Some hedge funds swear by the power of technical analysis, while others think it’s useless. Here are some quotes by two wealthy money managers as an example of contrasting opinions.
“I haven’t met a rich technician.” – Jim Rogers (Estimated net worth of $300 million). [1]
“I used fundamentals for nine years and got rich as a technician.” – Marty Schwartz (Estimated net worth of $50 million).[2]
Here is a list of a few rich technicians that got rich from trading using some form of technical analysis to help Mr. Rogers do some research and discover that they exist and have existed for 100 years.
- Paul Tudor Jones
- Marty Schwartz
- Jesse Livermore
- Nicolas Darvas
- William J. O’Neil
The Use of Technical Analysis by Fund Managers
Here’s what a hedge fund manager with 20 years of experience in the financial sector on both the sell-side with Deutsche Bank and JP Morgan and the buy-side with Brevan Howard has to say about hedge fund managers or anyone else who uses technical analysis:
“Some of them love it, and some of them hate it, and I think you have to really specify what you mean by technical analysis. If technical analysis means optically looking at the chart and looking at heads and shoulders and stuff like that, it becomes very difficult to test. You see you might look at this today and see it’s the heads and shoulders, and in five years, you might see something completely different, maybe a cup with a handle. What influenced you to make those choices you can’t determine you can’t test, so as long as the thing isn’t, you can’t write it down as a set of rules that you know even a guy that doesn’t speak English and sits in Mongolia can replicate then it’s not used there’s obviously another set of people that says well it’s more of an art than a science, and hey if they make money who am I to deny another poker players place in the sun. So ultimately that’s the really great thing about trading regardless of how you manage to get that black number at the end of the year that’s ultimately all that matters” – Corvin Codirla[3]
David Paul teaches his trading methods to banks, hedge funds, and private individuals, and he has our next quote on using technical analysis at the hedge fund level. He is the managing director of VectorVest U.K.
“It’s always looked upon as negative, certainly at the retail trader level. Institutional traders are taught on their first day that they buy good levels or they don’t buy at all. Unfortunately, most retail traders will wait for some confirmation before they get in that could be a candle pattern could be a moving average cross, or whatever. Institutional traders will buy at the level where most traders will put their stop loss a tick under the last low, and they will invariably put their stop loss at exactly where the institutional orders are.”
“I think that institutional traders are just doing what institutional traders do; putting their entry points at very good levels, however, if you are trading at the institutional level, it’s not always easy to get filled. At the retail level, if you want to buy 100 shares, you want to buy the pound against the dollar at a five or a point, you press the little button, and you’ve got it at the institutional level, it’s not that simple, and you’ve got and on occasions to actually generate the liquidity to get aboard I don’t think that anybody looks at where the stops are, but they will say to themselves well we know pretty sure that most of the stops will all be crowded around this obvious level so they will bid the market at that particular level all you need is one person to chicken out and the markets are going to go where the bids are, and all those people will be taken out.”
“If you do not think long and hard about where you’re going to put your stops that you’re going to find that you can quite easily die in a sea of stop losses, and here’s an exercise for some people. The next time you’re just about to put a trade on you, pick up something heavy, and you just go Poof!, and then you write down a piece of paper where you were going to buy and where you’re going to put your stop loss. Don’t buy it but put an order in to buy it at where you’re going to put your stop loss and then just watch how many times the market goes to your order. Markets will go to the obvious stops most of the time, and one of my rules is that I want to put my entries where the masses put their stops.”
“If you don’t get in at a good level there’s nothing that upsets me more than a guy saying that this is a very risky trade. I’ll use a tight stop loss that’s just rubbish because you’ll get stopped out over and over and over again the stop needs to be where the stop needs to be, so if your entry is sloppy then your stop loss is going to have to be a red bus away from where you got in at to give yourself a chance of staying in the move.”
“The average true range will help with that. Most traders will look at a stop loss of two and a half times the average true range or something like that nevertheless, if you want to get in with low stop losses at institutional levels, you’ve got to be brave. The institutional traders will use Fibonacci levels they will use trendlines, they’ll use simple horizontal support, and resistance levels to actually look for confluences to try and place their orders. Nothing clever, okay. Unfortunately, most retail traders, as I say, will look for some form of confirmation, and a desktop loss will then be too close, and you’ll get taken out in the noise.”
What analysis do hedge funds use?
While many individuals and retail traders or investors use technical analysis, big hedge funds and investment banks also use technical analysis as their primary or secondary factor in trading decisions and trade management. These large institutions have dedicated trading teams that use technical analysis.
Quantitative hedge fund strategies use quantitative analysis (QA) to make investment decisions. Quantitative analysis is a technique that seeks to understand patterns using mathematical and statistical modeling, measurement, and research relying on large data sets.[4]
Do hedge funds hire technical analysts?
Many large hedge funds have dedicated trading teams that use technical analysis. Around 60% of hedge fund traders employ technical factors when making decisions. You may not find them announcing it publicly. Investment banks also use technical analysis with dedicated teams who track the market momentum & directions. This is a common practice in the money management industry to integrate some form of technical analysis in making trade decisions in addition to or independent of fundamentals and macro. [5]
“Elliott Wave theory allows one to create incredibly favorable risk/reward opportunities. That is the same reason I attribute a lot of my own success to the Elliott Wave approach.” – Paul Tudor Jones (Net worth $7.5 billion)