Technical Analysis on Trial

Following investment advice from self appointed TA Champions.

Keno Leon
Keno Leon
Aug 16 · 7 min read

Preface:

Financial markets are considered to be prediction proof machines: the current price of something like Gold, Apple Stock or Bitcoin should reflect the agreed upon present and future value that market participants arrive to by buying and selling with the available information, thus future prices will reflect intrinsic and external events that are unknown, so nobody has a better chance of profiting ( unless there’s inside trading ), and most importantly predicting is a guess about future events.

What if someone told you that they could predict the market with 100% accuracy based solely on their observations of price movements ?

TA ( Technical Analysis ) does precisely that, and listen, I am not here to tell you all of it is snake oil just because I say so, I personally don’t touch the stuff, but I’ve always been curious as to how effective or ineffective it truly is, who knows, I might be wrong.

Thankfully there are tons of TA Gurus out there making daily recommendations based on charts and patterns, so in the interest of doing something more scientific, let’s take a sample and see what happens…

“ In god we trust, all others bring data. “

- William Edwards Deming

Methodology:

Find 5 self appointed gurus and follow their advice during the first 6 months of the year (Jan 2019 - Jun 2019). Simulate recommended trades, our initial position will be $1,000 and we will give each guru a $200 position to start, to give each guru an equal weight, we’ll divide the $200 in 5 periods and bet on the most popular strategy ( by likes, upvotes etc) that’s closest to that period date which conveniently is the end of month ( when you might get a paycheck and use your guru’s strategy ), short positions carry no interest to further simplify things and we will measure our Profit & Loss ( P/L) at the end of June 2019 unless there’s a specific target and it’s reached.

Meet our TA champions:

⚠️ Note: I am not using real names or handles as tempting as that might be, but instead I am replacing them with Pokemon, I am also leaving the exact source vague, but think forums, social media and trading platforms with a view ;)

TA Champion #1: “Pikachu” Deals in : Crypto

Battle Cry : “Golden intersection !”

………………. Trades and recommendations ……………….

Final P&L: -33% 🔻
Final Position (from $200) : $134.42 💸💸
Comments: "Pikachu" is a prolific TA Crypto Guru with literally thousands of recommendations and followers in social media, even though his first trade was positive, things went downhill from there, better luck next time champ.

TA Champion #2: “Evee” Deals in : Everything.

Special : “ Bullish Gartley and Bearish Bat Combo! ”

………………. Trades and recommendations ……………….

Final P&L: 2% 🔺
Final Position (from $200) : $204.18 💵
Comments: "Evee" seems to have a great feel for trends, it's a shame that he's doing TA, a couple of trades here could have been great long term positions, but since he had target prices the gains were less so, cute though.

TA Champion #3: “Mewtwo” Deals in : Stocks

Menacing monologuing : “ Bullz in this market are very sick…”

………………. Trades and recommendations ……………….

Final P&L: 1% 🔺
Final Position (from $200) : $201.02 😑
Comments: "Mewtwo" likes to double down on trades even though they are not going his way, if that doesn't work, then he'll reverse the trade, a shorter at heart, his best trade was a long position... all this drama and bravado for a 1% return ?

TA Champion #4: “Snorlax” Deals in : Forex

Likes to pontificate: “ A textbook ascending trendline and 50EMA breakout confirmed the change to a previous bullish trend”

………………. Trades and recommendations ……………….

Final P&L: 2% 🔺
Final Position (from $200) : $203.16 💤
Comments: "Snorlax" The problem with being an fx trader is that you need a hefty volume to trade and the margins are usually small, a savings account will give you a better (guaranteed) return in comparison, good investing is boring I guess.

TA Champion #5: “Charizard” Deals in : Indices

Battle Roar : “ A no brainer buy ! ”

……………………….Trades and recommendations ……………………….

