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Re: [Behavioral-Finance] Does technical analysis work?

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  • Research Dept.
    Hello Ed, EB I m going to weigh in here ... as far as I m concerned, for *small* EB accounts (more precise definition to follow) nearly all technical EB
    Message 1 of 4 , Jul 1, 2001
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      Hello Ed,

      EB> I'm going to weigh in here ... as far as I'm concerned, for *small*
      EB> accounts (more precise definition to follow) nearly all technical
      EB> trading systems are worthless. Those few technical trading systems
      EB> I've seen that appear to work take a tremendous capital base and a
      EB> psychological discipline unlikely to be found in someone who has not
      EB> devoted his or her life to trading.

      Just wondering ED - do you recall a young man named Troy Feilds who
      visited you a few years back? He was working for Stan Finney at the
      time. He reported back to us that you were working on a predictor
      that would pick the next days open or close (I am having problems
      remembering now). Anyway Troy is my second cousin and I also worked
      for Stan/Regal, I belive we have some common clients in different
      ventures.

      While working with Stan, I (like Troy) used the Ned Davis product
      Technaylzer to do my research and modeling. As you know NDR.com is a
      serious player in technical analysis, leaving no stone unturned. The
      data is perfect and the program is perfect not to mention obscure with
      only 6 or so clients (some known and undiscovered who's who)
      worldwide. Only with a product like that did I gain the confidence to
      understand what I was undertaking. Likewise only with all the money
      to spare did Ii gain the knowledge to apply it.

      It's the demons that keep the masses from following in the footsteps
      of automated systems pioneers. No matter how experienced one thinks
      he has become there resides doubt and turmoil. Not only copious
      amounts of capital but temperament under fire is required to make it
      BIG. Anything less than BIG is just random. Stan certainly has been
      at it long enough without a loosing year that any talk of luck or
      random is out the window. It took hard work and endless amounts of
      research as I'm sure you can relate and appreciate.

      In closing I would say that in addition to devoting ones life to
      trading, you MUST possess the PASSION!

      --

      Have a Great Day, Mark

      http://www.markbrown.com
    • Eugene Mondrus
      Ed, I absolutely agree with you. Small accounts are worthless. If you re starting with anything less than 100K you are already at a disadvantage. The
      Message 2 of 4 , Jul 1, 2001
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        Ed, I absolutely agree with you. Small accounts are worthless. If you’re starting with anything less than 100K you are already at a disadvantage. The psychological discipline factor should also not be discounted. I myself have called double tops, volume spikes, MA breakouts, but didn’t have the moxy (balls) to do anything about it. I have also let losing trades run, been stuck in positions for too long, and etc …. I would argue that the reason that the majority of traders lose money is not because they don’t have the right signals but because they don’t believe their own systems. And without a doubt systems change over time, and must be adjusted accordingly. Even if you’ve managed to run the past 100 years worth of data through the system that doesn’t guarantee that the system will be flawless.

         

        Without a doubt Technical Trading is HARD !

         

        But people do do it. And they do it by watching and acting on the signals and by understanding market psychology. It is that understand of market psychology that I would like to quantify.

         

        Gene Mondrus

        Consultant

        IBM Global Services

        (212) 493-5779 (work)

        (917) 912-5110 (cell)

        (718) 796-6777 (home office)

         

        -----Original Message-----
        From: Ed Borasky [mailto:znmeb@...]
        Sent: Saturday, June 30, 2001 10:12 PM
        To: behavioral-finance@yahoogroups.com
        Subject: [Behavioral-Finance] Does technical analysis work?

         

        I'm going to weigh in here ... as far as I'm concerned, for *small*
        accounts (more precise definition to follow) nearly all technical
        trading systems are worthless. Those few technical trading systems
        I've seen that appear to work take a tremendous capital base and a
        psychological discipline unlikely to be found in someone who has not
        devoted his or her life to trading.

        There are a lot of ways to do this wrong and essentially only one way
        to do this right. First, you acquire a database of past price, volume
        and open interest data. If the database isn't nearly flawless, you've
        got one strike against you. You divide that database into two sets,
        which we call the training set and the testing set. Both these sets
        should cover *long* periods of time, with *many* different economic
        and market conditions included. By the way, it isn't a matter of
        number of data points -- you need just as many *years* of tick data
        as you do daily, weekly or monthly data. And the more individual
        markets, the better.

