Quantitative Trading and Technical Analysis

[suby 10]

For everyone that has read/given feedback to my previous post on applying math to technical analysis, I wanted to do a followup post to ask the community who here applies quantitative methods to their trading specifically in regards to technical analysis....?

 

I have read ernest chan's book "quantitative trading"; however, I have no desire to trade mechanically. I was wondering if it was possibly to develop quantitative indicators specifically in regards to technical analysis and apply them as a discretionary trader.

 

Any feedback/insight is extremely appreciated!

[SIUYA 11]

"who here applies quantitative methods to their trading specifically in regards to technical analysis....?"

 

Any one who has done a backtest on a computer.....

anyone who has done a foward test....

anyone who records their trades and analyses the results.....

Plus

uses technical analysis fits this criteria.

 

That's why you do it.

 

Unfortunately you will find most things are at best right 50% of the time, hence why you might apply discretion.

Or you might find that they occur 90% of the time, but that last 10% wipes you out if that 1-100 year 9 standard deviation move happens......of you dont have a stop, and 90% is unlikely. etc;

etc;

 

What exactly are you after?

[suby 10]

"who here applies quantitative methods to their trading specifically in regards to technical analysis....?"

 

Any one who has done a backtest on a computer.....

anyone who has done a foward test....

anyone who records their trades and analyses the results.....

Plus

uses technical analysis fits this criteria.

 

That's why you do it.

 

Unfortunately you will find most things are at best right 50% of the time, hence why you might apply discretion.

Or you might find that they occur 90% of the time, but that last 10% wipes you out if that 1-100 year 9 standard deviation move happens......of you dont have a stop, and 90% is unlikely. etc;

etc;

 

What exactly are you after?

 

Structure I guess and attempting to develop an edge - maybe computers might not be the end all be all in trading?

 

I want to trade futures, specifically CL, and knowing how dominant high frequency trading is and algos are I guess i'm trying to derive an edge around that

[SIUYA 11]

Structure I guess and attempting to develop an edge - maybe computers might not be the end all be all in trading?

 

I want to trade futures, specifically CL, and knowing how dominant high frequency trading is and algos are I guess i'm trying to derive an edge around that

 

So you want to develop a mathematical edge around HFT and other algos that have been developed and are run by mathematical geniuses with more phds than ass holes......good luck.

 

Seriously - learn to follow the flow of the markets, understand what makes them tick, and move first, develop a feel for them - then plan and test.

 

Personally I think a lot of the 'edge' talk is BS - it comes from have a statistical or price related edge usually related to arbitrage opportunities. Our edge as traders is that we are small, nimble, dont need to trade and be patient and just need to follow what the market does. We should consider our selves as sheep and just follow the market. (others may differ but I have not seen someone argue with the market and make money over the long run as Mr market is bigger badder, more irrational and more ruthless - even big players who try and corner markets often get toweled up)

[DbPhoenix 42]

Our edge as traders is that we are small, nimble, dont need to trade and be patient and just need to follow what the market does. We should consider our selves as sheep and just follow the market.

 

You keep saying all these smart things, Siuya. But at least you're not alone:

Figuratively speaking, the small trader should imagine himself as a hitch-hiker in the market. For the ordinary hitch-hiker, someone else supplies the car, chauffeur, oil and gas. When he thinks the car is about to go in his direction, he jumps aboard and rides as far as he thinks the car will go. When he notices the machine has been stopped by a red light, or is about to turn a corner and go in some other direction, or that the car is running out of gas, or the brakes failing to work properly, he steps off and figures he has secured about as long a ride as he may expect. All he has supplied in this transaction is a modest commission and whatever brains were necessary to observe and recognize the opportunity when to get on and off. (Richard Wyckoff)

Here's an idea for an edge: learn how to draw a box and a straight line. No complex mathematical gyrations, no quantitative whatever, no statistics, no spreadsheets. Just a box and a line.

 

Db

[steve46 12]

Unfortunately, things have changed significantly since Mr. Wyckoff was pontificating from his Jaccuzzi so many years ago....

 

Clearly if a person has limited skills and is short on education, their options are few...perhaps drawing lines pointing at and away from boxes is the best they can hope for..ultimately if you can make it work, that is what counts....

 

I notice that the gentleman suggests that if a trader finds his/her emotions are getting in the way of their success, they should simply "stop doing that".....

 

I find it all very entertaining...

