TA question often asked... "Do trendlines work"?

[themickey]

You've got too many posts to truly believe trendline is the only stat used to quantify stock trades in absence of fundamentals.

I don't believe in trendlines alone, in fact sloping trendlines is not in my tool kit.
As another poster mentioned, horizontal lines rather.
TA Indicators also not part of my toolkit.
Fundamentals I used once, but no longer, most stocks I trade are small caps with zero earnings, also crypto.
I can code sloping trendlines but they are too cumbersome for me to bother.

 

[smacdtrader]

Yep! We like to say “stock prices are non-stationary”. You improve your analysis if you looked at log chg of price instead of absolute price. The old technical indicators are based upon this (oscillators, RSI, bollinger bands, etc) but don’t come calibrated properly. You actually generate a decent signal of momentum by using cross-sectional and/or a timeseries of rate of change. Bollinger bands on price chg are decent because they scale properly, etc. Again, not really a trading signal, but at least can corroborate a story.

The sad truth is that a lot of “technical analysts” are really just math and stats illiterate. :/

But it was very surprising to me that the period over which price could be assumed linear also is not stationary. I was trying to sanitize the idea of misleading distributions like period return and volatility, etc, but oh well.

I actually don't quite understand the raging debate over TA v FA since they both obviously work if done properly. It's more of a personal taste as far as I can tell. There's also a lot of crossover if you think about it. Like the Intelligent Investor is still a quant TA, strategy, it just uses something other than price. No big deal.

I also think if the TA can't be coded, then it's erroneous and useless, because it can't be tested.

 

[themickey]

Yes… this style is also the bread & butter of equity pods at hedge funds like millennium, citadel, baly, etc.

Hats off to you, I can't do it.
A problem I have is I don't trust the reliability of FA data, whereas stock price data is quite trustworthy imo.

 

[longandshort]

I actually don't quite understand the raging debate over TA v FA since they both obviously work if done properly. It's more of a personal taste as far as I can tell. There's also a lot of crossover if you think about it. Like the Intelligent Investor is still a quant TA, strategy, it just uses something other than price. No big deal.

I also think if the TA can't be coded, then it's erroneous and useless, because it can't be tested.

The debate is about the methodology and application. For example, if someone chooses to run a regression on two non-stationary timeseries and then claims that it’s a useful signal, despite high p-value and low t-stat, you would, correctly, assume that he’s stupid.

The right application of data is quite powerful. In the modern professional scene, there’s a distinction between systematic and discretionary styles. Systematic favors quantitative analysis on technical data, while discretionary relies on a mosaic of qualitative & ”quantimental” analysis. Different strategies and different scopes, but both legit.

 

[Laissez Faire]

That guys win rate is less than 50% which means he probably could improve his pnl if he flipped a coin instead of used “price action”. My hit rate is 65%… only add things to your process that increase your hit rate, or it’s a waste of time.

Good morning, longandshort,

A few comments and questions. Not related to the OP whose posts I disapprove of categorically.

I’ve seen you mention hit rate repeatedly through various posts, but with no mention of expected value, so I’m curious if I’m missing something?

a) With asymmetric bets – win rate is essentially meaningless:

Small risk/high reward + win rate < 50 % = positive EV.

High risk/small reward + win rate > 80 % = negative EV.

All else equal, the higher your win rate, the better of course. But my basic point is that in isolation it’s meaningless.

b) 50 % win rate versus random entry.

You seem to equate a 50 % win rate with a random entry. Clearly not the case if you consider my prior point.

c) Technical analysis in the hedge fund industry.

You know this industry better than me. So, I’m simply curious. Are there no successful hedge funds that utilize principles from classical TA?

Thank you.

 

[smacdtrader]

I mentioned previously that hitrate was in absolute terms. The hitrate of your signal absolutely needs to be 50%+. In stats terms, if your variable has low r2, what exactly is the use of it? And if you say “it improves multi-factor performance” then the question stands for the multi-factor signal you’re using.

Also, in reality you’re not accounting for transaction costs and b/a incorporate the probability distribution of (at least) the base rate. For example, if your point was true then you should be a trillionaire by buying 0dte call options every day. You’re not because the price of the call option includes the market implied distribution, which means your ability to spot a “high reward low risk” or “low reward high risk” opportunity based upon price is gonna be less than 50/50.

I'm going to investigate wetf you're talking about on the options thing cause sounds interesting. I'm simply saying that if you win 70 bucks 40% of the time and lose 30 bucks 60% of the time, you're good to go, regardless of the asset. I'm obviously not telling you anything you don't know. I legit thought you didn't know that. My bad.

 

[smacdtrader]

Hats off to you, I can't do it.
A problem I have is I don't trust the reliability of FA data, whereas stock price data is quite trustworthy imo.

A lot of historical price data actually sucks pretty bad. I've heard from others that if you want to run a legit quant strategy you have to collect your own tick data, or you hit a real disaster. So not that different than the institutions grilling companies for fundamentals on phone calls, etc.

 

[longandshort]

Good morning, longandshort

Good morning to you too.

a) With asymmetric bets – win rate is essentially meaningless:

Technically this is true but in practice it is not because the market already prices in base rates. This means that the price you are paying for your bet already includes the base rate of odds for asymmetric performance… you would need to be able to average a realized return much greater or improve your hit rate for this trade to be profitable.

For example, if this was true then your strategy should be to buy 0dte call options every day (“small risk, unlimited return” — extremely asymmetric).

b) 50 % win rate versus random entry.

You seem to equate a 50 % win rate with a random entry. Clearly not the case if you consider my prior point.

So let me start by saying that my language has been fairly loose and I wouldn’t exactly publish a paper based upon my wording lol. My point about hit rate is that you need a process that improves upon the base rate (which you can hypothetically see as starting at 50%).

c) Technical analysis in the hedge fund industry.

You know this industry better than me. So, I’m simply curious. Are there no successful hedge funds that utilize principles from classical TA?

Thank you.

Plenty of people look at charts and will even reference a technical analysis as part of their gatekeeping process.

For example, you like the stock and it’s just hit its 200dma… you may think that will give it some support and will call your analyst to discuss the latest research before you make the trade. This is the extent of “technical analysis” at a hedge fund.

However, it is generally considered weak analysis by itself, so you would need to have multiple other reasons to buy or sell a stock first.

 

[longandshort]

I'm going to investigate wetf you're talking about on the options thing cause sounds interesting. I'm simply saying that if you win 70 bucks 40% of the time and lose 30 bucks 60% of the time, you're good to go, regardless of the asset. I'm obviously not telling you anything you don't know. I legit thought you didn't know that. My bad.

My point about your asymmetry is that the market already prices in the base rate, so you actually have a 50% chance of getting the $70 trade 40% of the time. In real life your odds get worse due to transaction costs and other factors.

 

[smacdtrader]

My point about your asymmetry is that the market already prices in the base rate, so you actually have a 50% chance of getting the $70 trade 40% of the time. In real life your odds get worse due to transaction costs and other factors.

That's actually fascinating phenomenon to me that I've never considered. Is this in all asset classes? In what situations does it apply, not apply? Is this totally common understanding in the industry. I have never heard it before, but I'm pretty academic as opposed to seasoned practicioner.