Forum Archive Index - February 2003

[Travis Morien <travismorien@yahoo.com>]

--- "tennyson@caverock.net.nz"
<tennyson@caverock.net.nz> 

> Again, I don't claim to speak for Phaedrus, but from
> what I have 
> observed he doesn't use the same indicators on all
> shares he trades.  
> He does back test the indicators he uses on the
> particular share he 
> trades with though.  He doesn't have to get a system
> that works for 
> all shares.  He only has to find a system that works
> for the share 
> he wants to trade.

Backtesting in such a way works no better than
backtesting a single indicator on the entire market. 
Stocks do not have "personalities", although many
traders seem to think they do.


> 
> He is in effect trying to find an indicator(s) -
> there 
> may be more than one -  that will reflect the
> investor psychology 
> that drives one particular share price.  But he
> certainly doesn't 
> assume that because an indicator is successful in
> one share it will 
> always be useful when charting any other share.

No indicator based on OHLCV data contains this
information.  For futures and options you could learn
a few things from studying open interest but no
technical stock indicator, certainly not something
that could be programmed into a computer and
backtested, will ever deal with anything other than
randomly fluctuating curves, as opposed to "investor
psychology".

News comes along essentially randomly.

I'm always amused to hear the common TA concept that
they can follow the "insiders" by looking at a chart
price.  In many instances "insiders" do the opposite
of what TA people are looking for.  

For example in late January executives of Challenger
International were all selling, this selling had gone
on for a little while actually.  TA people would
conclude this was a bad thing, I concluded it was
spurious data because there are a wide variety of
reasons to sell, as opposed to insider purchases which
are usually done for only one reason, to make money. 
Next thing you know CLI announces it is to be taken
over by CPH and the stock is up 30% in a couple of
weeks.

Note that in the days before the takeover, the stock
slid.

So I say bah humbug to the all knowing insider.
 
> Of course any system using a signal which is an
> indicator of 
> human emotion and perception will not be
> mathematically 
> numerically precise.  To expect an 'answer' that you
> can put into a 
> formula, and hence program up a computer to do it,
> is like asking a 
> precise answer to the question:

The precision to which someone can measure psychology
in OHLCV data is only about as great as the precision
with which someone can measure the amount of
phlogiston in a piece of wood.  You can write the best
programs and use the best hardware but it is a doomed
enterprise.
> 
> "How bad do you feel about this bit of bad news?"
> 
> The answer depends upon who the collective 'you' is,
> how 'bad' the 
> bad news really is and how you *perceive* this bad
> news.  The answer 
> to this question is a judgement call which is why
> you need a human, 
> not a machine to make it.
 
TA users don't often pay much attention to fundamental
information such as "news", they just read charts.  If
the data is there to be extracted, a computer should
be able to do it.  There is a lot of high tech out
there, neural net programs, genetic algorythms etc,
but it doesn't find the signals that chart observers
claim is there.

 
> >Successful traders are much like successful
> gamblers,
> >they occupy themselves with managing their bet
> sizes
> >and limiting the amount they lose in any one
> session. 
> >  
> >I'm not claiming that there are no successful
> traders,
> >I am claiming that there are no successful
> technical
> >analysis methods .
> > 
> >Money management and risk management is, a field
> >quite distinct from technical analysis as it does
> not
> >involve chart reading, prediction of trends or
> >reaction to trends and instead focuses on the
> trader's
> >equity.
> > 
> >Just as with gamblers there is no suggestion that
> you
> >know what is coming up next, and this certainly has
> >nothing to do with support and resistance.
> >
> >
> 
> So what you are saying, Travis, is that successful
> traders are really
> successful risk managers.  

Yes.
> 
> Phaedrus is not using the idea of a 'support level'
> as something 
> that will always exist in the future.   Just because
> a 'support 
> level' has been observed to exist (respected) does
> not mean it will 
> be the next support level that exists as trading in
> that share 
> continues.  If that 'support level' is is breached
> then Phaedrus will 
> sell.  Strip away the fancy language ('support
> level')  and what 
> Phaedrus is describing is just a simple risk
> management technique.
> 
> It looks to me Travis, that both you and Phaedrus
> are saying the same 
> thing here on the subject of 'risk management'..

No, absolutely not.  

There are two aspects to trader money management and
as I said neither of them involve charts.

