To what instruments is tech. analysis applicable?

[Thales]

Hard to believe it's been seven years since your daughter annotated those charts.

Db

It wasn't hard for her. She learned to draw straight lines and count to 3 in pre-school, and I introduced her to trading when she could still believe that it really could be that simple.

You might be interested to know that this past summer her preferred day trading vehicle was the NQ. I don't trade it myself, but on days she is home right after school, we'll often put it up on one of our screens and play some shouldawouldacoulda while we watch the close.

 

[dbphoenix]

It wasn't hard for her. She learned to draw straight lines and count to 3 in pre-school, and I introduced her to trading when she could still believe that it really could be that simple.

You might be interested to know that this past summer her preferred day trading vehicle was the NQ. I don't trade it myself, but on days she is home right after school, we'll often put it up on one of our screens and play some shouldawouldacoulda while we watch the close.

If you haven't -- or even if you have -- gone into mean reversion with her, send me a PM. I have something which may be of interest.

Db

 

[IFeelFree]

No argument from me on needing a sound system. No problem accepting the validity of certain stat-arb models as yielding consistently profitable results. I do not agree with the random market hypothesis. And I am certain that the stay-at-home retail trader wannabe will do much better focusing on price action rather than statistical arbitrage. And by saying that, I do not mean to imply that statistics do not play an important role in the development of a sound trading plan based on price action.

The random walk hypothesis (as applied to market prices) is not absolutely true, it is an approximation. If it were absolutely true, it would be impossible for traders without inside information to consistently make money in the markets. (Obviously, some traders do make money consistently.) Some studies have presented evidence that supports the view that there are trends in the stock market and that the stock market is somewhat predictable. Some evidence indicates that markets are about 95% random and 5% deterministic.

Savvy traders use a wide variety of methods to gain an edge, even their own intuition. (There are many stories of the legendary trader, Jesse Livermore, having "premonitions" that led him to place highly profitable stock bets.) Statistical arbitrage methods model market prices as a combination of random and deterministic contributions, and then seek to maximize returns by minimizing the random component and maximizing the deterministic component. One of the advantages of algorithmic trading is that I don't have to stay at home and stare at streaming charts all day. I run my software once a day and execute trades when conditions look promising. I now spend less than 5 hours a week devoted to trading activities (although I must have spent hundreds of hours learning about statistical arbitrage and developing my software.). In the past 3 1/2 months, I've made 13.3% returns in live trading. (That puts me on track for >50% average yearly return I expected from a year of paper trading.) That's good enough for me.

 

[dbphoenix]

While everyone is entitled to believe whatever they choose, it is important on message boards like these to be more exact than one might be expected to be in the comments section of an article or blog. We have moved from a certainty that the market is random to an approximation and from conclusive studies to "some evidence". We have also moved from your >50% average yearly return to the results of a year of paper trading.

As for 13.3% over 3 1/2 months, that's fine. At least you are not in the red. However, there's nothing particularly remarkable about it. Even so, if you can do it "algorithmically" without having to babysit your trades, that's fine. But it's hardly the only way, much less the best way. It's just the best way for you, like tape reading was best for Jesse Livermore. And it's worth remembering that if statistical arbitrage methods were all there was to it, the success rate amongst traders would be much higher than it is.

Db

 

[IFeelFree]

I've never said that the markets are purely random. I've always tried to be clear that they have a large random component (when analyzed via statistical methods), but also a small deterministic component. Investors are not entirely rational which allows mispricings, and so, trading opportunities. Traders attempt to exploit these small (and occasionally not-so-small) mispricings to make profits. In early 2008, I sensed that investors were becoming too complacent and I moved the funds in my retirement account out of the stock market and into a money-market fund. In March 2009, I sensed that the panic and despair had become extreme, and I moved all my money 100% back into the stock market. This is an example how we try to take advantage of mispricings. Algorithmic trading methods are another way of doing that.

I've discussed my trading history using statistical arbitrage in other threads, such as:

http://www.trade2win.com/boards/tec...itrage-vs-traditional-technical-analysis.html

I don't claim extraordinary results, but they are pretty good, and time will tell whether my approach continues to perform well. It's always possible to get higher returns using more leverage, but that entails greater risk, as well. (See, Long Term Capital Management.) I'm using 2:1 leverage, which is as much as I feel comfortable with.

 

[nine]

Greetings voices from the past (and different places) and those who feel free - does that make one free or is one simply experiencing illusion?

IFF, DB is and always has been a little ascerbic - which doesn't make him wrong. Like a lemon or lime, he may be good for what ails you.

