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Evidence-Based Technical Analysis



Evidence-Based Technical Analysis


This book is about data mining to find trading rules and then verifying that the rules that were found are not co-incidences and are in fact valid rules that can be applied to current and future strategies. (I picked that up from the publisher's excerpt below.) Has anybody read this book and have any comments on it? (I have not yet read it?)

quote:
Evidence-Based Technical Analysis is a breakthrough book in that it rigorously applies the scientific method and recently developed statistical tests to determine the true effectiveness of trading strategies, rules or systems discovered by data mining. Traditional technical analysis – as currently practiced – is more like a faith-based folk art than a science, the author asserts. To move technical analysis forward, the author proposes a new type of technical analysis, which he calls: evidence-based technical analysis or EBTA. Unlike traditional technical analysis, EBTA is restricted to objective methods whose historical profitability can be quantified and then rigorously scrutinized. The author provides a new statistical methodology specifically designed for evaluating the performance of rules that are discovered by data mining, a process in which many rules are back-tested and the best performing rule(s) is selected. Experimental results presented in the book show that data mining is an effective approach for discovering useful rules. However, the historical performance of the best rule (s) is upwardly biased - a combined effect of randomness and data mining. Thus new statistical tests are needed to make reasonable inferences about the future profitability of rules discovered by data mining. Most importantly, in data mining case study the author evaluates over 6400 signaling rules applied to the S&P500 Index using these new tests. For technical analysts and traders, the book is a wake-up call to abandon subjective, interpretive methods and embrace an approach that is scientifically and statistically valid. For other traders, the rigorous testing of trading signals/rules may make their data mining efforts more productive and stimulate the development of new systems, signaling rules.
i confess my ignorance... what is data mining ?

honestly, this reminds me a lot of the neural network programming everyone ran off and tried some years back. (Talk about some back breaking programming). Somehow that was supposed to do basically what this EBTA thing is promising, to find the best rules for trading index futures. Problem is, it did not work in the real world and it faded into oblivion. So now the author proposes we exchange the data mining program in place of neural network program. I am sure it will make for a fun mental exercise, but I honestly doubt data mining will make the average trader any more profitable or likely to succeed in the markets.

i do like the quote "faith based folk art"


in terms of "EBTA", the best evidence I personally know of is your brokerage account statement at the end of the month


i do look forward to learning all about this however
Interestingly this is along similar lines to things that you and I talked about years ago. Basically back testing a system and then looking at the equity curve that it produces to check that it is smooth and consistent and not jerky and erratic.

I think that they have just swapped some of the words around.

From what I understand.

The data mining is the part where the algorithms trudge through gazillions of records of data looking for patterns and anomalies that produce profitable set-ups. These produce our trading rules and systems through back testing - in other words.

The "Evidence-Based" part is where you look at the equity curve produced from using those set-ups and strategies. If it is profitable over the back test then that's great but if the equity curve is erratic then it is probably just a fluke that this set-up works and it won't continue into the future.

That's what I understand - but I could be wrong.
re: EBTA

Read "The Education of a Speculator" by Victor Neiderhoffer
and "Long Term Secrets to Short Term Trading" by Larry Williams

Let's call it "Evidence Based Analysis" instead. In "Secrets of Professional Turf Betting" by Robert Bacon... I quote "The public is always behind the form". One must always consider "the ever changing cycles of markets". This is a major reason TA does not and will not ever work consistantly.
I do like what the quote said: "For technical analysts and traders, the book is a wake-up call to abandon subjective, interpretive methods and embrace an approach that is scientifically and statistically valid." That is why i suggested the above books.
Also study market profile analysis. This is a very strategic approach to the markets.
Personally, i gave up on TA in all forms years ago. I became a discretionary trader (not random trader) and I look to make a determination of the day's market structure by using real time sentiment indicators and market profile and then trading (using my experience) for a day swing move. This does require a large stop (at least 50% of the ATR) that trails loosely. However, the reward side can be quite large, anywhere from 3/1 to 5/1. The key is to get on the right side of the market and trade the trend. This method is far more productive than trading support and resistance using a 2 point gain with a 2 point stop. I also use very conservative MM. My margin is a minimum of $10,000 per contract for the Emini S/P. This not only gets me into the game but more importantly it keeps me in the game.
quote:
Originally posted by rrl

...and I look to make a determination of the day's market structure by using real time sentiment indicators and market profile and then trading (using my experience) for a day swing move....The key is to get on the right side of the market and trade the trend.


Your method of trade selection is, in my opinion, what all the good traders use, and exceptionally sound and the only way to do it. I question what happens to your account and mental health when we enter a choppy sideways market. This summer has been kind to this style of trading but earlier in the year we had an exceptionally tight 3 weeks where the ES hardly moved at all. How did you fare with this style during that period. I don't remember the exact dates offhand and I'm not at the trading computer right now so can't get to the charts but I can look this up and get back to you if you don't know the period that I'm talking about.

Thanks for the heads-up on the books! I've added them to the Xmas list while I continue to work through last Xmas' book pile.
This discussion points out the difference between market analysis and trading. Most successful traders that I know are just that, good traders. They consistently make good trading decisions, and over time consistenly produce profitable results.

