Why I Don't Believe in TA

[R. Raskolnikov]

He cannot get it. He has walls built up in his mind to protect his misconceptions from any scrutiny.

Quote from kut2k2:

+1

They can't test what they don't know. And what they don't know is where the TA that works resides.

Seriously, surf, how many times do you have to be told this?

 

[HurricaneUS]

Quote from marketsurfer:

Here is an article from CBS money back in 2009 laying out about an academic paper laying out a strong case against TA:

By LARRY SWEDROE / MONEYWATCH/ October 26, 2009, 7:00 AM
Is Technical Analysis a Waste of Time?
1 Comment
/ Shares/1 Tweets/Stumble/EmailMore +
There are some investors who believe they can profit by finding patterns in historical stock prices or trading volume. These investors are attempting to profit from technical analysis. Kevin Grogan, my colleague at Buckingham Asset Management, reviewed some evidence on these strategies and found that these investors could probably find a more productive use for their time.

A recent study by finance professors at Massey University in New Zealand examined more than 5,000 technical trading rules to see if they added value. The authors found "no evidence that the profits to the technical trading rules we consider are greater than those that might be expected due to random data variation."

The major contributions of this paper are:
The paper looks at more than 5,000 trading rules in 49 developed and emerging markets. Most other studies look at far fewer trading strategies and markets.
The paper uses statistical methods to adjust for data snooping bias.
The paper looks at both developed and emerging markets to determine whether technical trading rules add more value in less developed (or efficient) markets. The authors found that technical analysis may work better in emerging markets than developed markets, but it was "not a strong result."
The paper's findings certainly don't cast technical analysis in a great light, especially when you also consider the findings from some other significant studies on technical analysis:
The study "Market Efficiency and the Returns to Technical Analysis" found that profits from technical trading rules don't exceed reasonable estimates of transaction costs in the U.S. market.
The study "A Note on the Weak Form Efficiency of Capital Markets" applied technical trading rules to the U.K. market. They found the rules profitable, but again, the profits weren't large enough to overcome transaction costs.
These studies show that looking for patterns and studying historical stock price charts is simply a waste of time. Your time would be much better spent on other endeavors.
© 2009 CBS Interactive Inc.. All Rights Reserved

Hey surf...while you're at it....could you also ask the homeless bum on your local corner the best way to make a million dollars?

 

[Eyez]

Quote from marketsurfer:

I haven't seen the paper

surf

LOL, citing sources without an idea of what the source is actually saying?



When you try to optimize a losing system, all possible outcomes (ie. trying with 10MA, 20MA, 30MA, etc,etc increasing in 5p or 10p increments) will lose.

 

[kut2k2]

Quote from marketsurfer:

They are making up the 5000 rules? I haven't seen the paper but i dont think it could have been published with that kind of error.

surf

No, what he is saying is:

Academics consider a MA crossover with 200 different parameter sets to be 200 rules, whereas actual traders consider that to be one rule with 200 different parameter sets.

They didn't test 5000 actually distinctive rules. Not that it matters. We already know that public-domain TA is crap. Any of it that ever worked historically has long been "mined out".

 

[marketsurfer]

Quote from kut2k2:

No, what he is saying is:

Academics consider a MA crossover with 200 different parameter sets to be 200 rules, whereas actual traders consider that to be one rule with 200 different parameter sets.

They didn't test 5000 actually distinctive rules. Not that it matters. We already know that public-domain TA is crap. Any of it that ever worked historically has long been "mined out".

ok, thanks.

So, these folks that are claiming high win rates and years of profits following al brook style Price Action and or traditional chart reading are simply making things up? surf

 

[sculptor66]

The paper is online:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1181367

See page 8 ff. 'Trading Rule Specifications':

'We apply 5,806 of the technical trading rules suggested by Sullivan, Timmermann, and White (1999). Sullivan, Timmermann, and White (1999) test in excess of 7,000 rules, but one of their five rule families requires volume data which are not available for the MSCI indices we examine. The four rule families we test are Filter Rules, Moving Average Rules, Support and Resistance Rules, and Channel Break-outs. Sullivan, Timmermann, and White (1999) provide an excellent description of each rule in the appendix of their paper, which we recommend to the interested reader.'

The referenced paper by Sullivan, Timmermann and White is not online for free, however it is clear from the context that there a really only 4 different 'systems', this is what they call 'rule families'. Everything else are just different parameters sets. As I already said, this is the way it is done in many other academic studies also. No surprise here.

I have yet to see a paper which actually tests thousands of different trading systems, let alone something 'original'...

 

[R. Raskolnikov]

Which invariable leads back to the idea that you cannot test something you do not know, aka a proprietary combo of inputs and trading rules.

Quote from sculptor66:


I have yet to see a paper which actually tests thousands of different trading systems, let alone something 'original'...

 

[kut2k2]

Quote from marketsurfer:

ok, thanks.

So, these folks that are claiming high win rates and years of profits following al brook style Price Action and or traditional chart reading are simply making things up? surf

OK now you're pretending like you don't know the difference between discretionary trading and mechanical trading.

I can't comment on discretionary trading. If it works for somebody, more power to them. And academics typically don't try to test discretionary trading; I doubt they did so in the paper you cited.

 

[HurricaneUS]

Quote from sculptor66:

The paper is online:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1181367

See page 8 ff. 'Trading Rule Specifications':

'We apply 5,806 of the technical trading rules suggested by Sullivan, Timmermann, and White (1999). Sullivan, Timmermann, and White (1999) test in excess of 7,000 rules, but one of their five rule families requires volume data which are not available for the MSCI indices we examine. The four rule families we test are Filter Rules, Moving Average Rules, Support and Resistance Rules, and Channel Break-outs. Sullivan, Timmermann, and White (1999) provide an excellent description of each rule in the appendix of their paper, which we recommend to the interested reader.'

The referenced paper by Sullivan, Timmermann and White is not online for free, however it is clear from the context that there a really only 4 different 'systems', this is what they call 'rule families'. Everything else are just different parameters sets. As I already said, this is the way it is done in many other academic studies also. No surprise here.

I have yet to see a paper which actually tests thousands of different trading systems, let alone something 'original'...

surf, I hope the above faulty logic study is not the entire foundation of your argument against TA...not to mention that you're being highly delusional if you believe that your Price Drivers are not TA

 

[marketsurfer]

Quote from HurricaneUS:

surf, I hope the above faulty logic study is not the entire foundation of your argument against TA...not to mention that you're being highly delusional if you believe that your Price Drivers are not TA

not at all, i was just made aware of that study today surf