Technical Analysis

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  • 1.  Using volume and conviction in trend analysis

    Posted 05-02-2023 12:03

    In the most recent AAII Journal issue, Raymond Rondeau explains the relationship between volume, liquidity and conviction in order to effectively evaluate a price move's relevancy, trend strength and probable direction.

    His discussion is centered around the idea that volume-based methods are not as accurate as using conviction because they are not adjusted for modern-day investors. He notes that conviction allows for better relative liquidity comparisons between securities. I'm curious to hear other people's thoughts and suggestions on using volume and conviction to predict price trends and direction.

    Thanks in advance!

    Jenna Brashear
    AAII Community Manager
    Chicago, IL

  • 2.  RE: Using volume and conviction in trend analysis

    Posted 05-03-2023 16:21

    Hi ,

       Just multiplying c losing price times volume to get dollar volume does not seem that useful. However , taking the difference between

    c losing price and opening price and multiplying with volume would give you some indication of accumulation or distribution.

    What are the precise definitions of

     Optimized Balance Conviction (OBC) and Kinetic Conviction (KC) ?


    Jim McClean

  • 3.  RE: Using volume and conviction in trend analysis

    Posted 05-04-2023 11:44

    James, thank you for your comment. It makes sense to me.

    In the spirit of a good rugby strategy, I will pile on your comment to try to create a scoring scum.

    1. Multiplying price (value) by volume (buy/sell) to get "dollar volume" makes no sense to me either. Volume by definition includes BOTH buys and sells.

    2. Using the average price does "smooth" out price fluctuations during the day, but it also introduces the issue of "kurtosis," I. e., how "skewed" the data is. The distribution could be skewed toward the mean/center (called "platykurtic") or it could be skewed toward the tails of the distribution (called "leptokurtic") which produces a "flatter" distribution. Flatter distributions have "heavier" tails (a higher probability of extreme outlier values). "outline" values tend to have a higher impact on the overall average due to the way averages are calculated (based on distance from the mean, squared).

    3. Then there is the "fuzzy" concept of using color "hues" to denote shades of differences between the impact price movements. Different printers and different monitors produce very different color tones. Laser printed pages do, too.

    The Lesson of the Day:  There is a very large difference between calling something an "improvement" when it is  a mere "change."

    Dollar volume looks more like a mere change to me. I don't see an increase in information content.


  • 4.  RE: Using volume and conviction in trend analysis

    Posted 05-07-2023 16:51

    Ok, Jenna. You Tom Sawyered me again. 

    The phrase  - the relationship between volume, liquidity and conviction  - piqued my curiosity

    I had already been working to raise my proficiency level in technical analysis. I was still in an agnostic stage about some of the "promises" TA articles make. But it's what they leave out that troubles me the most.
    First, I read Rondau's article. That just aggravated my itch. The skepticism about TA being nothing but a Rorschach Test for technically-oriented Whiz Kids did not recede.

    Next, I did what I always do when I want to know something about investing -- I search the AAII database. That little "spyglass" takes me on some really interesting adventures. I feel like I am following "Alice Through the Looking Glass."  Many adventures await me, and I always encounter some "strange" concepts along the trip down the rabbit holes that populate the path to acquiring knowledge in the "professional" investment community.

    This time I found 93 -- that's no transposition - it's ninety-three - articles on technical analysis in the AAII database going back to 1990. 

    (Note to AAAII members: if you don't use the article search function, you are not getting anywhere near the full value of your AAII membership.)  

    So I do what I always do next. I imported the list into a spreadsheet and started sorting away. Every time I do this, it scared me how much larger the upper left quadrant called "know what you don't know" gets. I call this the McNamara Curse.

    After organizing the articles by title, date, and author, I checked to see how many I had already read. 12. Yep, my knowledge gap is about 87%. Sigh. this happens every time.

    Next, I read every article by Rondeau. There were 5. So I read all 5. That generated the prior comment (somewhere above or below).

    I noticed that Wayne had some articles on the list, too. I counted 32. Oh! Brother. Thorp needs a vacation or at least a day off. I put this task in the "pending" pile. 

    Rondeau led me to more information on the three technical indicators in the article that caused all this.

    Before you can say "Bob's your uncle!" I was neck-deep in the TA swamp. (I got sidetracked trying to find out the philology behind "Bob's your uncle!" Very interesting. Very Victorian. )

    To make a long already boring story shorter, I have read 14 articles on TA.

    Like The Queen of Hearts in "Alice in Wonderland" said, 

    "My dear, here we must run as fast as we can, just to stay in place.
    And if you wish to go anywhere you must run twice as fast as that."