Editing 2101: Technical Analysis

Jump to: navigation, search

Warning: You are not logged in. Your IP address will be publicly visible if you make any edits. If you log in or create an account, your edits will be attributed to your username, along with other benefits.

The edit can be undone. Please check the comparison below to verify that this is what you want to do, and then save the changes below to finish undoing the edit.
Latest revision Your text
Line 8: Line 8:
  
 
==Explanation==
 
==Explanation==
There are two recognized methods to attempt to predict the stock market, each with its own pros and cons:
+
{{incomplete| Comic is still undergoing TECHNICAL ANALYSIS (this is just the prologue). Do NOT delete this tag too soon.}}
  
*{{w|Technical analysis}} is more appropriate for traders seeking to benefit off short-term fluctuations in stock prices, by attempting to look for trends, momentum, patterns etc. in the stock prices.
+
{{w|Technical analysis}} is a field which attempts to study stock markets, cryptocurrency markets, etc. statistically (without regard to the fundamental value of the assets), seeking to profit off the patterns that are found there.
*{{w|Fundamental analysis}} is more appropriate for investors seeking to benefit off long-term fluctuations in stock prices, by attempting to guess future earnings based on some fundamental factor about the stock. Investors can choose to look for good Price/Earnings ratio or other indications that a stock may be a solid investment.
 
  
[http://www.investopedia.com/terms/r/randomwalktheory.asp Random Walk theory] suggests that neither of these methods are particularly useful at predicting the future of the stock market (see link for a funny story about dart throwing monkeys).
+
The theoretical value of a stock is the sum of all its future earnings, with earnings in the future discounted appropriately to account for the {{w|time value of money}}. Because these earnings are never fully predictable, traders may have different ideas about the true value of a stock, and buy the stock if they believe the currently offered prices are particularly low, or sell it when the prices are high.
 
 
The theoretical value of a stock is its [https://en.wikipedia.org/wiki/Net_present_value net present value] which is the sum of all its future earnings, with earnings in the future discounted appropriately to account for the {{w|time value of money}}. Because these earnings are never fully predictable, traders may have different ideas about the true value of a stock, and buy the stock if they believe the currently offered prices are particularly low, or sell it when the prices are high.
 
  
 
Technical analysis, however, does not even attempt to understand the earnings of the stock, instead focusing on the shapes and patterns that result from traders making their moves. While there is a human behavioral component to stock trading, it is not clear that one can extract much information from the shapes of stock charts. To the extent it does work, a substantial part of its success may be simply an artifact of the herd behavior of traders who engage in technical analysis, a zero-sum game.
 
Technical analysis, however, does not even attempt to understand the earnings of the stock, instead focusing on the shapes and patterns that result from traders making their moves. While there is a human behavioral component to stock trading, it is not clear that one can extract much information from the shapes of stock charts. To the extent it does work, a substantial part of its success may be simply an artifact of the herd behavior of traders who engage in technical analysis, a zero-sum game.
  
The comic displays a {{w|Candlestick chart|stock price chart}}, annotated with labels which purport to be technical analysis. These labels are nonsense from the perspective of technical analysis, but do accurately describe the graph itself: "{{w|allegro}}" (a musical term used to set the tempo at the beginning of a score), "{{w|prologue}}" (an introductory section of a play, book, or similar), "{{w|lumbar}} support" (the thing in a chair shaped to better support your back), "bathtub" (possibly a reference to the so-called "{{w|Bathtub curve}}"), "{{w|uptalk}}" (a speech pattern). One label celebrates that "these two points define a line! Promising signal." (In geometry, any two points define a line.)
+
The comic displays a {{w|Candlestick chart|stock price chart}}, annotated with labels which purport to be technical analysis. These labels are nonsense from the perspective of technical analysis, but do accurately describe the graph itself: "{{w|allegro}}" (a musical term used to set the tempo at the beginning of a score), "{{w|prologue}}" (an introductory section of a play, book, or similar), "{{w|lumbar}} support" (the thing in a chair shaped to better support your back), "bathtub" (possibly a reference to the so-called "{{w|Bathtub curve}}"), "{{w|uptalk}}" (a speech pattern). One label celebrates that "these two points define a line! Promising signal." (In Euclidian geometry, any two points define a line.)
 
 
The shape of the chart is similar to the exponential behavior of cryptocurrencies when they are successful, where price (positional height on the chart) roughly increases while volatility (height of the bars or candles themselves, and of the peaks and troughs, on the chart) does the same.  Technical analysis used to be an esoteric domain held by well-paid stock analysts, but as cryptocurrency has spread and taken down the many barriers to engaging in investment trading, people from all walks of life have begun staring at charts like this.
 
