>Their methods are many, varied and wackily named. A “death cross” is when a short-term moving average of an asset’s price falls below a long-term moving average.
I think the author is a little overly skeptical here. A moving average is by no means voodoo black magic, it's actually very simple. You take the price over the last x periods, for example 50 days, and find an average. Then you do the same with a different amount of periods, say 200 days, and then you compare that to the price. I think it's reasonable and useful to make inferences based on these three pieces of data. Is the price under the two averages? If yes, then it's likely a little low right now and might go up. Is the price way over the average price? If yes, it could go down. That, to me, is a reasonable analysis of data.
Taking it a little further, if the shorter period average is going down way faster than the longer period average, does that indicate something? Maybe that the price has been going down faster recently compared to the average of the longer period of time. Is that not a useful observation to make? If the short term average is going down so fast that it crosses the long term average, and the price is way above the two, isn't that a useful bit of information to know(that's a death cross). Perhaps you don't want to bet your entire life savings on this information, but it's also an exaggeration to claim that finding averages has no statistical merit.
If you then look into things, you'll find a lot technical indicators are derived from simple statistics and especially averages. Consider the very popular MACD, or Moving Average Convergence Divergence. A lot of people like that one, including myself, and it's made some people at least a little bit of money.
For me technical analysis is like the icing on the top of a very tasty fundamental analysis cake. You don't want a cake that's only icing, but if you do get the icing just right, then you can sell your cake for quite a bit more money.
More complicated averages do play a role in legitimate analysis of random walk processes, but taking fixed-window averages and comparing them to one another is effectively useless.
I worked as a quant trader at one point. I think there’s something to be said for technical analysis.
The simplest thing you can do is chase returns. Maybe you do that by looking at assets that have yielded large returns over the past N days. If you do so using total returns (i.e. price appreciation plus dividends, coupons, or whatever) that will bias you towards high yield bonds and high-risk equities. History says that’s honestly not a bad strategy.
If you decide you want to be less prone to buying high-yield assets that usually pay out but that could crumble at a moment’s notice, the next-simplest thing you can do is ask whether an asset has produced a good return relative to its long-term history. There are all sorts of reasons this could happen: maybe it’s a stock in a sector that recently became popular. Or maybe interest rates are falling and it’s a long duration bond.
In any case, it’s not obviously a bad idea to buy assets with recent good performance. “Hop on the bandwagon” works ok as an investment thesis IMO.
The key is that you operate in as many markets as possible and let diversification do the hard work for you. If you eke out a small edge that works across markets, on average you’ll do ok.
That’s my 2c on the systematic technical trading mentality. You don’t need to swallow it wholesale, but I don’t it’s fair to characterise texhnicL traders as a bunch of swivel-eyed loons either.
> Maybe you do that by looking at assets that have yielded large returns over the past N days.
So what is the performance of a technical analysis trading bot using such a simple algorithm for making buy and sell decisions? I don't trust myself to trade with discipline like that but I would totally trust software to do it for me.
I've observed that technical analysis is great when the price is simply oscillating. Plenty of money to be made in that back and forth... The problem is at any moment something can screw up the pattern. Maybe someone comes and places places a massive order worth hundreds of millions and the unexpected change in price wipes out any profits. A bot can probably close the position before it's too late but I'm only human.
>taking fixed-window averages and comparing them to one another is effectively useless
Is it really that simple? I'll fully admit that most of my understanding of the stock market is based on intuition and reading books with flashy titles. In other words, I'm far above the moving charalatan average in most aspects of my life, and you also sound like you might actually know what you're talking about based on how definitive your answer is. If you also, for example, back-test a moving average strategy it usually ends up terrible I've noticed--either making almost no money or losing money.
Yet, I really like watching the stock market. It's my favorite hobby in fact. It certainly feels like a death cross is going to be a bad time when it happens, but maybe the truth is more complicated then the cryptic silly lines I gain so much joy from.
You might already know this, but the stock market death-crossed around January and then it went down for a long time after that. But it also doesn't always go down so dramatically every time there is a death cross. I'm not keeping accurate tallies on the whole thing, but it seems like it's often bad when those two lines cross and often good when they cross in the opposite direction--the so-called "golden cross". I did actually put a little money on a stock because it golden-crossed recently and it went way up today, which was pretty exciting news. And I'm also avoiding a lot of stocks because they are about to death-crossed or just have recently on the weekly charts, but you know, I can also understand how the language I'm using might be mistaken for a seance organized by a bunch of teenagers dressed like vampires.
Mostly I listen to smart people like Warran Buffet and buy value stocks with good p/e, price-to-book, lots of equity, less debt, good earnings etc. It would be silly not to listen to the richest man in the world about what kind stocks to buy. Yet, it still feels like there's something else there, even if my little hobby is about as realistic as playing a round of magic the gathering. It's, you know, my little hour of make believe, that I put some money into in order to escape my otherwise mundane and factual existence.
I think the author is a little overly skeptical here. A moving average is by no means voodoo black magic, it's actually very simple. You take the price over the last x periods, for example 50 days, and find an average. Then you do the same with a different amount of periods, say 200 days, and then you compare that to the price. I think it's reasonable and useful to make inferences based on these three pieces of data. Is the price under the two averages? If yes, then it's likely a little low right now and might go up. Is the price way over the average price? If yes, it could go down. That, to me, is a reasonable analysis of data.
Taking it a little further, if the shorter period average is going down way faster than the longer period average, does that indicate something? Maybe that the price has been going down faster recently compared to the average of the longer period of time. Is that not a useful observation to make? If the short term average is going down so fast that it crosses the long term average, and the price is way above the two, isn't that a useful bit of information to know(that's a death cross). Perhaps you don't want to bet your entire life savings on this information, but it's also an exaggeration to claim that finding averages has no statistical merit.
If you then look into things, you'll find a lot technical indicators are derived from simple statistics and especially averages. Consider the very popular MACD, or Moving Average Convergence Divergence. A lot of people like that one, including myself, and it's made some people at least a little bit of money.
For me technical analysis is like the icing on the top of a very tasty fundamental analysis cake. You don't want a cake that's only icing, but if you do get the icing just right, then you can sell your cake for quite a bit more money.