Evidence-Based Technical Analysis

Evidence-Based Technical Analysis

This book is about data mining to find trading rules and then verifying that the rules that were found are not co-incidences and are in fact valid rules that can be applied to current and future strategies. (I picked that up from the publisher's excerpt below.) Has anybody read this book and have any comments on it? (I have not yet read it?)

quote:

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Evidence-Based Technical Analysis is a breakthrough book in that it rigorously applies the scientific method and recently developed statistical tests to determine the true effectiveness of trading strategies, rules or systems discovered by data mining. Traditional technical analysis – as currently practiced – is more like a faith-based folk art than a science, the author asserts. To move technical analysis forward, the author proposes a new type of technical analysis, which he calls: evidence-based technical analysis or EBTA. Unlike traditional technical analysis, EBTA is restricted to objective methods whose historical profitability can be quantified and then rigorously scrutinized. The author provides a new statistical methodology specifically designed for evaluating the performance of rules that are discovered by data mining, a process in which many rules are back-tested and the best performing rule(s) is selected. Experimental results presented in the book show that data mining is an effective approach for discovering useful rules. However, the historical performance of the best rule (s) is upwardly biased - a combined effect of randomness and data mining. Thus new statistical tests are needed to make reasonable inferences about the future profitability of rules discovered by data mining. Most importantly, in data mining case study the author evaluates over 6400 signaling rules applied to the S&P500 Index using these new tests. For technical analysts and traders, the book is a wake-up call to abandon subjective, interpretive methods and embrace an approach that is scientifically and statistically valid. For other traders, the rigorous testing of trading signals/rules may make their data mining efforts more productive and stimulate the development of new systems, signaling rules.

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It has the allure of easy money like the casinos do except more so. Most people learn from an early age that the casinos are stacked against you. With trading, you learn that you can turn it the other way around although most new traders don't do this.

When I was in Australia I remember seeing the odds of winning on a slot machine. I think by law that they have to publish these odds on each machine so that the residents/users are not misled about their odds of winning.

Here is an example of what is published on the slot machines in the Northern Territory of Australia:

The following describes some of the odds of an event happening and enables comparison of some gambling odds to odds of other possible life events.

Prize
One Chance In

Winning Powerball
55,000,000

Winning Gaming Machine Highest Prize Combination
10,000,000

Being killed by lightning (Australia)
1,500,000

Dying from venomous bite/sting (Australia)
1,000,000

Winning lucky seven
200,000

Winning $2 lottery
180,000

Winning $5 lottery
140,000

Being murdered (NT)
11,700

NT resident killed in alcohol related roadcrash in NT
4500

Marriage ending in divorce
2

That makes you think!

If the 1 in 2 for marriage ending in divorce is true throughout the world and your day trading system has a 40% of any trade winning then you are more likely to get divorced than come out with a profit on any of your trades.

Not looking good for marriage if your win ratio is over 50%...