Most Accurate Technical Analysis Indicators
The problem with some analysts that promote some indicators as more accurate than others is the fact that some indicators may work for only some period of time in the past, but not anymore, and potentially not across markets. One of the often quoted examples of this is the reversal of fortunes for one of the greatest technical analysis traders of all time, Richard Dennis, who trained a generation of successful hedge fund traders with his "turtles" program. Richard Dennis reportedly made $200 million in about ten years during the 1970s and early 80s from a starting capital of only a few thousand dollars. His technical analysis trading methods have been documented in several books during the last few years, by such authors as Curtis Faith. However, Richard Dennis reportedly lost $50 million during the period of 1987-88, a severe reversal of fortunes. Some claim that he did not follow his own technical analysis trading system rules during that period, while others think that his system simply had a very severe downturn in performance. This is why you need to test your own system on historical data, to see if your chosen technical analysis indicator or indicators perform satisfyingly profitably. Even then, as the Richard Dennis example shows, there are no guarantees that the indicator or system will perform well. To do backtesting, you can use a spreadsheet program combined with data from potentially multitude of data sources, such as those from central banks for historical data on currencies, or from Yahoo Finance for historical stock data. Many do their analysis on professional backtesting systems such as eSignal or MetaStock. Many who do their testing want as much historical data as possible. For example, there are reports that when John W. Henry formulated his technical analysis trading system, he tested the system on tens or perhaps hundreds of years worth of commodities data. The reason for doing such exhaustive testing of a system is that if it works throughout the years on one market, and works on many markets, there is a good chance that the system will work in the future as well. However, when you analyze your backtesting data, keep an eye on the drawbacks as well as profitability. The drawback data is one of the components you need to take into account when you formulate your risk management system, also known as money management. Money management should be designed so that you prepare for the inevitability that the system will produce losses, and how you handle risk in general and how you approach asset allocation in that regard. |