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"The standard deviation of the total return is another matter entirely. One extreme situation is that the candidate system may have an open position (long or short) exactly once out of 'n' trading opportunities. The standard deviation of the total return among all permutations will equal that of the raw returns.
More generally, we may have exactly 'k' open positions in the candidate system. The standard deviation of the total return among the permutations will be approximately sqrt(k) times the standard deviation of the raw returns, with the exact factor depending on the position vector. In other words, the dispersion of the permuted returns depends on the number of open positions"
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- Trade what you see. Invest in what you believe -
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It's certainly taken me a long time to get to wherever I'm at with trading/investing/market understanding.
Lately I have been doing more portfolio analysis type stuff, concentrating on equities. One of the major problems with "normal" strategy design is that one is either long flat or short (an equity). Anything other than long equities for the last decade or so has been silly.
SPY, QQQ, IWM, XLI (and the other sector SPDRs) give a return equal to about the average stock in the particular universe - sort the universe by return and the ETF will almost always be really close to the middle. The idea is picking some combination of equities that exceed (hopefully) the return of the ETF. Commercial solutions can't handle this simple but hugely important task.
A really important thing that I realized a few weeks ago, is using natural log returns. Academics are agnostic on using natural log or normal (EndPrice / StartPrice) - 1 returns. There really is no question that natural log returns are better for algorithm designers. However, commercial backtesting structures always (I think) use trade listings with fixed investments to analyze performance rather than natural logs. That is because if you use a trade listing, you might as well use that methodology.
I prefer to make my own errors in design rather than have help.
There is a commercial solution available that does exactly that, picks a combination of equities that (again...hopefully) exceeds that of the ETF. I can't divulge what it is and who runs it because I have a commercial interest in it.
This thread is kind of going off topic, so let's bump it back.
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- Trade what you see. Invest in what you believe -
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It would be much better to open a thread devoted to these side issues, or to find one that already exists. Keeping this one close to its topic, which is books on chart patterns and technical analysis, will make it a more useful thread for members who are interested in this sort of thing.
Books like Aronson's, which aim to show technical analysis does not work, are definitely on-topic because they are (a) books ( ), and (b) discuss technical analysis. Getting into the thesis of such books is fine as well, up to a point, but starting up discussions about the thesis and one's own views on the subject would be best continued elsewhere also.
So far, there have been no books listed in response to @TickedOff's original question, aside from the one that says it's not effective. Let's bump it back on-topic.
Thanks.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
Even took the words out of my mouth. However I don't agree that these are side issues. If someone wants to invest in learning something it is important to have a good understanding of the methodology's strengths and weaknesses.
Jonny correctly pointed out that chart reading is a soft skill and that there is no clear way to test the results of predictions based on chart patterns. Basically there are no great chart patterns, if we define great as something that shows reliable ways to make significant gains with minimum losses.
That being said let me mention two authors on the off chance that the original poster hasn't already figured his question out.
I do agree the thread took a diversion, but I believe it was an important topic to diverge to. I was once that newbie trader who wanted to concentrate on 'everything' to do with trading vs. concentrating on one or several things that actually worked. We so desperately want to believe technical analysis works (because we have all heard of it) we don't for one minute seek out the correct evidence to support that it actually does.
The 2 authors @semiopen mentioned are the classic go to for chart patterns and Japanese candlesticks. These guys should be billionaires by all accounts.
Japanese candlesticks as an example were developed in the 18th century, do they have a place in today's market? Every trader in the world can see them and when they see them they react to them. These are the locations that institutions feast on, literally. Sure, you might get a win every once in a while...
Everybody remembers the single bearish engulfing candle that worked, but conveniently forget about the 3 others on the same chart that didn't. Institutions can run a million computations for every conceivable chart pattern and candlestick formation before your 1 minute bar is complete. Institutions and big banks love new traders for this very reason. They know what you are looking at.
If the OP @TickedOff really wanted to improve his/her trading, they should be concentrating on Volume. This is what moves (or doesn't move) the market. If you can go even part way to unlocking what volume does within the underlying market structure, you stand half a chance to at least become a break even trader.
Now of course this is my opinion. People will disagree. I could post my entire statistical analysis for the 11 items I listed, but even if the evidence presented was crystal clear that luck was actually the governing factor and not the indicator or chart pattern, it still would not be believed by some. Unfortunately, I won't be able to post my findings because as I mentioned I have a commercial interest in a venture that uses my analysis to seek out contrarian opportunities to them.
So to bring this thread back to the pointy end, I don't recommended any books on technical analysis for chart trading, other than Aronson's book I mentioned. Whilst I may agree that trading stock chart patterns may have a sliver of potential greater than that for futures, most are bunk and fall into the category of statistical luck rather than skill.
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- Trade what you see. Invest in what you believe -
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I think it's totally legitimate to think that chart patterns and all of that kind of thing don't work, and to say so, including in this sort of thread. They may or may not, and it's a good topic for discussion. So would other things a person could look at, such as volume.
I'm just saying that getting deeply into these ideas leads pretty far away from the original question that was asked.
I totally agree that if chart patterns worked all that well, then the authors of charting books should all be rich. But then, they wouldn't be writing books either, I think. But this applies equally well to anyone writing any books on trading: very few actual billionaires are also how-to authors, somehow.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
Yes, funny that isn't it. I will put Brooks firmly in that camp too, but that is like kicking the hornets nest around FIO.
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- Trade what you see. Invest in what you believe -
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