[suby 10]

You keep saying all these smart things, Siuya. But at least you're not alone:

Figuratively speaking, the small trader should imagine himself as a hitch-hiker in the market. For the ordinary hitch-hiker, someone else supplies the car, chauffeur, oil and gas. When he thinks the car is about to go in his direction, he jumps aboard and rides as far as he thinks the car will go. When he notices the machine has been stopped by a red light, or is about to turn a corner and go in some other direction, or that the car is running out of gas, or the brakes failing to work properly, he steps off and figures he has secured about as long a ride as he may expect. All he has supplied in this transaction is a modest commission and whatever brains were necessary to observe and recognize the opportunity when to get on and off. (Richard Wyckoff)

Here's an idea for an edge: learn how to draw a box and a straight line. No complex mathematical gyrations, no quantitative whatever, no statistics, no spreadsheets. Just a box and a line.

 

Db

 

Lol thanks DB, I appreciate you putting things in perspective

[suby 10]

Unfortunately, things have changed significantly since Mr. Wyckoff was pontificating from his Jaccuzzi so many years ago....

 

Clearly if a person has limited skills and is short on education, their options are few...perhaps drawing lines pointing at and away from boxes is the best they can hope for..ultimately if you can make it work, that is what counts....

 

I notice that the gentleman suggests that if a trader finds his/her emotions are getting in the way of their success, they should simply "stop doing that".....

 

I find it all very entertaining...

 

Steve,

 

Do you trade quantitatively?

[steve46 12]

OK lets take a step back

 

First....these are "buzzwords".....we all use math..most everyone begins using charts and indicators even though they don't really know much about the tools and how they are constructed.....it is only when a person takes the time to obtain some background that they have a chance of moving past, the half truths and urban myth that flies about here (and on most public sites for that matter)...

 

Now as mentioned we all use math....but if you happen to have a signficant background in math, you can use it to your advantage....that "advantage" which some call an edge....depends on the kind of background information you have at your command and whether or not you have the skill and experience to apply it to the markets...

 

If you have a background....if you have knowledge...the best thing to do is to bring it to bear on the problem....if you don't well, as mentioned....your options are fewer....and you have to realize that in a market place where significant money is at stake...there are a lot of very well educated folks who are competing with you...

 

If you can obtain an edge (meaning you have a way of consistently making money) by drawing lines and boxes....God bless you...go for it....but if that doesn't work for you...you may want to at least give a thought to learning something that might help...the way I figure it....the time is going to go by anyway isn't it.....I think the real question is how are you going to invest in yourself...and are you giving yourself the best tools for success...?

 

The method I used to trade relied on math...along the way I tried to simplify it for use by retail traders with a limited knowledge of that subject...what I found was unexpected...and although it still requires math, I think it is a nice compromise...you don't have to have a significant math education, but you are a step up from drawing lines and boxes....

 

 

Hope this helps

Steve

Edited September 7, 2012 by steve46

[PrymeTyme 10]

Unfortunately, things have changed significantly since Mr. Wyckoff was pontificating from his Jaccuzzi so many years ago....

 

Clearly if a person has limited skills and is short on education, their options are few...perhaps drawing lines pointing at and away from boxes is the best they can hope for..ultimately if you can make it work, that is what counts....

 

I notice that the gentleman suggests that if a trader finds his/her emotions are getting in the way of their success, they should simply "stop doing that".....

 

I find it all very entertaining...

 

LoL

 

Nothing has changed , the underlying market mechanics are still the same.

 

All this just reminds me of this

 

NASA Spent Millions to Develop a Pen that Would Write in Space, whereas the Soviet Cosmonauts Used a Pencil

 

This tale with its message of simplicity and thrift--not to mention a failure of common sense

Does fit in this disussion well.

[steve46 12]

I would take issue with the idea that nothing has changed

 

But I notice that people are willing to put money at risk using everything from High Frequency methods to astological alignment of the planets....I'll stick with what I am doing.

[BlueHorseshoe 10]

You keep saying all these smart things, Siuya. But at least you're not alone:

Figuratively speaking, the small trader should imagine himself as a hitch-hiker in the market. For the ordinary hitch-hiker, someone else supplies the car, chauffeur, oil and gas. When he thinks the car is about to go in his direction, he jumps aboard and rides as far as he thinks the car will go. When he notices the machine has been stopped by a red light, or is about to turn a corner and go in some other direction, or that the car is running out of gas, or the brakes failing to work properly, he steps off and figures he has secured about as long a ride as he may expect. All he has supplied in this transaction is a modest commission and whatever brains were necessary to observe and recognize the opportunity when to get on and off. (Richard Wyckoff)

Here's an idea for an edge: learn how to draw a box and a straight line. No complex mathematical gyrations, no quantitative whatever, no statistics, no spreadsheets. Just a box and a line.

 

Db

 

It sounds so simple, doesn't it?