  
 
{| class="wikitable"
 
{| class="wikitable"
 
|+Graph labels and possible meanings
 
|+Graph labels and possible meanings
 
|-
 
|-
|{{w|Allegro_(music)|Allegro}}
+
|Allegro
|Tempo notation in music: played quickly and brightly (translation from Italian: cheerful, lively) - a series of very small changes in this region of the graph might suggest notes played quickly
+
|Tempo notation in music: played quickly and brightly - a series of very small changes in this region of the graph might suggest notes played quickly
 
|-
 
|-
 
|Prologue
 
|Prologue
Line 39: Line 34:
 
|-
 
|-
 
|Spline
 
|Spline
|A {{w|Spline (mathematics)|spline}} is a mathematical means of generating a smooth curve, referring to the smoothed curve shown here
+
|A spline is a mathematical means of generating a smooth curve, referring to the smoothed curve shown here
 
|-
 
|-
|{{w|Lumbar}} Support
+
|Lumbar Support
 
|A cushion or other device that provides support to the lower part of the ''spine'', a play on the preceding ''spline''
 
|A cushion or other device that provides support to the lower part of the ''spine'', a play on the preceding ''spline''
 
|-
 
|-
Line 54: Line 49:
 
|-
 
|-
 
|Declination
 
|Declination
|A term which sounds similar to decline, but actually refers to the angular distance of a point from one of the poles. The declination of magnetic north is used to correct the difference between true and magnetic north.
+
|Another term for a downward trend
 
|-
 
|-
 
|Inflection
 
|Inflection
|A point at which the slope of a graph changes from an increasing slope (getting steeper) to a decreasing slope (getting less steep).
+
|A point at which the slope of a graph changes
 
|-
 
|-
 
|Uptalk
 
|Uptalk
Line 63: Line 58:
 
|-
 
|-
 
|Bathtub
 
|Bathtub
|possibly a reference to the so-called "{{w|Bathtub curve}}", also, the shape is similar to that of a bathtub, and is drawn containing water.
+
|possibly a reference to the so-called "{{w|Bathtub curve}}"
 
|-
 
|-
 
|These two points define a line! Promising signal.
 
|These two points define a line! Promising signal.
|In geometry, any two points define a line; also looks somewhat like a communication line between two towers.  It is tempting when looking at market charts to draw imaginary lines that connect the extrema and hope it means something about the future. The drawn line in this case also just so happens to ignore the many periods of decline marked under "Declination" -- in this case it did eventually recover, but later labels (such as "likely to continue forever" at the end) suggest that this is more likely a case where blind optimism just so happens to have been right for those two particular points (as opposed to the many more possible pairs of points where the line wouldn't be so positive).  
+
|In Euclidian geometry, any two points define a line; also looks somewhat like a communication line between two towers.  It is tempting when looking at market charts to draw imaginary lines that connect the extrema and hope it means something about the future. The drawn line in this case also just so happens to ignore the many periods of decline marked under "Declination" -- in this case it did eventually recover, but later labels (such as "likely to continue forever" at the end) suggest that this is more likely a case where blind optimism just so happens to have been right for those two particular points (as opposed to the many more possible pairs of points where the line wouldn't be so positive).  
 
|-
 
|-
 
|Yikes
 
|Yikes
|This section of the chart refers to the actual use of a candlestick chart, which is to document the difference between the opening and closing value of a stock. A long red bar shows that a stock closed at a much lower value than it opened at, which would be disastrous for someone trading that stock.
+
|
 
|-
 
|-
 
|Wrong!
 
|Wrong!
 
|The circled pair of bars are the only pair in the whole graph where two red bars (negative growth) that large are next to each other -- larger red bars exist, but not next to another one of similar magnitude. Labeling it "wrong" suggests the analyst is choosing to ignore reality by throwing out actual past data rather than revise the theory being held.
 
|The circled pair of bars are the only pair in the whole graph where two red bars (negative growth) that large are next to each other -- larger red bars exist, but not next to another one of similar magnitude. Labeling it "wrong" suggests the analyst is choosing to ignore reality by throwing out actual past data rather than revise the theory being held.
 
