(15 votes, average: 4.4 out of 5)
Loading ...When I began to trade stocks (c. 2000) it soon became apparent to me that unless I found a trading “philosophy” with which I could feel comfortable, I would get very little sleep worrying about whether I had made the correct trading decisions each day. In my quest to reduce the rings under my eyes I accumulated and read all of the recommended books on the lists of those pre-blogosphere non-professional stock traders. Some names were pulled from references on Motley Fool posts (no iBC back then) while others from Elite Traders. In the end I had a collection of 30 books ranging from the well-known classics contained on the Gunners Memorial Library list as well as other (at the time) lesser-known works. At the conclusion of my reading, approximately 18 months, I concluded that I was well-suited as a practitioner of technical analysis.
Now that I knew what my “edge” would be (see, Trading in the Zone) I sought out the most well-known teachers of the art of technical analysis. I attended many “investor” trade shows and listened to these technical analysis ‘giants’ share their greatest trading secrets. Hah!
Eight years, thousands of bad trade dollars and hundreds of hours of technical analysis study and practice later, I feel no less confident about stock picking today using technical analysis than I did when I started this journey. This is not to say that, on-balance I am underwater from when I started. Far from it. But, if someone had asked me in 2000 if I expected in 2008 to be a really good technical analysis-based trader, my answer would have been a resounding Yes.
So why do I review my own trading journey? In this week’s Mauldin column John reposts an August 21, 2004 column in which he wrote in part:
“Dr. Gary Hirst, one of my favorite analysts and fund managers . . . [in 1991] began to look at technical analysis. He spent huge sums on computers and programming, analyzing a variety of technical analysis systems. Let me quote him on the results of his research:
“I had heard about technical analysis and chart patterns, and looking at this stuff I would say, what kind of voodoo is this? I was very, very skeptical that technical analysis had value. So I used the computers to check it out, and what I learned was that there was, in fact, no useful reality there. Statistically and mathematically all these tools — stochastics, RSI, chart patterns, Elliot Wave, and so on — just don’t work. If you code any of these rigorously into a computer and test them they produce no statistical basis for making money; they’re just wishful thinking. But I did find one thing that worked. In fact almost all technical analysis can be reduced to this one thing, though most people don’t realize it: the distributions of returns are not normal; they are skewed and have “fat tails.” In other words, markets do produce profitable trends. Sure, I found things that work over the short term, systems that work for five or ten years but then fail miserably. Everything you made, you gave back. Over the long term, trends are where the money is.”
So there it is 8 years later: it has been wishful thinking on my part to believe that technical analysis has been my true trading edge.
Further down, in the original 2004 posting he wrote:
“While technical indicators cannot be rigorously programmed to yield an automatic, always winning or low loss, don’t-think-about-it trading system, they do provide some useful insight. Volume, direction, momentum, stochastics, and so on are reflective of market psychology. With a great deal of time and effort, astute traders can use this data to determine what Mark Finn calls the “gist” of the market.
The great traders become adept at using this data to help them determine market psychology and thus market movement. They also employ excellent money management and risk control skills. My contention is they have the “feel.” Just like some people can hit 95 mph fastballs, they can look at amazing amounts of data and feel the market. They use solid money management techniques to control the risk, and they make money for themselves and their clients. Like Alex Rodriguez at the plate, they make it look easy.”
So I pose this to the other members of The Peanut Gallery as well as to the elite Tabbed iBC posters: “Do you believe that technical analysis really does provide an edge for a trader, or is it as rooted in reality as Santa Claus and the Easter Bunny?”
Zen, interesting question.
There have been many many traders who have made great livings from technical analysis. The Turtles, come to mind…
The fact that Hirst has realized that returns are not normal, in my opinion means that technical analysis, especially the variey of TA that identifies when a certain equity or index is “non-normal” in terms of its distribution of prices, can be very profitable.
Hirst’s claims that he has tested everything and that it has no useful value seems biased, and had I the actual methods and results to go from, rather than a succint executive summary, I bet we could pick apart his methodology to show that he got the results that he wanted. Meaning, he set the tests up to achieve a certain result, and it seems that he got what he wanted.
