Show Me the Data!

On the surface, technical analysis (TA) seems like a perfect compliment to algorithmic trading. I have three main criticisms, though. The last two posts explained why TA is not always objective. My next critique is the absence of supporting data.

One need not search long to find plenty of articles, blogs, and forums chock-full of people claiming to understand and profit from TA. Lots of trader education programs angle for your dollar, too (also see second-to-last paragraph here).

Despite all the expertise around, I have repeatedly found evidence to back TA missing. How do they know it works? What I’d like to hear is “I tested it.” Even better would be “I tested it and here is the data…” Less acceptable (see third paragraph here), although interesting, would be claims of profitability. Interestingly, I rarely hear this* despite the extent to which people seem to want to gloat, brag, [sell related products] and be followed on social media (see first two paragraphs here).

Show me the data?

My second major criticism of TA is that hardly any data is to be found! For those unwilling to believe others or to accept hollow claims at face value before setting sail in search of trading profits, lack of data is a hard reality. Is this optionScam.com or just a form of “market tuition” we all have to pay on our journey toward consistent profitability in the financial markets? [I would argue the latter]

Perhaps asking for evidence is part of the requisite due diligence for all new traders to better understand the landscape. I can imagine many people never even thinking to ask, though. Hardcore scientists, mathematicians, and statisticians are trained to analyze data critically. Others are not. My undergraduate years were spent amidst scientific literature and research labs, which has probably helped me survive as a full-time retail trader.

As discussed here, I always encourage keeping an eye out for the data. Research or study references should be available in books, articles, or blog posts. For interviews or webinars, people can ask about supporting data if none is given. In personal conversation with people who make TA claims, ask about live trades and ascertain sample size (I always prefer this to be large as mentioned in this fourth paragraph).

Many people ride the TA gravy train and exalt its profit potential. Few people provide hard data to suggest that it works, and this leads right into my third critique of TA, which I will discuss next time.

* — In the rare instance that I do, a further question or two are usually quick to reveal they haven’t
       carried out many live trades or anything close to a large sample size.