|-
 
|-
|If I add some lines here I can convince myself I'm doing something more than just seeing patterns in the graph of a random walk
+
|Slope
|A {{w|random walk}} is a mathematical object that describes a path that consists of a succession of random steps. Randall is trying to convince himself that the patterns in the stock chart are more meaningful than just random data. The {{w|Random walk hypothesis|random walk hypothesis}} is a financial theory that states that stock prices evolve according to a random walk, thus short-term price changes are random and cannot be predicted from past history.
+
|
|-
 
|Slope!
 
|The {{w|slope}} of a graph is the ratio of the "vertical change" to the "horizontal change". A measure of slope on a financial chart can be used to predict possible specific returns or losses, or to analyze those from the past, but Randall simply prints the word in his chart annotation, with an exclamation point possibly indicating how exciting its value is, rather than labeling the actual numeric slope.  This could also be a play on a second meaning of slope, meaning a rising or falling surface in general.
 
 
|-
 
|-
 
|Could be an omen
 
|Could be an omen
|This again makes reference to the financial meaning of the candlestick chart. The top of the small grey tick represents the highest value that the stock sold at over that day. The joke is that even though the stock did not grow appreciably, and actually sold at some point in the day for much lower, that it "could be an omen" that the value was rising.
+
|
 
|-
 
|-
 
|Red + Green = Christmas
 
|Red + Green = Christmas
|Red and green are traditional colors for the {{w|Christmas}} holiday in the U.S.
+
|Red and Green are traditional Colors for the Christmas holiday in the U.S.
 
|-
 
|-
 
|Likely to continue forever
 
|Likely to continue forever
|This is a mistaken opinion often held by buyers in a rising market. It's been rising so much, surely it's the best time to buy!  We could make millions!  Such times are generally followed by a sharp downturn resulting in significant losses, as can be seen historically farther back on the chart.  Cryptocurrency communities have significant members who call themselves "hodlers" -- these people always trust that the price will eventually go up even higher, because it has recovered so many times in the past.
+
|This is the opinion held by everyone who buys at an all time high. It's been rising so much, surely it's the best time to buy!  We could make millions!  Such times are generally followed by a sharp downturn resulting in significant losses, as can be seen historically farther back on the chart.  Cryptocurrency communities have significant members who call themselves "hodlers" -- these people always trust that the price will eventually go up even higher, because it has recovered so many times in the past.
 
|}
 
|}
  
The title text is a quote from {{w|James Tobin}} (from his 1984 paper [https://economicsociologydotorg.files.wordpress.com/2014/12/tobin-on-the-efficiency-of-the-financial-system.pdf ''On the efficiency of the financial system'']) that raises a question of very talented people building systems to make themselves a lot of money without actually accomplishing anything worth money. The quote was about the stock market and high speed traders in particular. It comments on the 'financialization' of the economy, where activities like speculation and abstracted financial products have become an increasingly large part of the economy, as opposed to investment in productive industry.
+
The mouseover text is a quote from {{w|James Tobin}} (from his 1984 paper [https://economicsociologydotorg.files.wordpress.com/2014/12/tobin-on-the-efficiency-of-the-financial-system.pdf ''On the efficiency of the financial system'']) that raises a question of very talented people building systems to make themselves a lot of money without actually accomplishing anything worth money. The quote was about the stock market and high speed traders in particular. It comments on the 'financialization' of the economy, where activities like speculation and abstracted financial products have become an increasingly large part of the economy, as opposed to investment in productive industry.
  
 
Interestingly, this comic appeared the day after [https://www.oxfamamerica.org/explore/stories/billionaire-wealth-grows-by-25-billion-a-day-while-poorest-wealth-falls/ Oxfam] reported that the world's 2,200 billionaires had added 12% to their wealth in 2018, while the 3.8 billion people comprising the poorest half of the world's population had lost 11%. Perhaps this prompted what appears to be Randall's jab at those whose business is merely making money.
 
Interestingly, this comic appeared the day after [https://www.oxfamamerica.org/explore/stories/billionaire-wealth-grows-by-25-billion-a-day-while-poorest-wealth-falls/ Oxfam] reported that the world's 2,200 billionaires had added 12% to their wealth in 2018, while the 3.8 billion people comprising the poorest half of the world's population had lost 11%. Perhaps this prompted what appears to be Randall's jab at those whose business is merely making money.

Please note that all contributions to explain xkcd may be edited, altered, or removed by other contributors. If you do not want your writing to be edited mercilessly, then do not submit it here.
You are also promising us that you wrote this yourself, or copied it from a public domain or similar free resource (see explain xkcd:Copyrights for details). Do not submit copyrighted work without permission!

To protect the wiki against automated edit spam, we kindly ask you to solve the following CAPTCHA:

Cancel | Editing help (opens in new window)