Does Technical Analysis Work? Here’s Proof! (Part 1)

While the title may strike you as clickbait, it’s really based on an August 2019 TDS article written by Janny Kul that is (as of the time of this writing) available online. In this blog mini-series, I am going to do some analysis of the article followed by a bit of extra digging at the end that you really won’t want to miss: stay tuned.

Also in 2019, I wrote a blog mini-series on the same topic where I presented and commented on a sampling of others’ beliefs about technical analysis (TA). This is more of the same except I will be focusing solely on the Janny Kul article. What I particularly like about the article pertains to this fourth paragraph: Kul gives us supporting data, which I find comparable to some of my studies described here.

I will go through Kul’s article quoting and commenting on different parts. I strongly encourage you to find the whole article online for a very interesting read.

     > Given computing power nowadays, in a matter of moments we can simply
     > test every possible indicator (~27), across every standard timeframe
     > (~15), across every possible tradable instrument (>100,000).

This would be 27 * 15 * 100,000 = 40.5M strategies. What kind of computer does Kul have access to that can do this in a “matter of moments?!” Backtesting over 8 – 12 years, my computer was taking 20+ minutes to backtest a double-digit number of strategies. If I round up to 100 and only consider 40M strategies, then it would take 400,000 times as long to run Kul’s backtest on my computer, which is ~15 years. A computer 1,000 times faster than mine would [only] take ~6 days. I have been thinking of upgrading so…

I would question whether it’s reasonable to undertake a backtest of that complexity. Even at that, he’s talking about applying TA “strictly how the indicators were intended to be used.” Not only do many people not believe those settings to be the best,* I strongly believe it important to explore the surrounding parameter space as I describe in paragraphs 4-5 here. This is more what I was doing in my studies where I had up to double digit iterations. This turns the 40.5M strategies into 4.5 billion or many, many more because even 100 iterations is small compared to the finer parameter grids most strategy developers seem to use. I discuss this in paragraphs 2-3 here and the last paragraph here.

I therefore disagree with Kul in his assessment of how simple a complete analysis of TA can be.

Nevertheless, Kul does present some actual data in the article and I will get to studying that next time.

* — Many comments imply this if you read closely in Part 2, Part 3, and Part 4;
       only the reply in Part 6 suggests simple strategies can actually work.