunately, in modern society, with the highly developed technology and the entry of computers into the family, these tasks seem to become simple, so there are many strange indicators, many of which I have never seen. I do not deny that high-sampling technical indicators can improve the accuracy of analysis, but the more accurate the indicators, the worse the stability. As time goes by and the market changes slightly, such technical indicators may be eliminated by the market. Perhaps ambiguity and imperfection last longer than perfection. Einstein once said that there must be uncertainty in a formula that can predict the future. Wave theory and Gann theory, two methods of unorthodox technical analysis, are indeed formulas for predicting the future, but they have persisted in the market precisely because of the uncertainty. Simple is beautiful, simple is stable. The hydrogen atom is simple but stable, and the heavier the nucleus, the faster it decays.

Perhaps before investing in stocks, it is beneficial to study philosophy and physics. Masters in various industries are busy finding commonalities in all things, and go to great lengths to ignore differences. This is a way of philosophical thinking, which is to summarize complex things into simple things. Biologists trace the countless biological evolutions in the world to the origin of single-celled organisms, and physicist Albert Einstein dedicated himself to the study of the "grand unification" theory in his later years after discovering the theory of relativity. Their way of thinking is to find the essence of all phenomena, while we sometimes embroider and add details to make simple things complicated. Maybe our world has developed from two opposite forces, forming a colorful world. Regarding this point, if the reader is not interested, you can skip it.

Here I would like to say a few words to the experts in the research and development of technical indicators. The grafting of the moving average system and KDJ indicators at the same scale cannot cultivate invincible technical indicators, but will only make people live in constant contradictions. The more indicators you analyze, the more opportunities for contradictions. When you get a advantage, you will inevitably absorb a disadvantage. It's ridiculous to think about it. Technical analysts can spend their whole lives trying to improve the accuracy of technical indicators, but they refuse to accept small costs. This is like an aunt selling sorbets. Instead of focusing on how to increase sales to get more profits, she focuses all her energy on where the wholesale price of sorbets is lower, and even fantasizes that the wholesale price of sorbets can be free. This way, there is really no cost, and the sales revenue equals the profit.

Finally, a metaphor that I think is very appropriate. The market is like 5 playing cards, of which 4 spades and 1 heart. There are two ways to gamble: one is to draw the hearts for 10 yuan, and if you draw the spades for 1 yuan; the other is to draw the hearts for 10 yuan, and if you draw the spades for 1 yuan. Changes in the market are nothing more than changes in the ratio of black and red and the odds. Of course, before each gamble, you can choose any way to gamble. Technical analysis can only tell us which way to gamble, not how to draw the hearts for 10 yuan the first time, or how to alternate between two different gambling methods to maximize profits. Those who are interested can try this game and see which one makes more money by exclusively using the first way of gambling, the second way of gambling, or alternating. I don't think anyone would be stupid enough to try this boring game, but I did try it many times in boredom. Sadly, most people in the stock market use the second way of gambling. People who use alternate ways of gambling may lose more due to short-term experience.

Trading is not an exact science, but a mindset exercise, a gambling technique. Successful investors find a trace of inevitability in a market that is completely non-inevitable to achieve ultimate profit. Often this trace of inevitability does not come from the market, but from their own strategy. You may find this poker metaphor ridiculous, but if you exchange 1 yuan for 10,000 yuan to play this game, see if you can lose 60,000 yuan three or even six times in a row and remain indifferent. This is the exercise of mentality. Strategy is very simple, and the key is mentality. You know, when we play games, we know the fixed probability; but the market can only give us a rough probability, which cannot be so clear.