Forum Archive Index - February 2003

[Travis Morien <travismorien@yahoo.com>]

--- "tennyson@caverock.net.nz"
<tennyson@caverock.net.nz> 

> >I say bah humbug to the all knowing insider.
> >
> 
> 
> Except when the insider is buying?

There is this belief among TAs that insider activity
can be clearly seen on charts.  In reality, most
genuine insiders do their major buying and selling off
market.

It is true that when a company executive buys his
company's stock this is a bullish sign, but the
opposite is not necessarily true because sell orders
could be for a wide variety of personal reasons.

I will point out at this stage that Hulbert Financial
Digest in the US, whose raison d'etre is to analyse
the results of other investment newsletters, has found
that newsletters specialising in tracking the buying
and selling of stock executives and other "insiders"
do not appear to deliver above average returns.  I
other words, the evidence supporting the great wisdom
of insiders is scant.
> 

> Maybe, but I don't see anyone on this forum making
> the claim that 
> they can program a computer to trade automatically.

But there is a claim that psychology leaves an
unambiguous imprint in OHLCV data, which is easily
visible when that data is plotted on a price vs time
axis.

If the signal is there it should be a very simple
matter to train a neural net to pick it up.  There are
working neural net programs out there but they cost
tens of millions of dollars to develop and feed into
incredibly detailed economic databases containing
every possible piece of information.  (If interested,
do a Google search on "The Prediction Company").  Why
would the developers go to such expense if the
patterns were there in simple OHLCV data and they were
obvious to anyone with a copy of Metastock.
> 
> By the same token, I don't see any fundamental
> investor here claiming 
> they can pick shares by using automated fundamental
> analysis.

Dimensional Fund Advisors pretty much do that with
their index funds.  In 2002 the Dimensional Fund
Advisors Australian Value Trust (buying the bottom 30%
of Australian stocks by price to book ratio)
outperformed all but one fund in Australia.  The only
manager to beat them, Tyndall, did so by the slimmest
of margins.

So provided I could diversify cheaply I'd be more than
happy to unleash my computer onto the market to buy on
the basis of fundamentals.  I'd incorporate a
regression to the mean rule into forecasting future
growth from past growth and buy the 30% of stocks with
the highest expected returns according to my valuation
models.

I don't actually do that in practice of course, but I
can't afford to buy 30% of the market.

 



> > The second aspect is the limitation of losses.  So
> > called "risk management".  These basically involve
> > stop losses of various sorts including fixed stops
> or
> > trailing stops.  Once again it has nothing to do
> with
> > technical analysis because it is based on your
> trade
> > equity, not the price of the stock.
> >
> >
> 
> Please explain how you can 'fixed stop' or 'trailing
> stop' that is 
> not based on the price of a stock.

It is a function of the trade size and other things as
well as the price.  What I meant to say, and I admit I
screwed it up, was that stop loss orders are designed
to automatically terminate a trade as soon as a loss
exceeds a preset amount.  It doesn't depend on any TA
concept such as support/resistance or trendline breaks
or whatever. 



> >If someone here has any credible
> >evidence whatsoever I'd love to hear it.  I'm sure
> you
> >all do because no rational thinking human being
> would
> >follow an investment strategy without first
> >determining whether or not it works, would they?
> >
> >
> 
> 
> Well, I'm not so sure.  Plenty of people buy any
> property because 
> "property always goes up".   They still teach
> budding fund managers 
> 'efficient market theory' at university.

Efficient market theory is taught but generally not
taken entirely seriously.  Efficiency is of only
academic interest.  

What is more important is how to exploit these
inefficiencies and spot them ahead of time.  Easier
said than done, especially when hindsight is involved.

But seriously, members of this group blasted me with
their contempt for my 'stupidity' at not understanding
TA.  Suggestions were made that I'm just an angry and
disgruntled failed trader.

Perhaps these are the people best qualified to provide
the evidence I have requested that TA outperforms coin
flipping.  

Negative replies to my original posts came in thick
and fast, but I note that my critics have been
strangely quiet when I asked them to provide their
proof.

I've listed a variety of studies and researchers to
back up my claims.  the best I've seen come back the
other way have been comments made with hindsight
regarding individual stocks that appeared after the
fact to adhere to a trading system quite well.

That level of "proof" is as valid as testimonials that
a few weeks after your horoscope said you would
encounter financial loss that you go a speeding
ticket.  Absence of conflicting testimonials doesn't
mean this one is valid, its just that people don't
bother listing the number of times their fortune
teller predicted something that never happened just as
chartists choose to ignore stocks that didn't adhere
to their trading system or display the phenomenon of
support and resistance.

My insistance that if support and resistance is real
and reliable and, more importantly, tradeable, is an
entirely reasonable expectation.  Support and
resistance is not an obscure subjective phenomenon, it
is obvious in hindsight.  All I ask is for evidence
that it is obvious with foresight as well.

Maybe someone has this evidence framed on their wall
next to the framed copy someone mentioned they had
made of Phaedrus's original devastating countertattack
that certainly showed me who was the boss. 

And yeah, I'd like to hear this from an actual trader
rather than a dedicated non-trader who doesn't use the
techniques himself.

Travis
www.travismorien.com




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