 

I think what Wyckoff forgot to mention is that hitchhikers sometimes get picked up by heartless bad men who empty their wallets, slit their throats and leave them in a ditch. There's always someone on the other side of the deal with an agenda of their own, and quite often they're the ones in the driving seat. They can turn the car around at a moment's notice and run it off the edge of a precipice. Or deliver you safely to your destination and leave you with a false sense of security until the next time. There's always risk.

 

But I hate extended metaphors . . .

 

BlueHorseshoe

[BlueHorseshoe 10]

For everyone that has read/given feedback to my previous post on applying math to technical analysis, I wanted to do a followup post to ask the community who here applies quantitative methods to their trading specifically in regards to technical analysis....?

 

I have read ernest chan's book "quantitative trading"; however, I have no desire to trade mechanically. I was wondering if it was possibly to develop quantitative indicators specifically in regards to technical analysis and apply them as a discretionary trader.

 

Any feedback/insight is extremely appreciated!

 

Although SIUYA's comments regarding competing in the HFT arena are sensible, I do think that it is worth trying to understand a little about how HFTs (and indeed any other major market participants) operate, and how this might impact on your own trading. In the case of HFTs this will most likely relate to the availability of liquidity at key times for your strategy.

 

You might also bear in mind that to employ a quantitative, statistical approach does not mean you need to trade with high frequency. As I recall, Chan's strategies can involve holding periods of several months.

 

Hope that's some help.

 

BlueHorseshoe

[DbPhoenix 42]

It sounds so simple, doesn't it?

 

I think what Wyckoff forgot to mention is that hitchhikers sometimes get picked up by heartless bad men who empty their wallets, slit their throats and leave them in a ditch. There's always someone on the other side of the deal with an agenda of their own, and quite often they're the ones in the driving seat. They can turn the car around at a moment's notice and run it off the edge of a precipice. Or deliver you safely to your destination and leave you with a false sense of security until the next time. There's always risk.

 

But I hate extended metaphors . . .

 

BlueHorseshoe

 

Sounds colorful, but you're missing the point. Wyckoff is about determining the flow of price and riding that flow until it reverses. If you don't like the auto metaphor, great. One could also use surfing and sailing, but surfers wipe out and sailboats founder. But the metaphor is not the thing.

 

Markets are about demand and supply and have been since at least the Sumerians. Sellers want the highest price. Buyers want the lowest. If one looks at this as nothing more than numbers, he will spend his trading life chasing shadows, which may be why beginners spend so many years learning how to make more than lunch money, if they ever do.

 

Db

[BlueHorseshoe 10]

Sounds colorful, but you're missing the point. Wyckoff is about determining the flow of price and riding that flow until it reverses. If you don't like the auto metaphor, great. One could also use surfing and sailing, but surfers wipe out and sailboats founder. But the metaphor is not the thing.

 

Markets are about demand and supply and have been since at least the Sumerians. Sellers want the highest price. Buyers want the lowest. If one looks at this as nothing more than numbers, he will spend his trading life chasing shadows, which may be why beginners spend so many years learning how to make more than lunch money, if they ever do.

 

Db

 

I agree (who wouldn't?) with the essential nature of supply and demand. However, as I suggested before, what the Wyckoff allegory is missing is any sense of the inherent risk in this (or pretty much any) approach to trading. Risk isn't a reason not to trade, but I don't like to read colorful verbiage that glosses it over: "just jump on board and ride a trend, man, go with the flow". It's crass, reductive, and an unfair way to represent what a trader will doubtless experience.

 

BlueHorseshoe

[DbPhoenix 42]

I agree (who wouldn't?) with the essential nature of supply and demand. However, as I suggested before, what the Wyckoff allegory is missing is any sense of the inherent risk in this (or pretty much any) approach to trading. Risk isn't a reason not to trade, but I don't like to read colorful verbiage that glosses it over: "just jump on board and ride a trend, man, go with the flow". It's crass, reductive, and an unfair way to represent what a trader will doubtless experience.

 

BlueHorseshoe

 

Wyckoff hardly ignores risk. Risk management is a key element of his approach.

 

From page 1 of his course:

This is a method of judging the stock market by its own action.

 

It is intended for investors as well as for traders.

 

It has been planned and prepared for those who desire to safeguard their investment capital against, and to make money from, the fluctuations in the priced of stocks dealt in on the New York Stock Exchange or any other organized exchange.

 

It is applicable as well to bonds, preferred stocks and the leading commodity markets.

 

Anyone who buys or sells a stock, a bond or a commodity for profit is speculating if he employs intelligent foresight.

 

If he does not, he is gambling.

 

Your purpose should be to become an intelligent, scientific and successful investor and trader.