I say that because I can tell you without a doubt that certain indicators, breakouts from ranges, combinations of price/volume, moving average combos, etc. have been tested over and over and over and shown to be profitable.
The answer then is a resounding, “Yes, TA does provide an edge for a trader.”
The better question, would be, “How does one combine TA with money management to create a significant edge?”
And, since many TA indicators are derivative of a simple price, volume, and moving avg. relationship, another good question would be, “Which indicators have been tested and shown to provide an edge.”
Right now, I’m working almost entirely with RSI(2). It is absurd to say that it does not provide an edge. Now, in the future, whether it is 6 months, or six years, the edge may disappear. However, that just means that something else has started working, perhaps again.
Zen, I voted 5 stars for you, but now, there is no vote shown and it won’t let me vote.
Woodster:
I was hoping that you would reply because as The iBC House TA-in-Resident your insight would be most useful.
What stuck me is your (correct) observation that there are “many many traders who have made great livings from technical analysis”.
While I only have a basic understanding of how The Turtles did it [I did read the Covel book: The Complete TurtleTrader: The Legend, the Lessons, the Results] it seems to me they traded by RULES, not technical analysis, per se. As Cramer has written in his books, the only people he knows who have become wealthy with technical analysis are those who collect fees from teaching others how to do it, not from trading. None of the Market Wizards (I or II) I recollect used it. Maybe it was before their time.
Wood:
Thanks for the 5 star. It is there now.
It most certainly provides an edge…
Parameters are what you must define before you look at technical analysis.
The reality you have to face is you can not win all the time. One can strive to be very consistent which will make you money year in and year out.
In the world of day trading chart chomping is mostly what you go by.
Every stock has trigger prices that represent support or resistance. It is technical anlysis that allows you to discover those prices and then it is up to you to determine what took place at that price.
Once you see the “battle” between buyers and sellers you can then anticipate a potential move one way or the other.
Example: If you want to trade a stock you must utilize 1,5, and 20 day charts to make your decisions.
If you are a long term investor you want to use 1, 3, 5, &10 year charts to determine your decisions.
I will argue that charts are all you need to make money.
Furthermore, you must discover nuances about a chart. Some stocks consistently rip for years. What happened before this monutmental climb?
I’m always trying to identify parameters on the chart that might lead to a long term gainer. That is for the investor in me.
My everyday thought process of you must bank coin every day has me look ar 5 & 20 day charts to determine a possible long or short.
The negatives: sometimes you can not see gap ups or downs based on news events. The charts won’t tell you when Enron is cooking its books.
Some will argue the last paragraph is false. Sometimes I think so myself.
I’ll give you a real life example based on my assumptions. Friday the S&P rested on its support level of 1,383-1,385.
Looking at the day chart or the 5 day you will see the market gapped down and then traded sideways. Since we only broke 1383 intially in the morning and then kinda bounced along that level we can assume the market was neutral at that support level. Why? Since buyers nor sellers over took the other.
This means the market is waiting for further news to determine direction.
My assumption is since the sellers did not take control we might dip below that number slightly and then attempt to rally.
The market as of late has trade higher despite bad news this recent selloff from 1420 S&P to Fridays close of 1392 only represents a little profit taking as opposed to liquidation selling. So to me the chart suggests that if there is not horrificc news the S&P might challenge the recent highs of 1420 again.
I beleive if that did occur we would see a double top. I believe this since my sentiment is a little bearish right now. If that occurs then we go back to test 1383 again. As said before you must observe what occurs at that level to give you direction or possible momentum. If we fail to break I go long. If we break I go short.
If we break 1425-1434 on the upside the market has pushed through to a new area which would suggest higher prices there after. I would certainly cover any shorts if we closed above this new level. Or I might add longs to my portfolio to make up for losses on the short side. I know though that I should cover no questions asked.
Anyway my BBQ is starting so I hope you got asomething out of this.
Peace
Zen,
Al Weiss, The Human Chart Encyclopedia. Page 177 on The New Market Wizards.
Summary: 52% annually, largest drawdown of 17%. My wife has me moving yard sale crap back in the house, so unfortunately, that is as much summarizing as I have time to complete right now.
