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The article mocks technical analysis by calling it "astrology", but there is much academic research supporting the use of cross-sectional and time series moment

The article mocks technical analysis by calling it "astrology", but there is much academic research supporting the use of cross-sectional and time series momentum. A simple way to decide whether an asset is an uptrend is to compare its latest price to its N-day moving average. A site that lets you test moving average strategies is Portfolio Visualizer -- a backtest of the 200-day moving average crossover on an S&P 500 index fund is at https://www.portfoliovisualizer.com/test-market-timing-model?s=y&coreSatellite=false&timingModel=5&timePeriod=4&startYear=1985&firstMonth=1&endYear=2022&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&periodicAdjustment=0&adjustmentAmount=0&inflationAdjusted=true&adjustmentPercentage=0.0&adjustmentFrequency=4&singleAbsoluteMomentum=false&volatilityTarget=9.0&downsideVolatility=false&outOfMarketStartMonth=5&outOfMarketEndMonth=10&outOfMarketAssetType=1&movingAverageSignal=1&movingAverageType=1&multipleTimingPeriods=false&periodWeighting=2&windowSize=-1&windowSizeInDays=200&movingAverageType2=1&windowSize2=10&windowSizeInDays2=105&excludePreviousMonth=false&normalizeReturns=false&volatilityWindowSize=0&volatilityWindowSizeInDays=0&assetsToHold=1&allocationWeights=1&riskControlType=0&riskWindowSize=10&riskWindowSizeInDays=0&stopLossMode=0&stopLossThreshold=2.0&stopLossAssetType=1&rebalancePeriod=-1&separateSignalAsset=false&tradeExecution=0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&comparedAllocation=0&timingPeriods%5B0%5D=5&timingUnits%5B0%5D=2&timingWeights%5B0%5D=100&timingUnits%5B1%5D=2&timingWeights%5B1%5D=0&timingUnits%5B2%5D=2&timingWeights%5B2%5D=0&timingUnits%5B3%5D=2&timingWeights%5B3%5D=0&timingUnits%5B4%5D=2&timingWeights%5B4%5D=0&volatilityPeriodUnit=1&volatilityPeriodWeight=0&symbol1=VFINX&allocation1_1=100 https://www.portfoliovisualizer.com/test-market-timing-model... . The result is that a trend-following system, compared to buy-and-hold, has had slightly lower returns, 10.57% vs. 11.10%, but substantially lower volatility, 11.48% vs. 15.22%, and thus a higher Sharpe ratio, over the period Jan 1985 - Aug 2022.

eimrine 4y ago
Any other working ways except of moving average? As a beginner trader, for me this seems the only working part of "astrology".
- pfortuny 4y ago
  As another commenter said, the moving average has already been arbitraged out. You can now study the moving variance, but it will have also been… Then you can look at the kurtosis of covariances… At some point something will be new. That is astrology.
klipt 4y ago
But there are tons of trading firms using very sophisticated mathematical modelling. Surely a signal as simple as this is already widely used and therefore, the Alpha has been largely arbitraged out already?
- Bostonian 4y ago
  The high frequency trading firms are interested in strategies with Sharpe ratio of 3 and above, not the 0.10 incremental Sharpe ratio for the strategy I linked to.
  - orsenthil 4y ago
    Bostonian, portfoliovisualizer and approach you shared is very interesting. I am a new comer in this domain, can you share some good resources to get started? Courses / Books that share recipes can help me.
- endymi0n 4y ago
  This. If there would have been any Alpha to gain by dead simple, well known pattern recognition, it would have been exploited very long ago already. By now Technical Analysis is all about reading meaning into white noise (that’s overlaying fundamentals and a general light upwards trend).
  - nightski 4y ago
    Well there is historically quite solid Alpha to be gained from the dead simple strategy of buy and hold. That's just another dead simple strategy after all, yet plenty of people recommend it.
    - plonk 4y ago
      Because the long-term trend is always upwards. Trying to take advantage of volatility in the short term is completely different, it’s a zero-sum game.
NovemberWhiskey 4y ago
Swap out your S&P 500 fund for a random large cap fund (say VLCAX) and, whoops, worse CAGR and worse Sharpe ratio over the same period for your strategy. You can prove you would've made money by backtesting anything.
- deleted 4y ago
  [deleted]
worik 4y ago
> there is much academic research supporting the use of cross-sectional and time series momentum Yes. It gets you published. and... No. It is nonsense. I have researched TA. My conclusion is that the efficient market hypothesis, in its weak form, is true. There are a lot of cognitive biases at work and a lot of wishful thinking. All information has a cost, that cost is factored into pricing, but it is cheaper for some than for others. That explains some of the effects you see. Another is trading costs. Transaction costs for most actors in the market are as high as they have ever been (it is a deliberate policy of financial firms, and many costs are hidden, but those gleaming skyscrapers on Wall St? Transaction costs). When yuo see a simulation of TA my advice is to calculate the minimum transaction cost for profit, and then compare that to what is actually available (Transaction costs often reach 200 basis points, and the cheapest I found were in German markets in the nineteenth century. A damning indictment on modern finance)
- integrate-this 4y ago
  The efficient markets hypothesis does not, and has not, stood up to empirical research since it was first invented. The reason that it's a hypothesis, and not a theory, is that it's impossible to disprove because all of evidence that disagrees with it is dismissed as spurious.
  - worik 4y ago
    > he efficient markets hypothesis does not, and has not, stood up to empirical research since it was first invented Yes it has. In its weak form. More pointedly all the supposed counter examples turn out to be snake oil. People really want to believe there is some magic that can predict the future.... > the reason that it's a hypothesis, and not a theory, is that it's impossible to disprove It is an hypothesis. It is impossible to prove it, only disprove it. And.... > because all of evidence that disagrees with it is dismissed as spurious. All the counter examples turn out to be snake oil. I spend years looking, repeating simulations, back testing algorithms.... Snake oil each and every time People really want to believe....
    - 4y ago