Traders decide on the average amount per trade they
are going to commit, these methods include pyramiding
vs anti-pyramiding strategies where the trade size is
increased in line with equity increases or decreases,
or optimal f and secure f.  These methods are always
based on mathematical techniques and analysis of
trades.  No charting is involved.  This is often
referred to as "money management", though I prefer to
call it "trade sizing" because "money management" has
other meanings.

The second aspect is the limitation of losses.  So
called "risk management".  These basically involve
stop losses of various sorts including fixed stops or
trailing stops.  Once again it has nothing to do with
technical analysis because it is based on your trade
equity, not the price of the stock.

I meet all sorts of people in my profession including
fund managers.  I chat with the manager of a hedge
fund which includes futures trading strategies from
time to time and he describes TA as "enormously
overrated and overused" and claims it has next to no
value for a professional trader.  On the other hand,
money management and risk management are absolutely
crucial, especially in leveraged trading.

I've also got a client who used to trade
professionally at a bank's options desk, you will not
find anywhere a more staunch critic of chartists.

> 
> >
> > 
> >Risk management isn't TA so anyone trying to argue
> >that TA works because risk management works is
> tying
> >themselves into logical knots.
> >
> > 
> >There's the Johnson Report on day traders,
> >commissioned by North American Securities
> >Administrators Association (NASAA, a consumer
> >protection group trying to keep the futures
> industry
> >honest) that demonstrated that almost none of those
> >surveyed made money and the few that did so
> appeared
> >to take on so much risk that their risk of ruin was
> >calculated to be nearly 100%, implying that
> eventually
> >they were nearly guaranteed to lose.
> >
> 
> Phaedrus doesn't make his decisions on intraday
> prices, so this is a 
> red herring.

Well if you read the report you'll see it doesn't only
focus on day traders, it just finds that they are the
worst of the lot.

> 
> >
> >TA and risk management are quite distinct
> > concepts.
> >
> 
> How can you have a trend without a beginning and an
> end?  So how can 
> you argue that using risk management techniques to
> determine a 
> beginning and an end is a 'quite distinct concept'?

Um, I think you might be thinking of something else. 
Risk management does not rely on trends in stock
prices.

> Of course it would be a dumb system.  That's the
> point I was making.  
> Finding a trading system, or finding several trading
> sytems to be 
> dumb is not necessarily proof that all trading
> systems are dumb.

I'm not saying trading systems are dumb, I'm saying
technical analysis is dumb.

A trader can use a 100% fundamental analysis approach
along with risk management and money management. 
Technical analysis is a distinct concept, which is why
books on money management and risk management usually
have very little info on TA and books on TA have very
little info on MM and RM.
> 
> You have already identified some things that are
> dumb: high turnover 
> (using systems that generate too many buy/sell
> signals).  Systems 
> that have a poor associated risk management system. 
>  Phaedrus's 
> system may indeed be dumb.  But by setting up a
> couple of straw men 
> and pulling them down you have not proved it to be
> so.

I'm not setting up straw men, I'm listing the many
reasons why trading techniques do not work.

Ok, lets take a different tack then.

I've listed a number of studies that have found that
trading is not a profitable passtime and that the
overwhelming majority of those that attempt it do
extremely poorly.

I've listed evidence that TA doesn't work, and given
reasons why.

Since everyone here is so keen to argue against that
and so convinced that I'm wrong I'll ask someone else
to provide a bit of info.

Anyone is welcome to chip in with evidence that:

TA systems work, including studies to support this
assertion or comprehensive backtesting studies that
work on valid out of sample data.

That users of TA can outperform the market over the
long term and that successful users outnumber what one
might expect from completely random chance.

That there exist successful TA users and that their
success comes from TA.

That there is a single person out there, anywhere,
other than fundamental analysts such as Buffett and
Templeton who has consistently been successful in
predicting market turns.

Provide evidence for some or all of these and I'll
stop terrorising this group with all my horrible nasty
little facts.

Note that you need to do better than just quoting some
article written by an internet pundit, I'm
specifically looking for credible information with a
degree of respectability and scientific repeatability.
 I know there are many articles making claims about
TA, I don't need more claims I just want evidence.

Once again, anyone is welcome to contribute here, not
just Snoopy.  If someone here has any credible
evidence whatsoever I'd love to hear it.  I'm sure you
all do because no rational thinking human being would
follow an investment strategy without first
determining whether or not it works, would they?

Travis
www.travismorien.com


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