The Research Hub: "Technical Levels"

The absurdity of thinking there are rules

Several people messaged me asking for me to explain this tweet further and I think it will be a good window into exploring some larger ideas:

https://twitter.com/Globalflows/status/1780069508612587719

As you know, my Capital Flows account is only a representation of the most professional and scholarly work.

Here is the deal, if there is publically available information or analysis on the time series of an asset then there is likely no edge in using it. You can still make money by having a different time preference or risk tolerance but recognize that the overall profitability is much more dependent on that than some artificial “technical level.”

Something I always ask myself is, did someone succeed in x activity because of y or in spite of y? Does the successful practitioner succeed BECAUSE he didn’t get a ton of sleep or in spite of it? Insert whatever variable into the place of y and nailing down WHY someone was successful becomes incredibly difficult. This is one of the reasons the self-help industry is a little bit misleading in my opinion but that is a topic for another day.

Technically not technical:

Alright, so “technical levels”, what are these? The truth is that no one knows or has a clear definition for them. People will spew out phrases about technical levels but in truth there is no TESTABLE definition. TESTABILITY is one of the most important things you need when trying to understand the world. Just notice that people who have no clue what they are talking about will never provide testability to their thesis for where it’s wrong.

If you want to dig into this more, check out The Beginning Of Infinity:

Back to my original Tweet on technical levels. Let’s take a super basic example: People will say this is a “technical support level”

Is it? How many times does the price need to bounce off this level for it to be “official”? Also, why would buying and selling even aggregate around specific places? And then how many limit orders exist that cause buying and selling at these levels which aren’t even seen in the time series? We don’t have the ability to answer all of these questions today but check out the book I linked in this article:

Let’s go over several ideas to help you contextualize these problems correctly:

• First, specific parts of a time series have fewer signals than others. For example, the degree of standard deviation and volume that occurs in the Asia session is significantly lower than in the London or US cash equity session. Due to this dynamic, you need to weigh this part of the time series differently. Let’s say we drift above or below an OHLC level on a daily or weekly basis during the Asia session. Is this a “technical break” of the level?

• Second, institutional players running execution algorithms are not making decisions based on some technical level. This goes back to HOW execution works in the first place

• Third, “levels” can occur but must be taken in the context of how execution works on an intraday, daily, weekly, and monthly basis. These can be quantified using OHLC levels on a daily, weekly, and monthly basis. Additionally, you need to remember transactions are never evenly distributed evenly through time which means that you need to weigh certain parts of the time series as having a higher signal than others. While there are many qualifications for using volume (and I find many popular metrics for quantifying volume as falling grossly short of providing a signal), fundamentally, you need to transact against comparable size OR move price until you attract enough market participants to take the other side of your trade. This is why TWAP and VWAP can deviate from each other. The limitation of these metrics is that the timeseries is only a narrow reflection of the actual supply and demand forces that exist under the surface. The price is always right but it is still a shadow on the wall of plato’s cave.

• Fourth, you need to start on a foundation of how liquidity works, NOT technical lines. If you start from a place of “technical lines” then it’s like trying to understand the fundamentals of an entity by secondhand knowledge. You will never be able to make implications within the intended range of variables that can be extrapolated. Here are papers on this:

Conclusion:

Coming back to the original tweet:

Main thing you need to know is that technical levels are not places you put your stops. Stops are put in places that have a higher signal-to-noise ratio in them. In order to identify a high signal-to-noise ratio, it occurs by STACKING informational edges. Informational edges frame the scenario analysis for a timeseries and clearly show confirmation or falsification of an idea. A stop is put in a place where the idea is falsified and you won’t get shaken out of the trade for the wrong reason.

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Final note, I took the paywall off the Week head article from Sunday. We are at a key place with the gold and crude trades I am running. This would be a great place to do a free trial on the Substack because macro vol is picking back up and there will be a ton of opportunities over the next month. We will be moving forward with a lot of speed so be ready to drink from the firehose.

Remember……

In the information age, you simply need to be at the right place, at the right time, with the right information to succeed

Chaos is only beginning