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I joined this conversation a bit late, but you might divide technical
analysis indictors into two main groups. Predictive and Following. The
former generally tries to pick trading tops and bottoms and should, in my
opinion, be considered dubious at best. Following types, however, can be
extremely accurate. The objective here is to find a newly established price
move as early as possible. If structured properly, back testing can be very
legitimate. I always measure the quality of back testing, by the ability to
duplicate the back testing results with current trading. If current trading
using the parameters of the back test matches the experience of the study,
the back test is usually valid to some degree. Actually, if your historical
study is structured properly, this is not rocket science. Historical
studies should not only include indicators, but the money management used to
apply the system. Statistical significance to me is does the system make
money in real time.
Best,
Larry Carhartt
MasterDATA
The Only Source for Index & ETF Composite/Breadth Reports, Charts & Data
www.MasterDATA.com
lc@xxxxxxxxxxxxxx
818-701-6686
-----Original Message-----
From: equismetastock@xxxxxxxxxxxxxxx [mailto:equismetastock@xxxxxxxxxxxxxxx]
On Behalf Of sebastiandanconia
Sent: Wednesday, September 07, 2005 6:23 AM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: [EquisMetaStock Group] (OT) Entire "statistics" discussion has a
major fault.
There seems to be a widespread confusion between causation and
correlation.
If a stock price is in an uptrend and the Inverse Fisher Transform of
RSI is greater than 50 (indicating a "buy" signal, depending on
parameter), that's only a correlation between the IFT of RSI and stock
price. The stock isn't rising because of the indicator, the indicator
is rising because of the stock price and it's the same story with
virtually every TA indicator.
So what is the purpose of back-testing this OR ANY indicator if it's
not the cause of stock price movement? The only things that are being
generated are meaningless correlations.
Luck to all,
Sebastian
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