Wood,
Al Weiss categorically states a 50/50 distribution to technical analysis.
The second component being tight money management.
Through the years I’ve seen this question be discussed many times…the outcome always comes down to effective money management.
The analysis [technical] simply provides entry/exit triggers [nothing wrong with that]
jog on
duc
Nice post. Seems to me the specific definition of what constitues technical analysis is always a bit ambigious though. Is someone who buys only fundamentally sound stocks after a pullback (for axample) using TA if they use charts to evaluate the extent and depth of the pullback? Is an IBD trend-follower using TA if he avoids buying a rally that may be deemed over-extended? Again, only evident by analyzing the technical components of recent price movement. What about a contrarian bottom-fisher, he most certainly uses TA to determine the “bottom” does he not?
“Over the long term, trends are where the money is.” How the hell do you determine a trend without some form of TA?
To paraphrase the great Warren Buffett:
Technical analysis is an excellent way to combine both ignorance and laziness.
Duc:
“The better question, would be, “How does one combine TA with money management to create a significant edge?”
-Woodshedder, 1st Comment of the Post.
From the Weiss interview:
Q: What popular chart patterns are accurate only 50 percent of the time?
Most of them. But that’s not a drawback. A pattern that works 50 percent of the time can be quite profitable if you employ it with a good risk control plan.
Q: Is technical analysis an art or a science?
Its both an art and a science. It’s an art in the sense that if you asked ten different traders to define a head-and-shoulders pattern, you’d come up with ten different answers. However, for any individual trader, the definition can be made mathematically precise. In other words, chart traders are artists until they mathematiclly define their patterns–say, as part of a system structure–at which time they become scientists.
———————————————————
The mathematics is exactly right. When I post my breakouts, maybe some have you have noticed that they all look very similar in nature. I can tell you what percentage of breakouts from that particular mathematical parameter will be successful and how many fail. Likewise I can tell you what percentage typically gain 20% and how long it takes them to do so.
The problem that I see with TA is whether one waits for confirmation or whether one buys/sells in anticipation of the event/catalyst. Also, is a pattern a pattern without confirmation? Does one sell short in anticipation of the head and shoulders breakdown, or does one wait for the breakdown (pattern confirmed) before selling short?
Similarly, when testing patterns, I see the value in waiting for the pattern to confirm (which is mathematically quantifiable) before calculating an entry. Thus, what one discovers is that there is no pattern until there is some event/catalyst to start from, at least in my opinion.
Anyway, I’m always curious as to whether technical analysts choose to anticipate or wait for confirmation.
Wood,
This is a complete methodology utilising a “New High’s” trigger, pretty similar to the Turtle methodology.
ENTRY.
There were many suggested but I preferred Price action over oscillators as the trigger to buy. As this is a long-term approach I felt the entry would pale in significance as the trade developed, so I wanted to adopt a buy high and sell higher approach. Initially I wanted the stocks to be moving positively so I placed a moving average filter in the entry that the stock:
- must be trading over its 40 day moving average. It must close below $10
- it must have a close greater than the open.
- it must have a 21 day average of trading value over $500,000
- the bar I’m looking for must be the highest value of the last 70 trading periods
- it must also CROSS the highest high value for the last 10 Trading periods.
This filter is important as it means that the stock is trading at higher highs not simply the FIRST high thats trading above the highest value for 70 periods.
It was also important that the method didn’t require EVERY trade to be taken to ensure success. The 2 eyeball filters I use below are simply personal “Feel Good” inclusions, testing indicates a difference in return over 6 yrs can be as much as twice the lowest return over 20000 tested portfolio’s. Our case study is at the high end–so it is possible these “Feel good” filters may serve a purpose. According to testing their inclusion is not necessary to return positive figures.
I also have 2 eyeball filters.
- the stock must be in an obvious uptrend or obviously breaking out of a down move.
- the stock cannot be trapped in a trading range.
INITIAL STOP
We tried a number of stops and in the end settled with a fixed % stop of 90% of the purchase price. So if the buy was at $1 then the stop was set at 90c.
Closer stops gave more trades and less winners
Wider stops gave less trades and similar winners to the 90%.
Profit in both cases remained compatable.
At an 80% stop only 9% were stopped out as against 23% on the 90% model.
However time spent in un profitable trades outweighed increasing the width of the initial stop to avoid being stopped out.
The optimum stop level appears to be between 94 and 90%.
As the idea is to ride winners for as long as possible I wanted to give a stock the opportunity to get underway but not be bogged down waiting while it ranged between a but and a wide stop level.
I’ve found movers tend to move sooner than later.
EXIT
Nothing will alter the performance of a trading method more than the exit.
There is normally a balance to find between letting a profit run for as long as possible and not giving back too much when a trend ends. I have tried and tested many many exits. All work to some degree and it appears that a critical mass is found in that the best performing generally give similar return. Moving Averages and ATR’s tend to work similarly and from the research I have done so far give the best Reward to Risk return.
For TT I found the Moving Average (Exponential)of the low over 180 periods to be the best/most consistent. When price crosses this indicator then its sold next open.
Its pretty rare that price falls from a Peak of its highs to cross a 180day Exponential of the low. Ideally a price that falls and flattens gives back less,while the M/A comes up to meet it.
I’m not convinced that this is the be all and end all of exits even for this method. But it serves its purpose well both in testing and trading.
SYSTEMS TESTS—-RESULTS and REVIEW.
Starting capital is $100,000
Number of stocks in a portfolio is 10 representing 10% of Capital.As capital increases I increase my buy size.This can be tested as well.(Pyramid Profits).
I set costs at $30 in and $30 out.This maybe a bit low but due to the infrequency of trades does not have a large impact on results.
Firstly I will look at test results on a singular portfolio chosen for that date.
As more than one portfolio selection of stocks is possible over the time a portfolio is initially bought and as we may start our trading at any given day or month or year,this singular test is not conclusive enough in isolation.Me may well be lucky enough to choose the only profitable portfolio the method could have chosen or the only losing portfolio or anything in between.
MONTE CARLO TESTING
Is designed to give us a more accurate idea of how well the method would perform over a great deal of portfolio’s.I have chosen 20,000 as the number to test.
Basically its like giving the method to 20000 people and asking them to all go off with $100,000 and come back in the period designated and then collating all the results.In our first case thats 6 yrs. Tradesim took 58 seconds!
For comparison and discussion I will look at
(1) Testing from 1/1/96 to 1/8/2002 these are the results used when we started. Plus Monte Carlo Testing
(2) Current testing from 1/1/96 to 1/1/2006 to compare long term.Plus Monte Carlo Testing
(3) Testing from 1/09/2002 to 1/1/2006 to see how the test results compare with those actually traded here.Plus Monte Carlo Testing.
Firstly (1)
Detailed Report
(TTrader BT margin Master 2002)
Simulation Summary
Simulation Date: 29/12/2005
Simulation Time: 12:28:35 PM
Simulation Duration: 0.42 seconds
Trade Summary
Earliest Entry Date in the Trade Database: 30/08/1996
Latest Entry Date in the Trade Database: 30/07/2002
Earliest Exit Date in the Trade Database: 7/11/1996
Latest Exit Date in the Trade Database: 11/05/2005
Start Trade Entry Date: 30/08/1996
Stop Trade Entry Date: 30/07/2002
First Entry Date: 30/08/1996
Last Entry Date: 30/07/2002
First Exit Date: 5/12/1996
Last Exit Date: 13/03/2003
Total Trading duration: 2386 days
Profit Summary
Profit Status: PROFITABLE
Starting Capital: $100,000.00
Finishing Capital: $321,443.43
Maximum Equity/(Date): $221,443.43 (13/03/2003)
Minimum Equity/(Date): -$4,423.62 (11/12/1997)
Gross Trade Profit: $306,181.94 (306.18%)