You said, in the beginnings of time, or just this thread:

"widely traded financial instruments are essentially "random walks", which means they are unpredictable"

Then, in the same post you said:

"I trade a cointegrated PORTFOLIO of stocks/bonds/commodity ETFs which I carefully assemble so as to minimize the random component and maximize the deterministic (predictable) component"

I have to wonder if the ability to add some stuff together to create predictability doesn't imply that some predictability was there in the first place. One of the funniest things about trading is the extent to which knowledge of science and of statistics is claimed by those who never practiced as science or statisticians.

I must be much younger than you two because I've been trading for fewer years but I do have 3 degrees covering science, stats, and finance. Plus a few Moocs from Harvard and MIT to refresh areas I haven't looked at for a little while. What I do know for sure of statistics is that we tend to underestimate our ignorance.

Fun

 

[IFeelFree]

nine,

If you truly feel free, you are. It's really the mind that keeps us in bondage.

I probably wasn't clear when I wrote that "widely traded financial instruments are essentially 'random walks'...". I wanted to convey that trying to perceive patterns in a time series that is 95% a random walk, one can easily be led astray. We tend to overestimate our ability to discern meaningful patterns, like "seeing elephants in the clouds". I can't tell you how much "technical analysis" I've seen over the years that was either too vague to be useful, or just plain made wrong predictions.

As I've said many times, there is a small deterministic component in financial series', and that's what traders exploit to make profits. Statistical methods such as statistical arbitrage are an attempt to formalize those efforts.

As for my qualifications, I have an advanced degree in physics, and I've worked as both a scientist and as a software engineer for over 30 years. I've studied time series analysis in some detail, and I've made a serious effort to apply these methods to trading, which appears to be bearing fruit. I guess that gives me some right to express an opinion on a trading forum.

With regard to your statement, "What I do know for sure of statistics is that we tend to underestimate our ignorance", I would say that statistics, when properly applied, helps to keep us honest about our level of ignorance. We can quantify our uncertainty. That said, all models are a simplification of reality, and so are not absolute truth. They can be useful, nevertheless.

 

[nine]

OK. I enjoyed that post and find it difficult to pick holes in.

I'm not sure if its 95% or some other number but to me it varies from worse to better depending. A big part is finding the areas/times/situations that can offer 60% vs the areas that are 99% say. I've spent some time trying to automate what I do by eye and given up basically because I'm applying traditional technical analysis and I can't seem to turn big picture elements into C++. I must have a look at a more statistical approach though as its unlikely to require the same edge integration if it can improve the value of simple edges.

Addressing the earliest post I'd say that TA can work and define TA as the application of brain to detection of patterns in price time and volume (I dont use the last) to find executable situations where the expectancy of wins significantly exceeds the expectancy of losses. This might be a strategy with a 33% chance of a win but large wins compared to the losses or it might be the opposite.

dB's free strategy is one that I could make work. I personally tend to stack more edges. So I look to:

1 longer timeframes to detect likely supply and demand, and where stops & entry orders might be anticipated
2 longer timeframes for flows/trends/moves that might persist for a bit
3 medium timeframe to provide an indication that an entry should occur here, exits perhaps there, and I'd be wrong somewhere else
4 short timeframes to take advantage of "randomness" (or rotation or noise or forced reversion etc) so that I can get better risk reward.

All of those things, like statistical automation, are forms of technical analysis. Any one by itself is unlikely to stack luck in your favour sufficiently. The trick is to formulate compound edges that you might believe in, test them "scientifically" until you're sure enough, and then trade them with a consistency that would make Mark Douglas's ghost proud of you.

 

[Thales]

dB's free strategy is one that I could make work.

It is a nice, simple, strategy derived from objectively observed price action. I see, however, that a number of would be at-homers have struggled mightily to make it is difficult as possible.

All of those things ... are forms of technical analysis. Any one by itself is unlikely to stack luck in your favour sufficiently. The trick is to formulate compound edges that you might believe in, test them "scientifically" until you're sure enough, and then trade them with a consistency that would make Mark Douglas's ghost proud of you.

"The trick is to formulate compound edges that you might believe in, test them "scientifically" until you're sure enough, and then trade them with a consistency that would make Mark Douglas's ghost proud of you."

And there you have the explanation for why so many fail, whether using db's strategy, indicators, order flow, etc. and so on. Failure to formulate edges based on one's own experiences & observations of price action, lack of any testing, scientific or otherwise, which leads to a lack of confidence which prevents one from trading any strategy with the consistency necessary to benefit from an edge The would-be trader, hoping for gold, then proceeds to "cherry-pick," taking this signal but not that one, and invariably at the end of the day, our hapless would-be market conquistador finds he has picked a basket filled mostly with bad cherries.

