Like the casino’s edge is very small, when exploited many, many times, the net result is incredibly profitable. we then discussed the need to have good, clean historic data, with which to test ideas, as inaccurate data with gaps or spikes, could easily lead to misleading or wrong results.
in this article we build on those foundations and explore the development of some ideas, from conception, through to creating trading rules, testing them and determining whether they give us a robust edge.
The technical analysis on the market, easily accessible via a quick search of the web and one will find countless examples such as, ‘the oscillator is overbought and therefore the market is a good sell here’, or ‘the market has breached the 5 day or 400 day moving average’, or ‘the price is at an extreme level, testing the lower Bollinger Band’.The reason that most of these views continue to be followed is summed up beautifully by the legendary william eckhardt, of the famous turtle trading experiment,
‘Since most small to moderate profits tend to vanish, the market teaches you to cash them in before they get away. Since the market spends more time in consolidations than in trends, it teaches you to buy dips and sell rallies. Since the market trades through the same prices again and again and seems, if only you wait long enough to return to prices it has visited before, it teaches you to hold on to bad trades. The market likes to lull you into false security of high success rate techniques, which often lose disastrously in the long run. The general idea is that what works most of the time is nearly the opposite of what works in the long run.’