Gross Trade Loss: -$84,738.51 (-84.74%)
Total Net Profit: $221,443.43 (221.44%)
Average Profit per Trade: $1,743.65
Profit Factor: 3.6133
Profit Index: 72.32%
Total Transaction Cost: $7,620.00
Total Slippage: $0.00
Daily Compound Interest Rate: 0.0489%
Annualized Compound Interest Rate: 19.5569%
Trade Statistics
Trades Processed: 884
Trades Taken: 127
Partial Trades Taken: 0
Trades Rejected: 498
Winning Trades: 46 (36.22%)
Losing Trades: 81 (63.78%)
Breakeven Trades: 0 (0.00%)
Normal Exit Trades: 95 (74.80%)
Delayed Normal Exit Trades: 0 (0.00%)
Open Trades: 0 (0.00%)
Protective Stop Exit Trades: 32 (25.20%)
Time Stop Exit Trades: 0 (0.00%)
Profit Stop Exit Trades: 0 (0.00%)
Largest Winning Trade/(Date): $52,671.10 (15/01/2002)
Largest Losing Trade/(Date): -$6,822.40 (11/12/1997)
Average Winning Trade: $6,656.13
Average Losing Trade: -$1,046.15
Average Win/Average Loss: 6.3625
Trade Duration Statistics
(All Trades)
Maximum Trade Duration: 1226 (days)
Minimum Trade Duration: 1 (days)
Average Trade Duration: 159 (days)
(Winning Trades)
Maximum Trade Duration: 1226 (days)
Minimum Trade Duration: 1 (days)
Average Trade Duration: 338 (days)
(Losing Trades)
Maximum Trade Duration: 443 (days)
Minimum Trade Duration: 2 (days)
Average Trade Duration: 57 (days)
Consecutive Trade Statistics
Maximum consecutive winning trades: 4
Maximum consecutive losing trades: 10
Average consecutive winning trades: 1.70
Average consecutive losing trades: 3.12
Trade Expectation Statistics
Normalized Expectation per dollar risked: $1.5000
Maximum Reward/Risk ratio: 47.70
Minimum Reward/Risk ratio: -6.64
Average Positive Reward/Risk ratio: 5.43
Average Negative Reward/Risk ratio: -0.73
Relative Drawdown
Maximum Dollar Drawdown/(Date): $7,176.00 (7/08/2002)
Maximum Percentage Drawdown/(Date): 6.7020% (11/12/1997)
Absolute (Peak-to-Valley) Dollar Drawdown
Maximum Dollar Drawdown: $13,838.72 (12.3200%)
Capital Peak/(Date): $112,288.96 (23/06/1998)
Capital Valley/(Date): $98,450.24 (8/02/2000)
Absolute (Peak-to-Valley) Percent Drawdown
Maximum Percentage Drawdown: 12.3200% ($13,838.72)
Capital Peak/(Date): $112,288.96 (23/06/1998)
Capital Valley/(Date): $98,450.24 (8/02/2000)
I will just comment on Statistics of importance to most,More detailed descriptions I will leave you to research yourself.
Thanks to David Samboursky Designer of TRADESIM for his extensive manual a must read for budding systems developers.
(1) Profit factor—Ratio of Gross trade profit to Gross trade loss (3.61).
(2) Profit Index—Total NETT profit to GROSS trade Profit. 100% would mean the system has no losing trades.0% would break even,and negative % would be inefficient.(72.32)
(3)Annualised Compounded Interest rate.—Total nett Profit and total trade duration expressed as a yearly compounded interest rate.(19.55)
(4)Trades processed,—–total number of trades that the method found.Includes trades triggered twice or more times.(884)
(5)Trades Taken—-total number taken by the method (Governed by capital available).Only trades triggered once taken,second triggers not taken even if funds available.(127)
(6)Winning trades(36%) only 36% were winning trades meaning that Winning trades needed to be much higher than losing trades
infact 3 times more as can be seen below it is 6.36 x.
(7) Normal exits at 75% and protective stop exits at 25% shows a quater being stopped out.(Our protective stop is set at 10% of initial buy price).Extensive testing found that a 20% stop from initial Purchase price bought this down to 9% being stopped out but found trades were left in no mans land longer (Between stop and Buy price) this has a negative effect on efficiency.
At the other end Stops at less than 8% had us out of stocks often on minor corrections.
(8) Average trade duration 338 days—–this is important as we look at Equity curves,if you dont take into account open profit and just closed trades then most longterm methods look very sick as stops and short term failures are taken well before those that have great trends!
