Article Selection

A Selection of Price Action Lab Blog Articles

For articles about DLPAL software click here.

  1. Why traditional technical analysis is no longer effective

TA was developed during a period of strong serial correlation in the equity markets. After markets became mean-reverting pattern confirmation no longer worked.

Interview for Forbes
The Post-Hoc Chartist
http://www.priceactionlab.com/Blog/2012/12/the-main-cause-of-failure-of-some-popular-technical-trading-methods/
http://www.priceactionlab.com/Blog/2015/11/technical-analysis-wealth-redistribution/
http://www.priceactionlab.com/Blog/2015/07/chartists-debunked/
http://www.priceactionlab.com/Blog/2015/08/momersion-indicator/
Is the Bulk of Technical Analysis “Thinking in Words”?

2. Forecasting price moves using traditional methods does not work due to mean reversion.

http://www.priceactionlab.com/Blog/2015/09/jim-simons-trend-following/

Trend-followers using moving average crossovers with increased lag are at the mercy of market swings. Note that trend-followers do make forecasts.

Trend Followers Make Forecasts
Trend-following is Dead

3. Backtesting of trading strategies based on indicators or patterns that are not good price predictors often produces random results due to data-mining bias.

http://www.priceactionlab.com/Blog/2015/09/counter-intuitive-backtesting/
http://www.priceactionlab.com/Blog/2015/11/backtest-results/
http://www.priceactionlab.com/Blog/2015/12/long-term-backtests/

4. Machine learning was popular in the 1980s but it can be an ineffective process of developing trading strategies due to data-snooping:

http://www.priceactionlab.com/Blog/2012/06/fooled-by-randomness-through-selection-bias/
Five Myths About Data-Mining Bias

The probability of finding a statistical significant trading system via machine learning is close to 0 unless the attributes used are significant.

5. Hypothesis testing can easily fool strategy developers in the presence of over-fitting, especially when machine leaning is employed:

http://www.priceactionlab.com/Blog/2015/10/statistical-hypothesis-testing-2/
http://www.priceactionlab.com/Blog/2015/10/perils-statistical-hypothesis-testing/
http://www.priceactionlab.com/Blog/2015/09/hypothesis-testing/

6. Traders can succeed if they can identify anomalies in price data that can lead to a positive and stable expectation. These anomalies include mean-reversion, calendar effects, short-term price patterns, overnight effects, etc.

Articles with examples of systems that exploit  price action anomalies:

Simple Explanation For Stock Market Rally
http://www.priceactionlab.com/Blog/2015/08/performance-strategies-momersion/
http://www.priceactionlab.com/Blog/2015/10/significant-anomaly-bonds/
http://www.priceactionlab.com/Blog/2015/08/momersion-indicator/
http://www.priceactionlab.com/Blog/2015/11/overnight-trading-anomaly-backtesting-r/

Note that price action anomalies are arbitraged out constantly and a good trader must be always looking for new ones. This is one key to success.

7. Another key to success is practical risk and money management while staying away from hype, such as for example optimal position size determination.

http://www.priceactionlab.com/Blog/2013/09/practical-position-sizing-based-on-the-risk-ratio/

8. Momentum is a crowded trade and an anomaly that is being arbitraged out.

Momentum, Randomness And Survivorship Bias
Momentum: A Crowded Trade
Three Reasons Why Investors Neglect Momentum
Momentum is Price Breakout
Selection Bias and Momentum Systems

9. Some markets are too efficient to trade successfully and some other markets are negative-sum games due to their cost structure. Traders should keep cost low and prefer markets that have a directional bias, such as for example the equity markets.

Related articles with links to three more articles:
http://www.priceactionlab.com/Blog/2015/06/the-perils-of-trading-part-four/

For more articles visit the blog archive

If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY

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