Good to see you and db here, nine. If you two remain semi-active here, I'd become a semi-regular visitor myself.

Best Wishes,

Thales

 

[Thales]

If you haven't -- or even if you have -- gone into mean reversion with her, send me a PM. I have something which may be of interest.

Db

I haven't discussed it with her much, though she does track weekly and daily trend channels as it seems you do as well from a quick scan I had of your SLA strategy. I'll shoot you a PM in the coming days/week. Thank you for the offer.

Best Wishes,

Thales

 

[dbphoenix]

And there you have the explanation for why so many fail, whether using db's strategy, indicators, order flow, etc. and so on. Failure to formulate edges based on one's own experiences & observations of price action, lack of any testing, scientific or otherwise, which leads to a lack of confidence which prevents one from trading any strategy with the consistency necessary to benefit from an edge The would-be trader, hoping for gold, then proceeds to "cherry-pick," taking this signal but not that one, and invariably at the end of the day, our hapless would-be market conquistador finds he has picked a basket filled mostly with bad cherries.

Interesting that you would post this just now, as I posted the following only a few minutes ago in my own journal:

I suggest, therefore, that those who are serious about developing trading plans focus on the market and on price behavior rather than on themselves, unless they want to spend years trying to reconcile two forces which are in many ways mutually incompatible. If one enters correctly, for example, issues of stops and breakeven and size and "targets" become irrelevant. If one doesn't enter correctly, then of course he has to exit. But his doing so has nothing to do with his hopes and needs and wants and desires. Rather it has to do with the fact that he read the market incorrectly. One should, in fact, once he has entered a trade, forget about the fact that he entered the trade at all and focus instead on the market. Only in this way will he become "available" to profit from what the market has to offer.

Nearly all traders except for beginners are in a quandary: they are eager to trade yet are afraid to trade (beginners have not yet learned fear, but they soon will unless they put together thoroughly-tested and consistently-profitable trading plans before they begin trading). Thus traders seek to exploit the market while simultaneously insulating themselves from any negative consequences of attempting to do so. That's what the bulk of the millions of trading forum posts and blogs and books and articles and newsletters and trading rooms et al infinitum hawked at Trade-O-Rama are all about. Only an infinitesimally small number of them are focused on why price moves as it does. Which is why there are so many millions (billions?) of posts (and books and blogs and so forth).

Db

 

[IFeelFree]

Addressing the earliest post I'd say that TA can work and define TA as the application of brain to detection of patterns in price time and volume (I dont use the last) to find executable situations where the expectancy of wins significantly exceeds the expectancy of losses.

If a person can look at a price chart and detect patterns he can exploit to make profits, I wish him all the best. He is smarter than me in that respect. I'm just too aware of my tendency (and the tendency of most people) to see patterns that are not predictive of anything. It may be the case that some experienced traders have a highly developed intuition and can recognize chart patterns corresponding to the collective patterned behavior of other traders. Some studies indicate that experienced traders are superior to novice traders in their ability to apply technical analysis successfully. However, the subjective nature of technical analysis often makes it difficult to study academically.

I don't trust my cognitive biases. Therefore, I prefer methods grounded in statistics. The rapid rise in the use of algorithmic trading systems among institutional traders in recent years is an indication of the effectiveness of such methods. Statistical arbitrage is one of the methods they use. My background in mathematics makes this an attractive approach for me.

 

[Fugazsy]

"All patterns fail, and the failures often fail, but a failed failure is a second
entry in the original direction and has a high probability of success". AB

It is not about being more intelligent it is about being able to understand the forces behind technicality, observing the market (as somebody mentioned before) and then finding a style/way which relates with your own personality.

Market can be random or not, or shifting between the two (who cares?), for sure TA can give a slight edge towards the trader.

 

[dbphoenix]

The fascinating thing about the stock market -- the factor that keeps us all involved -- is that its risks are not random. Those who complain that "you can't know" are just lazy, ignorant, or inexperienced. Others "know" it can be fathomed, and keep trying even as they accuse it of being random; they are unwilling to blame themselves for mistakes. Still others grasp that the market is anticipatory, yet are unable to perceive that their own actions are always coincident, instead. We aren't talking about randomness at all, but something demonstrably predictable--even though not perfectly so. Some people have the psychiatrists tell us, a subconscious will to lose; others defiantly believe they can beat the odds; some -- kids taking drugs, for example -- get so caught up with the consensus opinion of their peers that they never even confront the risk. There is some sort of risk in every choice, even in not making one, and it may very well turn out that the greater risk was taken along the apparently safer path.

The value of technical analysis in the stock market is to reduce risk. It is especially helpful in guiding you to believe what otherwise seems unacceptable.

--Justin Mamis