Final P&L: -28% 🔻
Final Position (from $200) : $143.57 🔥🔥
Comments: With a whopping -93.8 trade, "Charizard" wins the worst trade of the group, good thing he's been doing this since 2000’s and is according to the bio "#1 source of trading success!" yay !

After Game Report

On the surface, we didn’t loose our shirts, we also didn’t win the game, or did we ? before digging in deeper let’s first look at the overall returns:

The question one needs to ask when judging performance is “compared to what ?”, in this case a valid question to ask is how good or bad was this 🔻-11.4% in comparison to other alternatives ? So let’s check against what the markets were doing during this period by making a competing portfolio:

Ouch, the markets returned a whooping 🔺 +47.2% , mostly thanks to crypto, if you take that out, you’d still get a 🔺+4-6% return , not great, but definitely better than what our “champions” delivered.

Our market benchmarks in case you are curious:BTC - Crypto: Decent stand in lieu of a Crypto etf.
UUP - Fx: Invesco DB US Dollar Index Bullish Fund.
SPX - Stocks: The S&P 500 in etf form.
FXY - Fx: Invesco CurrencyShares® Japanese Yen Trust
IVV - Stocks: iShares Core S&P 500
Other: Fx & Stock etfs picked by AUM (Higher), P&L calculated from 2-Feb-2019 to 28-Jun-2019.Caveats: Not a perfect comparison, trades were made once, and all are long positions, I think it's fair if you consider we also took interest out of short positions on the other portfolio.

Recap :

Investing is a brutal game that is notoriously hard to predict and win, like with any other difficult thing we humans encounter, ( death, disease, relationships, politics, etc,etc), there are multiple stories that try to explain them, and sometimes due to our social nature the loudest voices are taken as truth. Here, I’ve tried to simply use data to test Technical Analysis ( the loudest voice ) to predict market movements, instead of taking their advice for granted.

The results are surprising/unsurprising depending on where you come from, if you already doubted TA, this is more proof it is trash, If you are on the fence you might be convinced it might not work, and if you are a diehard TA fan you are thinking I did something wrong and TA is still great.

Whatever your conclusions are, I hope you at least consider verifying the source and track record of the advice you might take or consider other alternatives if you can’t…


Sample Size:

The admittedly small sample size bothers me a bit, maybe not enough to devote more time to the problem, but it would be interesting to query say 100 TA gurus and narrow it down further by market and other metrics, before you discount the whole experiment, let me just state that these 5 TA gurus have a combined ~half a million followers, so I believe it is representative.

The TA revisionist mentality:

I need to get this off my chest: while researching these TA champions I noticed that they rewrote most negative trades at their convenience, so if a long trade is not working, then suddenly it becomes a short due to another chart pattern, there is simply no accountability, so they can further claim the original trade was successful if the trend once more reverses !

Alternatives:

While not an explicit or definitive critique of TA, you might be wondering what are the alternatives.

  1. Fundamental analysis, on the other side of TA, delves into the company/asset and sectors past, present and future conditions as well as macro circumstances. FA is a complex and expensive beast, and anecdotally from my time in Wall Street it doesn’t seem to do better than indexing…
  2. Good investing for the majority of us is boring and simple, it consists of both time in the market ( vs trying to time the market ) and a risk balanced portfolio that is index based (vs stock/asset picking), for a decent starting place check this faq: https://www.reddit.com/r/investing/wiki/faq

Good luck and thanks for reading !

About the Author: Born Eugenio Noyola Leon (Keno) I am a Designer, Software Developer & Artist currently living in Mexico City and working on Conscious AI , you can find me at www.k3no.com

Dialogue & Discourse

News and ideas worth talking about. Fundamentally informative and intelligently analytical. Clarity and truth working against tribalism.

Keno Leon

Written by

Keno Leon

AI, Software Developer, Designer : www.k3no.com

Dialogue & Discourse

News and ideas worth talking about. Fundamentally informative and intelligently analytical. Clarity and truth working against tribalism.

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