Average losing trade of 57 days means that we do give them a good while to prove themselves.
(9) Average and Maximum winning and losing trades are to be expected given the duration of trades mentioned above.
(10) Expectation for every dollar risked is $1.50
(11) Risk reward ratio on average is 5.43 so reward is on average 5.43 times the risk taken.We should aim to get this as high as possible with longterm methods which due to their long trading length nature only have 30-40% winners.I have seen methods with 12 times reward to risk.Anything over 3 is respectable,for longterm methods and can be as low as 1.2 for high % winner futures methods.
(12) Drawdowns.—One of the most important statistics.
Relative drawdown is the loss in equity from the previous equity high.expressed in a % and a $ value, both generally occure at different points of the life of the traded porfolio.
I find the % statistic the most important as it mainly falls on the INITIAL buy period of a portfolio.I want to know this as I want to know if my allocated capital will withstand this Initial purchase period before profits or open equity kick in.(6.7%) So if I’m trading $100,000 I can expect to drop up to $7000 and if I’m trading on margin at 2:1 then I will need $14000.
Peak to Valley drawdown
This is the loss of equity from a peak to a valley.Peak being a high point in equity and valley being a low point.
Maximum peak to valley drawdown is the biggest loss of equity form a peak to a valley within the trading period.
(13)Maximum Consecutive string of losses
10–this is an important statistic as its good to know that a risk of 1% which is the risk for tt–means a 10% loss in equity and is quite handleable.
(14)Average win to average loss
A healthy 6.36
Monte Carlo Report
(TTrader BT margin Master 2002)
Simulation Summary
Simulation Date: 29/12/2005
Simulation Time: 9:27:38 PM
Simulation Duration: 200.11 seconds
Trade Parameters
Initial Capital: $100,000.00
Portfolio Limit: 100.00%
Maximum number of open positions: 100
Position Size Model: Fixed Percent Risk
Percentage of capital risked per trade: 2.00%
Position size limit: 10.00%
Portfolio Heat: 20.00%
Pyramid profits: Yes
Transaction cost (Trade Entry): $30.00
Transaction cost (Trade Exit): $30.00
Margin Requirement: 100.00%
Trade Preferences
Trading Instrument: Stocks
Break Even Trades: Process separately
Trade Position Type: Process long trades only
Entry Order Type: Default Order
Exit Order Type: Default Order
Minimum Trade Size: $0.00
Accept Partial Trades: No
Volume Filter: Ignore Volume Information
Pyramid Trades: No
Use Level Zero trades only: Yes
Simulation Stats
Number of trade simulations: 20000
Trades processed per simulation: 884
Maximum Number of Trades Executed: 149
Average Number of Trades Executed: 131
Minimum Number of Trades Executed: 118
Standard Deviation: 5.28
Profit Stats
Maximum Profit: $269,013.66 (269.01%)
Average Profit: $193,372.40 (193.37%)
Minimum Profit: $105,877.92 (105.88%)
Standard Deviation: $31,363.17 (31.36%)
Probability of Profit: 100.00%
Probability of Loss: 0.00%
Percent Winning Trade Stats
Maximum percentage of winning trades: 40.83%
Average percentage of winning trades: 33.56%
Minimum percentage of winning trades: 27.54%
Standard Deviation: 1.88%
Percent Losing Trade Stats
Maximum percentage of losing trades: 72.46%
Average percentage of losing Trades: 66.44%
Minimum percentage of losing trades: 59.17%
Standard Deviation: 1.88%
Average Relative Dollar Drawdown Stats
Maximum of the Average Relative Dollar Drawdown: $2,643.37
Average of the Average Relative Dollar Drawdown: $1,939.11
Minimum of the Average Relative Dollar Drawdown: $1,452.71
Standard Deviation: $174.17
Average Relative Percent Drawdown Stats
Maximum of the Average Relative Percent Drawdown: 2.0731%
Average of the Average Relative Percent Drawdown: 1.3973%
Minimum of the Average Relative Percent Drawdown: 1.0079%
Standard Deviation: 0.1559%
Maximum Peak-to-Valley Dollar Drawdown Stats
Maximum Absolute Dollar Drawdown: $22,090.87
Average Absolute Dollar Drawdown: $15,162.93
Minimum Absolute Dollar Drawdown: $9,839.53
Standard Deviation: $2,790.70
Maximum Peak-to-Valley Percent Drawdown Stats
Maximum Absolute Percent Drawdown: 20.4311%
Average Absolute Percent Drawdown: 13.0116%
Minimum Absolute Percent Drawdown: 8.1730%
Standard Deviation: 2.8755%
Simulation stats.