eimrine 4y ago

Any other working ways except of moving average? As a beginner trader, for me this seems the only working part of "astrology".

pfortuny 4y ago
As another commenter said, the moving average has already been arbitraged out. You can now study the moving variance, but it will have also been… Then you can look at the kurtosis of covariances… At some point something will be new. That is astrology.

klipt 4y ago

But there are tons of trading firms using very sophisticated mathematical modelling. Surely a signal as simple as this is already widely used and therefore, the Alpha has been largely arbitraged out already?

Bostonian 4y ago
The high frequency trading firms are interested in strategies with Sharpe ratio of 3 and above, not the 0.10 incremental Sharpe ratio for the strategy I linked to.
- orsenthil 4y ago
  Bostonian, portfoliovisualizer and approach you shared is very interesting. I am a new comer in this domain, can you share some good resources to get started? Courses / Books that share recipes can help me.
endymi0n 4y ago
This. If there would have been any Alpha to gain by dead simple, well known pattern recognition, it would have been exploited very long ago already. By now Technical Analysis is all about reading meaning into white noise (that’s overlaying fundamentals and a general light upwards trend).
- nightski 4y ago
  Well there is historically quite solid Alpha to be gained from the dead simple strategy of buy and hold. That's just another dead simple strategy after all, yet plenty of people recommend it.
  - plonk 4y ago
    Because the long-term trend is always upwards. Trying to take advantage of volatility in the short term is completely different, it’s a zero-sum game.

NovemberWhiskey 4y ago

Swap out your S&P 500 fund for a random large cap fund (say VLCAX) and, whoops, worse CAGR and worse Sharpe ratio over the same period for your strategy. You can prove you would've made money by backtesting anything.

deleted 4y ago
[deleted]

worik 4y ago

> there is much academic research supporting the use of cross-sectional and time series momentum Yes. It gets you published. and... No. It is nonsense. I have researched TA. My conclusion is that the efficient market hypothesis, in its weak form, is true. There are a lot of cognitive biases at work and a lot of wishful thinking. All information has a cost, that cost is factored into pricing, but it is cheaper for some than for others. That explains some of the effects you see. Another is trading costs. Transaction costs for most actors in the market are as high as they have ever been (it is a deliberate policy of financial firms, and many costs are hidden, but those gleaming skyscrapers on Wall St? Transaction costs). When yuo see a simulation of TA my advice is to calculate the minimum transaction cost for profit, and then compare that to what is actually available (Transaction costs often reach 200 basis points, and the cheapest I found were in German markets in the nineteenth century. A damning indictment on modern finance)

integrate-this 4y ago
The efficient markets hypothesis does not, and has not, stood up to empirical research since it was first invented. The reason that it's a hypothesis, and not a theory, is that it's impossible to disprove because all of evidence that disagrees with it is dismissed as spurious.
- worik 4y ago
  > he efficient markets hypothesis does not, and has not, stood up to empirical research since it was first invented Yes it has. In its weak form. More pointedly all the supposed counter examples turn out to be snake oil. People really want to believe there is some magic that can predict the future.... > the reason that it's a hypothesis, and not a theory, is that it's impossible to disprove It is an hypothesis. It is impossible to prove it, only disprove it. And.... > because all of evidence that disagrees with it is dismissed as spurious. All the counter examples turn out to be snake oil. I spend years looking, repeating simulations, back testing algorithms.... Snake oil each and every time People really want to believe....
  - 4y ago