 

This Method is for those who have had either little or no experience operating in the stock market, or for those who have had much experience but who have never been shown the real rules of the game.

 

Out of the very limited number who really understand the inner workings of the stock market, practically no one has been willing to show the public the real inside. I believe it is time for someone to step forward and do this.

 

The appalling losses, in securities, suffered annually by millions of people, are enough to make the angels weep.

 

These losses are the direct result of stock market plunging by people, most of whom do not realize what they are risking, and who have an amazingly small knowledge of the market.

[Emphasis mine] (Richard Wyckoff)

 

Those who suffer from emotional problems will insist that one cannot trade without emotion. Emotion must be controlled. Emotion must be directed. Emotion must be managed.

 

None of this is true.

 

Those who don't understand the nature of buying and selling will insist that quantification is necessary, that one must apply statistical analysis and maintain spreadsheets and address "algos" and "HFTs" and so forth.

 

But none of this is true, either (unless one is scalping for ticks).

 

Then there are those who insist that the market is a battlefield and that one must know and prepare for and fight one's enemies.

 

But this is a misdirection as well, since it necessitates forcing one's ego into the matter, and we all know how helpful ego is when trading.

 

Or there's the one about the market being shark-infested waters. Nothing like inviting that old fear response, is there?

 

I can't help but wonder why message board habitues fill beginners' heads with this stuff.

 

Db

[steve46 12]

"Those who suffer from emotional problems will insist that one cannot trade without emotion. Emotion must be controlled. Emotion must be directed. Emotion must be managed".

 

It seems to me sir, that you have the perfect solution to all this....simply delete any challenging, provacative or emotionally charged material from your view.....

 

To the extent that you are able to control the world around you, everything should be perfectly calm.....

 

Then all you have to do is to make sure you never get caught outside your climate controlled little neighborhood at night....or the big bad wolf may come and take your lunch money.....

 

Oh look at that....its getting dark out....

Edited September 8, 2012 by steve46

[BlueHorseshoe 10]

I can't help but wonder why message board habitues fill beginners' heads with this stuff.

 

I never suggested that Wyckoff ignores risk. I suggested that the quote you had chosen downplays this aspect.

 

You can deduce what you like about my psychological makeup, but I think that the markets are indeeed "shark-ridden waters". Not a charity ball.

 

As for "message board habitues", well you're the one with 2300+ posts to your name, so you should know pal

 

BlueHorseshoe

[DbPhoenix 42]

I never suggested that Wyckoff ignores risk. I suggested that the quote you had chosen downplays this aspect.

 

You can deduce what you like about my psychological makeup, but I think that the markets are indeeed "shark-ridden waters". Not a charity ball.

 

As for "message board habitues", well you're the one with 2300+ posts to your name, so you should know pal

 

BlueHorseshoe

 

I know nothing about your psychological makeup, but the fact that you view the markets as you do affects the approach you take to trading. Whether or not this view results in profits that are sufficient to provide oneself (and his family) with a reasonably high standard of living is a matter for conjecture.

 

As for the number of posts, note that I joined TL four years ago. You've racked up 685 in nine months, so it'll all wind up about the same.

 

In any case, comments about emotional problems and the denizens of message boards do not necessarily apply to any one person in particular. But it is nonetheless common that someone who has at last been able to eke out a profit of any kind after years of trying by at least discovering the ultimate MACD setting, for example, will insist that this is the true course, and that all beginners must also follow this course if they are to reach the promised land. Likewise, those who have found a way to beat their id into submission in order to complete a trade will most likely come to believe that everybody endures this same struggle and must treat their ids likewise.

 

Db

[SIUYA 11]

suby - no wonder we all get so confused.

its simple - if you have a maths back ground and an affinity to it, and really want to learn it - go for it. You will be competing against very smart people and teams of them who have been doing this for a long time.

if not stick to the simple things, and most importantly things that work for you.

Drawing a box, or using statistical probability distributions pretty much do the same things IMHO - you find places of support, or resistance and you trade accordingly.

You manage the trade - and your emotions (either by shutting them out or tricking them or playing to your strengths combined with your strategy)

 

Period - every one pretty much does the same things to make money.

and while its not that easy it is that simple at a base level. the rest becomes semantics of how to define support, resistance, a trend, where you place stops etc. and most people who are arguing with each other generally do the same thing but in different ways.

 

any way --- have a good weekend - I am off to a buck's day pub crawl where statistically its a high probability i will get trollied (100% certainty), hitch a ride home in a taxi and not end up in a box with the cold hard cement as support - and will not find resistance from my partner because I did not deal with her or my emotions well as a result of my historical educational walk between pubs.