Technical Analysis, from a Quant's Perspective

[fatrat]

First, do not flame me. I am merely stating what I heard in a conversation.

There were a number of quants where I used to work. Some used technical analysis and others did not. One fellow in particular told me that he believes technical analysis does not genuinely provide the edge required to be consistently profitable.

I'm not fully sure I agree with his statement, but I'm wondering if there are quants out there who have some more words on the matter. What exactly is a man with a PhD in mathematics saying when he believes technical analysis doesn't provide a significant edge to be consistently profitable?

This isn't the first time I've heard someone say this, really. There was another fellow who used to post here regularly who claimed that people were delusional if they thought optimizing systems based on different moving averages was going to get them anywhere.

And what is it, exactly, that quants provide that makes them so valuable to all of these quantitative hedge funds?

 

[marketsurfer]

quants attempt to provide objective research.

TA is subjective.


surfer

 

[snooptrader]

Quote from fatrat:

What exactly is a man with a PhD in mathematics saying when he believes technical analysis doesn't provide a significant edge to be consistently profitable?

He is saying that he does not know how to properly apply TA. Those who cannot do something tend to dismiss it...

 

[kut2k2]

Quote from fatrat:

... What exactly is a man with a PhD in mathematics saying when he believes technical analysis doesn't provide a significant edge to be consistently profitable?

It means he hasn't figured it out, and he can't believe that there's anyone smarter than him who has figured it out.

It happens even to bona fide geniuses. Einstein was completely wrong on quantum mechanics, because he couldn't accept the notion that "God plays dice with the universe."

 

[panzerman]

Quote from fatrat:

One fellow in particular told me that he believes technical analysis does not genuinely provide the edge required to be consistently profitable.

Did he say that fundamental analysis gave that edge or that some hybrid of the two gave the edge? Did he say that it is impossible to have an edge?

There is one way and one way only to make a stock go up, and that is to buy it (and vice versa.) Neither TA or fundamentals give 100% accurate signals as to when a preponderence of buyers or sellers are in the market, but too many people have gotten rich using either method to say that they can't provide an edge.

 

[steve46]

First, I may not agree with your characterization of the scene.

I know a few "quants" myself. Like any professionals, some are more skilled than others, certainly some are better communicators than others.

Also I have had occasion to hire folks with backgrounds in quantitative methods, math, statistics, and physics. In general this has been a frustrating pursuit in that most of these folks were unable to add long term value to the business of managing and making money in financial markets.

Fortunately those who have made money in the markets using quantitative methods have left a trail of sorts that one can navigate to their goal providing they are smart (and I mean street smart/detective smart).

So let me get to the bottom line for you.. Here it is from my point of view. IF you can obtain a sufficient background in math, stats, or some allied field. IF you can learn to adapt and learn quickly, it is possible to learn enough to research in way that produces a viable, usable edge or advantage that permits you to reduce risk enough to overcome expenses and random adverse events. I have seen it done. I have replicated that kind of research myself and in the process, learned how it is done.

In my opinion, because markets exhibit a tendency to cycle between stationarity and random behavior. What passes for "quantitative research" is often invalid or of limited value. I am pretty sure that if you could talk to a highly skilled researcher you would find that their world view is quite different.

Regards,
Steve

 

[OddTrader]

Are/ were they rich or poor quants?

Listen to the rich quants only if telling you truth.

 

[MGJ]

Mostly this is a disagreement about definitions. What's "Technical Analysis"? What is it that a "Quant" does? How much do they overlap? How do they differ?

For example, where do you put "Rule Based Mechanical Trading Systems?" Some would say "B". Others "A" and still others "C". Each of them are correct -- according to their definitions of quant and of TA.

Where do you put "Calendar Anomalies" like "Sell in May and Go Away" or "Buy 2 days before the end of the month and sell 2 days after the beginning of the next month"? A good case could be made for all four choices: A, B, C, D.

Where do you put Graham-and-Dodd "Value Investing"? At D? At A?

How about Financial Astrology?

When there is disagreement about "What is TA" and "What is Quant", there will necessarily be disagreement about which is more beneficial & profitable.

 

[trade4succes]

I am not a quant but i believe TA is a scam. nobody making good money using ta makes money from the ta, it´s the person (or quant) behind it

 

[quantzack]

Quote from MGJ:

Mostly this is a disagreement about definitions. What's "Technical Analysis"? What is it that a "Quant" does? How much do they overlap? How do they differ?

Has anybody ever seen an Automated Technical Analysis trading system, which is non-subjective and rules-based, with clear entry/exit signals. Such a system would NOT be subject to human interpretation or judgement(area B in above figure). This would avoid the problem of subjectivity which plagues TA.