        So, if you're working with stocks, I'd say you need 100 or more stocks
        that have been trading for at least 20 years, and preferably far
        enough back to include the long bear market in the mid 1970s.

        Next, you search over millions of possible mechanical systems on the
        training set. This is the easy part if you're a competent programmer,
        but it's next to impossible if you aren't. The computer does all the
        work. Expect it to take a fair amount of time, even on the 1.333 GHz
        systems you can buy today. You should come out of this step with a
        small handful (no more than five) systems that are promising.

        Now you do a Monte Carlo simulation of these five systems on the
        *testing* data set. The numbers you got during the training set search
        are essentially meaningless -- what matters is how the systems perform
        on data they have not seen! First, you simulate the systems against
        the test data and record the exact trades made -- entry date/time and
        price, exit date/time and price, commissions, an allowance for
        slippage and the bid-ask spread. Again, if you're not a competent
        programmer, this step will be impossible.

        The list of trades is then fed to a Monte Carlo simulator which will
        tell you if the systems are worthwhile and what your capital base
        needs to be. Fortunately, at least one vendor -- CSI Data -- provides
        such a simulator in their Unfair Advantage package. If you don't have
        that, again, you need to be or find a competent programmer. If you
        don't go through *all* this work, you've got another strike against
        you.

        Let's assume you find one system that passes these rigorous tests. You
        now need two things: a large enough capital base (the Monte Carlo
        simulation should tell you this) and psychological discipline. You
        need these to ride out the drawdowns (again the Monte Carlo should
        tell you what the drawdowns are likely to be) and to take *every*
        entry and exit that the system gives you. If you try to second-guess
        the system, you have another strike against you.

        So, in conclusion, I believe it is *possible* to make a living as a
        technical system trader. However, it is *extremely* difficult, and
        most people who try it without doing the massive amounts of homework
        I've sketched out above are going to lose money that they can't
        afford to lose.
        --
        M. Edward (Ed) Borasky, Chief Scientist, Borasky Research
        http://www.borasky-research.net  http://www.aracnet.com/~znmeb
        mailto:znmeb@...  mailto:znmeb@...

        If there's nothing to astrology, how come so many famous men were
        born on holidays?



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      • Zac
        ... The idea that if only traders could follow their systems they would make money is a myth. Traders are far more likely to remember the great trades they
        Message 3 of 4 , Jul 2, 2001
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          12:56 01/07/2001 -0400, you wrote:

          >Ed, I absolutely agree with you. Small accounts are worthless. If you re
          >starting with anything less than 100K you are already at a disadvantage.
          >The psychological discipline factor should also not be discounted. I
          >myself have called double tops, volume spikes, MA breakouts, but didn t
          >have the moxy (balls) to do anything about it. I have also let losing
          >trades run, been stuck in positions for too long, and etc &. I would argue
          >that the reason that the majority of traders lose money is not because
          >they don t have the right signals but because they don t believe their own
          >systems. And without a doubt systems change over time, and must be
          >adjusted accordingly. Even if you ve managed to run the past 100 years
          >worth of data through the system that doesn t guarantee that the system
          >will be flawless.

          The idea that if only traders could follow their systems they would make
          money is a myth.
          Traders are far more likely to remember the great trades they didn't take
          than the bad trades they didn't take.

          Having said that, it is true that psychological factors play a large part
          in the trading process.

          Most small traders probably lose their accounts through over-trading - so
          in this sense, yes, even if they had a statistical edge they would still
          more than likely lose their money through lack of money management caused
          by, "The psychological discipline factor" - similar to playing the
          individual numbers on a roulette table rather than dying slowly on
          red/black.. However, most traders do not have an edge or to put it another
          way, most traders do not know that they don't have an edge, as it is
          extremely difficult to prove - part of the attribution issue.

          The temptation to override one's system diminishes as one gets more
          experienced; it becomes increasing clear that one doesn't stand a hope in
          hell of bettering the system given the [transparent] complexity of the
          pattern recognition process going on under the hood (I'm not referring to
          MA crossover type systems where one's judgement is probably as
          accurate/inaccurate as the system).

          Regards,

          Zac
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