This Article is actually a reply sent by Bob Fulks, a respected technical trader, to questions raised on technical analysis.
Question 1) I realize no method is perfect, but can technical analysis be as effective a method for equity (or other market) selection and timing as compared to analyzing fundamentals or some other method?
Answer 1)
The two methods are quite different. The reasons equities change price is due to both longer term fundamental factors, such as revenue and profit growth, and short-term psychological factors, such as people thinking it will be worth more tomorrow. The problem with fundamental analysis is that if no except you understands that an equity is undervalued, the price may not move up for years. Fundamental analysis tends to work if there are industry analysts following a stock and promoting it to their clients. Technical analysis just looks at what is happening now and doesn't much care why it is happening. Most people on these lists care primarily about
technical analysis.
Question 2) If the answer to #1 was positive, is automating the process to a trading system the next logical step? Do real/full-time traders use trading systems to make real income?
Answer 2)
Many people look at charts and make decisions on chart patterns. The human brain is very good at recognizing patterns that are almost impossible for a
computer to interpret. But it is hard for a person to be objective. There are hundreds of indicators and it is easy to look at enough indicators and
see what you want to see. Trading systems are objective but can only handle situations that they are programmed to handle. Lots of traders make real
income using trading systems, (even though many academics will tell you that technical analysis doesn't work.)
Question 3) If the answer to #2 was positive, would you recommend the TradeStation software to a close friend? Is the product a necessity for a serious ta/system trader? If you had it to do again, would you plunk down another $2400+ dollars for it? If not TS then what?
Answer 3)
If your trading system is more than a few lines in length, (and it better be), there is really no other choice. There are other products but they tend to be limited in what kind of systems you can create. SuperCharts has many similar features but the lack of the PowerEditor makes it nearly impossible to write other than very simple indicators and systems.
In addition, there are a large number of programs for TradeStation that are available from many sources. This makes it easy to build upon the work of
others and helps you learn the many quirks of programming the product. People hate Omega Research because Omega tends to do dumb things that
alienate their customers. I could never figure out why. I was an executive of a software company before I started trading and we would never think of
treating our customers the way Omega treats theirs. TradeStation is the only choice now but there are companies trying to end that dominance. Many
users would quickly move to another product if they had a real choice. It certainly is not perfect but as of now, it is about the only game in town.
Lots of people can make it do marvelous things. To put the cost in perspective, the cost of the software will be insignificant when you consider the cost of the time you spend learning to use it and the cost of all the money you will lose learning to trade.
Question 4) If the answer to #3 was positive, were you successful and what were your experiences developing your own profitable system? Did you find it necessary to obtain one from another source? If so, how does one evaluate these sources?
Answer 4)
Don't plan on making money with the canned systems and indicators that come with the product. These are really just examples to learn from. To create a
profitable system, you will need to write your own system in their EasyLanguage. The language is pretty easy to learn if you have any computer
programming experience but can be pretty difficult if you don't. Most of the power is in the library of functions which take a lot of time to learn
to use effectively.
There are also several newsletters, such as TSExpress, that explain many of the idiosyncrasies of using the product. I suggest you buy several of these
and get all the back issues. It will save you a lot of effort. Developing a trading system that really works seems to be hard for a lot of
people. Recent threads on this list have been discussing this topic in detail. I think the main problem is that people try to use the popular
indicator functions. There are many popular indicators such as MACD, RSI, ADX, etc., that have been developed over the years to help people try to
see changes in trends on charts. These always look good on charts. They were developed as stand-alone indicators to show some feature and work
pretty well for this.
But many people try to combine a bunch of them together to generate buy/sell signals. In my opinion this cannot work well. After all, most of
these indicators start by using the price as the input. The indicator functions then manipulate the price lots of ways to derive a new value for
the indicators. People then manipulate these indicator values lots of ways to create a trading signal. But, by the time the original price data has
gone through all of these transformations, it is impossible to understand what is really happening. They then tune lots of parameters until
TradeStation tells them that combination of parameters would have made money if they had that code with those values to start trading a few years
ago. And then they get discouraged when they lose money trading the system. I feel that it is better work directly with the raw price data and
manipulate it in ways that make logical sense to you.
The other option is to purchase a trading system from someone. In my experience, this rarely works because there are so many variables in every
style of trading. It is very unlikely that you will find a good system that actually works and that fits your style of trading. Besides, most of the
ones that you can buy for any reasonable price are worthless. Why would anyone sell you, for a few thousand dollars, a printing press to print
money? Most of the ones you can buy are locked so that you cannot see the code (called "Black Boxes"). If you don't know how something works, it is
hard to really have enough confidence in it to trade it.
There are many vendors selling professionally developed components that you can use to help develop your systems. (Jurik Research, SirTrade, etc.)
There are also consultants that will help you develop systems for a fee. Many are very experienced.
Question 5) I don't mind putting in hours and hours of reading and research and adding this to my share of hard-knocks, but I want to feel that my initial learning efforts are headed in the right direction. Any comments or opinions from individuals who are truely "walking-the-walk" would be very much appreciated.
P.S. My apologies to those who've heard these questions for the 10,000th time. Maybe a FAQ for new comers is available?
Answer 5)
I thought your questions were well thought out and worth the effort to answer. These are obviously my personal opinions. Others will probably disagree.
Bob Fulks
