Re: [Behavioral-Finance] Does technical analysis work?
- 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
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
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.
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From: Ed Borasky [mailto:znmeb@...]
Sent: Saturday, June 30, 2001 10:12 PM
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
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
If there's nothing to astrology, how come so many famous men were
born on holidays?
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- 12:56 01/07/2001 -0400, you wrote:
>Ed, I absolutely agree with you. Small accounts are worthless. If you reThe idea that if only traders could follow their systems they would make
>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.
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).