I’m happy to announce a new series of pages: Analyzing Technical Analysis.
I frequently read people talking about Moving Average Crossovers, Bollinger Bands, Relative Strength Indexes and other indicators that allegedly allow traders to beat the market. The default algorithm at QuantConnect uses volume-weighted moving averges to beat the market. A few weeks ago, my Uber driver told me he uses Average True Ranges to trade the currency market.
It’s hard to believe all these strategies are being discussed if there’s nothing there. Then again, it’s also hard to believe a successful currency trader would drive Uber.
This series of posts is an attempt to rigorously and thoroughly check the effectiveness of technical analysis indicators through a series of iPython notebooks. In the notebooks, I’ll do my best to set my biases aside and objectively test the facts. In posts such as these, I’ll share my conclusions.
In the initial block of posts, I tested how returns react in the days after moving averages cross each other and when prices “bounce” off moving averages. (Click here for results and here for a guide to interpreting results.) In every strategy for every horizon, nothing close to statistically significant returns are observed. The strategies failed so spectacularly, I almost felt guilty about making my computer subset white noise so many times.
Regardless, it has been a good exercise. The past two weeks haven’t taught me how to beat the market, but I did finally have a good excuse to make the jump from R to Python, I learned how to perform bash scripting and I developed an objective way to test trading strategies.
With some luck, the next strategy I try will make me fabulously wealthy.