Is ‘Quantitative Technical Analysis’ Helpful in Developing Trading Systems?
The journey of a trader or investor is an interesting one. My specific journey, in a nutshell, started off trying to look at stocks as a "business" by studying the fundamentals of the underlying companies and trying to find companies that were fundamentally sound, with low debt levels, good balance sheets and other qualitative fundamental factors that were positive.
I soon learned that stocks could go up and down based on other factors that weren't so easy to assess regardless of a company's fundamental picture. Things like unscheduled news events, scheduled earnings announcements and the like could, and did!, hugely affect the short term price of any particular stock I was trading. "Perceptions", such as "forward guidance" and "expectations" going forward also could have surprising (positive or negative) effects on the price of a stock.
When you are playing the game of picking stock direction, these factors can be unsettling and you soon learn that fundamentals, while useful, are NOT great tools for stock timing. They are one piece of a puzzle.
As a discretionary trader, I pretty much got fed up with all the time it took to vet things fundamentally, and started using services that were trustworthy that I could use to more quickly rate stocks that should be good/strong fundamentally. Aside from the fact that companies can play all kinds of accounting tricks (and lie), it's the best guess you have when living in the world of fundamentals. Not to mention, fundamentals aren't being revised "every day". They come out quarterly. A lot can happen in a few months.
Naturally, this led me to another discipline, called Technical Analysis. Technical Analysis (TA) proved to be "part science part art", but frankly, I still like and use it to this day. Although TA is a huge field encompassing many different disciplines and ways of looking at stock price action -- from Elliott Wave to Candlesticks, Chart Patterns and everything in-between -- it offers some relatively objective ways to look at market price action and start to develop more "fine tuned" timing rules.
For example, you can use trend lines to determine when a stock has broken an uptrend or a downtrend. You can use chart patterns to determine when there has been a triangle consolidation break out. You can use fibonacci retracements and extensions to look at potential areas of support and resistance. Great tools, still use them to this day. However... guess what?
They are still pretty subjective, and they can leave a lot of room open for interpretation between one "Technical Analyst" and another. And, not every TA looks at "the rules" or application of the art and science of TA the same way.
So, what is a trader/investor to do? Well, one solution is to look at Technical Analysis from a more "Quantitative" stand point. In other words, Quantitative Technical Analysis. The attempt to Quantify specific aspects of Technical Analysis.
As a System Trader and System Developer, this is a worthy pursuit. It's something that I've attempted to, and continue to attempt to do. I'm a "trust but verify" kind of guy these days when it comes to trading or investing ideas. I like to see how an idea has performed historically in the past to gain an indication of what I might be able to expect in the future. It's the best guess we have, really.
In this presentation that I gave back in December of 2019 to the Canadian Society of Technical Analysts, I took an introductory look at Quantitative Technical Analysis from a historical perspective. I asked the questions,
- "How well have certain popular technical analysis indicators performed in the past based on very simple rules?" and perhaps
- "Could we use these rules as a starting point to develop trading/investing strategies that could be further refined?"
This is a good starting point when looking at developing a rules-based Systematic Trading System approach, by incorporating "Quantitative Technical Analysis" into the process.
I believe Technical Analysts have a leading role to play in this evolution of the "Art and Science" of Technical Analysis.
Enjoy the video presentation...!
Good Systematic Investing,
Dave
Systematic Investors Group Team