Having worked with many traders, I know exactly one successful trader that uses pure technical analysis to make trading decisions, and as it turns out he is one of the best traders I know. He combines an extremely high level of trading skill with sound (and very consistent) TA based market analytics.

Technical Analysis (Evidence Based or otherwise) in and of itself is neither good nor bad, and like any method used to make trading decisions, TA is right some of the time and wrong some of the time...ie. resulting in a probable outcome. Unfortunately, when the method will be right or wrong is not predictable in advance. Making matters worse, markets tend to lock into phases, where one method (trend following for example) will outperform for a period of time, and other methods (fading breakouts/oscillators) will underperform during that same period. This market tendency leads to strings (streaks) of wins or losses, which tends to drift around in a random way as well. The random unpredictability of each trading decision and individual outcome creates chaos with inexperienced traders. After all, no one puts on a new trade expecting an adverse outcome (a loss). After a string of losses, the inexperienced trader usually abandon's the specific method (that failed) in search of something more reliable.

The best Evidence Based TA approach will still suffer from this fundamental problem of random outcomes. EBTA will still experience unpredictable strings of losses and wins. Thus EBTA like any other TA approach will, in the future, produce the same result for an individual trader. A poor trader can have the best possible EBTA method, combine it with consistently poor trading skill and behavior, resulting in the predictable outcome of eventual failure.

TA is no substitute for proven trading skills.
"I question what happens to your account and mental health when we enter a choppy sideways market." from "day trading"

as far as the mental aspect, I remain calm. I have learned to accept what the market is willing to give. As far as choppy markets that is not a problem. It's not the consolidation periods that are a problem it's the ATR or volitility. This recent change in market cycle that now has 14 point ATR's helps greatly. But over the last 4 years when we had ATR's as low as 7 or 8 that caused me to change the stop and target points. I could not go for 5-9 day swing moves. I had to accept 4-6 points and less. So my methodology still worked but the money management had to be changed. As far as the final result to my brokerage statement i was still producing my same w/l record but the absolute amounts were smaller and the total return on capital was less. I could have increased that by taking more risk and trading more contracts but I won't do that. It's not my style. i am very conservative.

from pt_emini
"Having worked with many traders, I know exactly one successful trader that uses pure technical analysis to make trading decisions, and as it turns out he is one of the best traders I know. He combines an extremely high level of trading skill with sound (and very consistent) TA based market analytics.

Technical Analysis (Evidence Based or otherwise) in and of itself is neither good nor bad, and like any method used to make trading decisions, TA is right some of the time and wrong some of the time...ie. resulting in a probable outcome."

yes, i agree. i never said anyone could not be consistantly profitable but that TA will never work consistantly due to the ever changing cycle of markets. Far be it for me to say "this is good and that is bad.". Each trader finds their own comfort level in terms of method and MM style. if it works for that trader it is good. for myself, i have never had any long range success with TA setups.
quote:
Originally posted by rrl

...recent change in market cycle that now has 14 point ATR's helps greatly. But over the last 4 years when we had ATR's as low as 7 or 8 that caused me to change the stop and target points...


ATR is obviously historic and shows what has happened in the past up to today. If it drops and you change your style, it may then pick up, making a mess of your new style. So your style of trading is dictated by an historic ATR and you can't use the historic ATR to select a style for the future because you don't know what the ATR today or tomorrow will be.

Or am I missing something here?
answer to day trading:

the market cycles i am talking about occur over long periods of time, as in years. the best example is the volitilty and volume increases that started to occur these past few months, we have not seen this sort of change in years. it is not hard to recognize. I dont change my style each day or week depoending on a few narrow range days. when the market dried up in 2001 or so it was not hard to respond or recognize that change either. so i changed my approach. likewise i changed my approach again according to what happened these last few months AND i expect this current volitility to continue. How long? Exactly - i dont know. but i would say for the next 2 years or so.
Over this time period we will get narrow range days and maybe a week or two, but the market character has changed and the increased volitility is the the new mean average. Its not going to suddenly go back to 7 point ranges combined with a severe drop in volume averages out of the blue without very good reasons. the markets dont work that way.
I think that last posting of yours is probable one of the most valuable that I have ever seen. Not because I didn't already know that but because I believe that is the most important aspect to profitable trading. I also believe that successful discretionary traders that don't use tools such as long term values of ATR, are successful because they have seen these market cycles time and again and without realizing it they adapt their trading styles when the markets change like this.
quote:
Originally posted by rrl

re: EBTA
...One must always consider "the ever changing cycles of markets". This is a major reason TA does not and will not ever work consistantly...Personally, i gave up on TA in all forms years ago. I became a discretionary trader (not random trader)...The key is to get on the right side of the market and trade the trend. This method is far more productive than trading support and resistance...

rrl: What you say makes a lot of sense but there are still some problems with it. For example, what happens when there is no trend for the day and you get stopped out? What happens when you get on the wrong side of the trend and get stopped out? What happens when you get on the right side of the trend but a sudden move takes you out of the trade before the trend sets in?

This style of trading means that you can get long periods of draw downs in your trading. Is this right?
Not looking good for marriage if your win ratio is over 50%...