Monday, January 14, 2013

Surprise...Technical Indicators Don't Work

Technical Indicators Don't Work.....How Could They?


Today market participants, investors and traders are unfortunately taught to chase their own tail. This is very unfortunate and it is something that we at Trade Ideas have been trying to change for over 9 years. We are inundated with new types of indicators and studies that are supposed to help. However these studies were never put through a scientific test to see if they actually help with investing or trading. I'll cut to the chase, they don't work. These technical analysis studies were conceived and designed at a time when technology that could validate the study simply did not exist. Let's look at the facts.
  • MACD (moving average convergence/divergence) is a technical analysis indicator created by Gerald Appel in the late 1970s
  • RSI The relative strength index was developed by J. Welles Wilder and published in a 1978 bookNew Concepts in Technical Trading Systems
  • Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s
  • Ichimoku Kinko Hyo - usually just called ichimoku is a technical analysis method that builds on candlestick charting to improve the accuracy of forecast price moves. It was developed in the late 1930s by Goichi Hosoda,
  • The Elliott Wave Principle - is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytic tools in the 1930s.
  • Commodity Channel Index (CCI) is an oscillator originally introduced by Donald Lambert in an article published in the October 1980 issue of Commodities magazine 
  • Vector Vest - In 1978, Dr. Bart DiLiddo, Ph.D. began to create mathematical models that clearly define EXACTLY what causes a stock’s price to rise or fall. No opinions. No guesswork.
The issue is that market vendor revenues are tied to dangling the carrot of hope in  front of needy investors.  Here is this indicator, here is a new one, and here is yet another one; it is an endless cycle.


Yesterday my partners and I attended a Warden TC2000 seminar in La Jolla, California. We are fans of Warden TC2000. The charting is well done and our two products link to one another allowing users to seamlessly interact between the two products, clicking on symbols in Trade Ideas and updating the charts in TC2000.

Golf clap to TC2000 for an excellent marketing job. There were over 150 people in the conference room looking at two large screens displaying the latest version of TC2000. The attendees were engaged and the presenter kept the flow going at a good pace and knew how to work the software.

My partners and I attended this conference to see how TC2000 was approaching the scanning aspect of their software, which is of course Trade Ideas specialty. So we were there doing a little competitive intelligence.

The presenter showcased the various parts of the charting package which included a vast library of technical indicators. It was long and extensive, over 80 different technical indicators and end users had the ability to manipulate the settings of these indicators in almost any way imaginable. From the simple to the complicated you could spend 10 years trying to find the best technical indicator for your specific trading style.

After a short break, the seminar reconvened to look at the TC2000 scanner.  An attendee asked the presenter if he could scan for a technical set up in TC2000, like for example when the 20 period SMA crosses the 50 period SMA and have TC2000 tell him how that condition has been working in the current market. The presenter paused.  He said, "Well, what you are asking for is backtesting, and TC2000 does not do any backtesting." He said TC2000 doesn't like it because it can give people a false sense of predictive value. Then he said something I want to use in my presentations, he said if technical indicators worked, they would be called "technical guarantors" not indicators. The audience laughed.

We invite you to take a look at how Trade Ideas approaches backtesting and validation of how a strategy is performing in today's current market conditions. Our backtesting module, The OddsMaker, has a number of unique tools allowing for the immediate visualization and analysis of your strategy’s simulated performance. And our unique Execution Consulting service provides our clients with fully developed and backtested strategies and trading plans with the best chance of producing profit.

To Get Started with Execution Consulting or if You Have Questions: