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David Aronson's book is definitely worth reading, in my view. I am only
part way through it but already it is making me rethink some things I had
previously taken as given.
In regards to the charts I posted, it is simply an example of the dangers in
assuming that there is always a falsifiable theory contained within price
data alone, ie there is a repeatable price pattern that can be relied upon
in making trading decisions. Aronson refers to a similar exercise that was
undertaken with several "chart experts" and they could not determine which
charts were random and which contained actual price data.
The message I get out of this is that placing too much faith in accepted
chart patterns such as double bottoms, head and shoulders, trend breakouts,
etc, etc is potentially dangerous. It is very easy to create random charts
and test this for yourself. You will, without fail, find plenty of trading
opportunities based on the more common signals. Naturally, if the process
is random, it implies that the expected move from a given position may or
may not occur - it is totally random!
Please note that I am certainly not suggesting that TA, or even charts
alone, can never provide us with useful information on which to base our
trading decisions, only that we need to be careful in how we interpret the
data. For me, it has meant that I intend to spend less time looking for
the perfect entry and focus more attention on good exits, position sizing
and money management - nothing new, I know.
If anyone is interested in easily creating random price charts, email me and
I'll happily send you a spreadsheet that you can use to create your own
charts ad nauseum. It is very simple.
Cheers
John
_____
From: equismetastock@xxxxxxxxxxxxxxx [mailto:equismetastock@xxxxxxxxxxxxxxx]
On Behalf Of Eduardo Gontan Pulgarin
Sent: Monday, 12 March 2007 2:48 AM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: Re: [EquisMetaStock Group] Charting wisdom
Yes, David Aronson's book is excellent reading, I would recommend it to
anyone who decides to take up trading the markets with TA, if nothing else ,
how to recognise a mile away those "gurus" of Technical Trading!
Let's make one thing clear: it is not possible to predict the markets, no
matter what tools are used:TA, FA, Cristal Balls. etc...
But having said that, it is possible to make money out of the market; hard
but possible.
One of my favourite piece of software for trading the indices is the
Automatic Pattern Search (APS) from Michael Harris; based on price patterns
only, I have been able to dig out patterns with a 90% of profitability,
amazing!
So, what's the catch? Simple; if I told you that the same pattern must be
traded with a profit target of 2% from entry price and a stop loss of ...5%!
Now, what would you think? Besides, over time, those patterns revert to
mean, or simply stop appearing any longer.
Which is why Michael Harris, in his latest book "Profitability and
Systematic Trading", gave a whole section to Risk and Profitability, where
risk and money management are covered by something like 28 formulas; then,
there is also a discussion on the pitfalls of backtesting.
You can make money with APS, but you won't become wildly rich overnight!
Now, coming back to David Aronson, anybody cares to tell me where in his
book money and risk management are covered? Anybody cares to tell me how to
use TA in those two topics, risk and money management? Anybody who actually
has got a clue of what I am talking about? I know that Jose does - after
all, I am using the tools he designed, and yes, they are based on TA, I
wouldn't be able to use them on Metastock otherwise!
Yes, TA works, and so does FA; but without risk or money management you
won't get very far; there are people who make money out of the markets, and
yet their rate of failure is above 60% and even 70%!
Do you really think they'll take any notice of your charts, John?
Eduardo.
John Nicholson <johnnic@xxxxxxxx <mailto:johnnic%40bigpond.net.au> net.au>
wrote:
(I am attempting to attach several small graphs to this note. If I have
been unsuccessful, I'd appreciate the advice of others on how best I can do
so).
The following eight charts are broken into two groups. Four of the
(randomly placed) charts are actual charts of stocks covering a chosen 2000
day period on the ASX. The other four are totally random, i.e. they have
been developed using a simple random number generator that equates to the
toss of a coin to determine whether the price went up or down on any single
day over the 2000 day period.
Would anyone care to try and identify which are the four actual charts and
which are the random charts?
Please note that this is not meant to be anything more than a bit of fun. I
am not trying to make any particular point, although I might say that when I
borrowed this idea from David Aronson's book "Evidence-Based Technical
Analysis" and tested it for myself, I drew some conclusions that might be
considered heresy by some.
John
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