(1) Over the 20000 portfolios portfolios ranged from 118 trades to 149 trades
(2) Profit Stats indicate that maximum Profit can range from 269% to 107% which is a large range. The Average being 193%
our nett profit on our singular test of 221% being above the average.
We should look at ways of keeping above this average.
(3)Percent winning trades–One of the ways of doing this is to increase these.Our test case has 36.2% winners where the average has only 33.5.
(4) Probability of profit 100%.
Finally the thing I like about this report is that the deviation from the mean in all tests is very minor,meaning a general consistency.
jog on
duc
Thanks for that post, Duc.
The one thing that Tradestation is lacking in is the inability to run Monte Carlo sims.
Wood,
I’d say that is a MAJOR liability.
Find a Monte carlo sim.
jog on
duc
Duc, unfortunately, most testing software offering that are priced in the range 2-3K.
Funny or strange, but my wallet won’t let me outlay that much for testing, although the expense is really not more than 2-3 bad trades, or not a lot.
I will, at some point, get there. Right now, TS is getting me started.
Wood,
I’ll check with a mate of mine in Aussie, we might be able to get one for nowt….my preferred price.
jog on
duc
I am glad that I am a daytrader who only basically trades four ETFs these days over and over again. Blood is squirting out of my eyes and I have a massive migraine reading the details of the above.
Zen, Wood and Duc, you guys are into some interesting stuff, a lot of it is over my head, but interesting nonetheless. Excellent work all above,look forward to more discussions. Let me know when you plan on vacationing in Monte Carlo. Yog on.
TraderCaddy, can I ask which 4 etf’s any foreign stuff like FXI, FXP? thanks.
TA gives definite parameters for a market that is random, and undefined (theoretically). This makes trading mentally bearable. You know at what point you will be right, or wrong. I find this indispensable in my trading.
Stocks that move up over longer periods of time do so for fundamental reasons. End of story. You could argue that the TA will reflect the fundamentals so why pay attention to them but I don’t think that is the correct approach (for me).
The key is experience. Just having an understanding of breakouts, RSI(2) and what those strategies are, nothing more, will NOT necessarily make money trading them. in fact, you will probably lose it.
I understand the mechanics of a steering wheel and how it works, but it doesn’t mean you can drive a car perfectly and in off-road conditions your first time. It takes a broader understanding of the market forces to judge the how good a trade is, even after you’ve found it.
That is the A-Rod feel described above which I think is a great way to explain it.
buylo- No the etfs I usually daytrade are SMH, GDX, XLF, KRE. Except for KRE I watch the 3 or 4 top stocks within the etfs (usually make up about 50% of the etf) and within the first 5 minutes or so can tell if they are good shorts or longs for the first half hour or so of trading. KRE is a bit of a different animal and has more of a smoothing price range as there are many stocks that make up the top 50% of this etf. I can usually detect intra day changes also by the daily RSI of the top stocks within the etf(s).
I realize this is contrary to what most daytraders do (they scan and go for the momo stocks) but I would rather put on larger positions with these more conservative securities (etfs). This is my edge and takes out the randomness of the market which takes most daytraders down.
I also am watching oil, gold, interest rates, and the dollar as they are impacting the markets (ala John Murphy).
I know a very successful daytrader who just trades GE all of the time as he knows it inside and out. He makes a good living just trading GE. Check out Ducati and GS.
Sorry for being verbose.
“TA gives definite parameters for a market that is random, and undefined (theoretically). This makes trading mentally bearable. You know at what point you will be right, or wrong. I find this indispensable in my trading.”
Couldn’t have said it any better.
+1
My Very Own Byline Photo!!! “Just Do It, Do it”.
Very appropriate since the Nike slogan “Just Do It” is an especially Zen attitude.
Thanks for the photo and to all of the responses to my original question.
I believe The Fly will rightfully win the Favorite Finance Blog award in the Globe and Mail contest:
http://www.reportonbusiness.com/v5/content/ROB/bloggerPoll.html
Great post, and excellent discussion.
Technical Anlysis is a great way to recognize “what’s hot” and what the major institutions are buying. From there, you can notice specific trends as they’re being formed, and look for patterns that are setting up within those trends that are taking off. But technical analysis can be used to define certain aspects of money management. While it might be the money management and not the TA that’s making the methods profitable, without TA it can be difficult to recognize the profitable situations.
People that look at thousands of charts a week, (or in some cases a day), always outperform a very large majority of traders. Perhaps there’s no clearly defined system that will work for the long run, but knowing what charts are doing, and how the market pyschology is behaving will set up.
Dan Zanger turned 10,000 to 40 million in less than 2 years, trading low float high earnings (70% from the previous year) stocks with good technical setups. And he continues to show +100% returns. He is extremely picky and will often be out of the market unless top performing high earning stocks (he no longer focuses on low float due to his amount of capital), in the top sectors/industries are setting up and breaking out when the overall market is setting up and breaking out. He looks at thousands of patterns a night. “Lazy and ignorant” can be very profitable, if you’re willing to be that active in your laziness.
Hell, Bill Gates did the “ultimate lazy” thing by talking to IBM, asking them how much they would pay for a operating system, found out they’d give him 1 million, and then he just highered someone to do it for 50,000… that’s pretty lazy and doesn’t involve much work.
Now of course, Buffett was not lazy in terms of work… Buffett took that same 10,000, borrowed 100,000 used the money to eventually IPO the company and raise millions from his shareholders, and invest that money into growing companies that had been neglected and undervalued and had the right business with the right cashflow. Buffet’s return on his invested money might have been much much lower than Dan Zanger, but because he properly used leverage and integration of his business into other businesses, along with money management, and things that make him successful, he is the wealthiest man in the world.
Then again borrowing and leveraging millions to invest, is a hell of a lot lazier then to work at McDonalds for your entire life, pay taxes on a large percentage of your gains, and then when you have the millions, then do what Buffett did.
And did the people that shared in the company of Birkshire not have a certain degree of laziness to give Buffett money and let him do the investing?
Having a certain degree of “laziness” can be a good thing, if you have a plan.
TA although “lazy” can work if you have the right rules and money management, and use them as a small part of your overall plan.
and everyone procrastinates on something. The difference is, the so called “lazy” people procrastinate on the important things, while the productive people are “lazy” and procrastinate on the unimportant things. If you can find a lazy way that works, By being “lazy”, you can use your time to learn more important things, like how to manage money, protect losses, build a business and use it to defer taxes and funnel them back into your investment, and raise capital the way that Buffett does.
@Wood
I did a short piece on Monte Carlo but there are some great cheap tools for Excel out there:
Check the bottom of the page:
http://www.vertex42.com/ExcelArticles/mc/index.html
@Duc
I’ve been looking for some Open Source for a bit now but haven’t found anything I like so I’m writing my own.
Thanks Cuervo- I’ll check it out.
Ducati
For a staunch fundamentalist who spent years telling us T/A wasnt worth the paper its written on—you seem to have turned full circle.
Tech/a
Designer of T/T (Techtrader) which Duc kindly cut and pasted my work here from “The Chartist”.
Appears my work has given you some cred!
Also appears you have adopted many of my views—previously rejected as rubbish.
For those who wish to follow in realtime (T/T has been traded live for the last 6 years) I’m sure Duc will gladly supply the link.(Starting capital was $30K and is now $450K).
Peanut Gallery—APT.
Crap
on
Tech/a, on the off chance that Ducati does not provide the link, I would love to have it, if you do not mind sharing. Thanks…
http://www.thechartist.com.au/forum/ubbthreads.php?ubb=postlist&Board=53&page=1
You’ll need to join–its free just like the method.
Fully disclosed and Zippo.