Trading Systems used in technical analysis are not secrets, everyone has them. After years of using technical analysis for trading and portfolio management, I can tell you that there is little new. Technical analysis systems use formulas that provide an absolute value. That allows rules to be built around them in the form of trading systems and trading plans.
Turtle trading rules, moving average rules, stochastic, MACD, Bollinger Bands, RSI, Momentum indicators, CCI, and On Balance Volume are not secret formulas. The secret sauce is which asset you use with them.
Some traders will use a 50 day moving average as a trading system. The 50 day moving average is a great tool when matched to the correct stock, ETF, and futures contract. It can devastate a trader’s portfolio and his psyche when used with the wrong asset.
If the asset you are applying a system to tends to be stable, it would not be appropriate to use trend following indicators. A portfolio manager would want to use technical analysis formulas that work to produce short term oscillator or swing trading signals.
It would be too easy if every asset had only one characteristic either trending or stable. That would take all the fun out of portfolio management. The key is to identify the dominate characteristic over a couple market cycles. Most market cycles are 3-4 years. It would be logical to test an assets characteristics over 8-10 years or 2-3 market cycles to determine the dominate characteristic.
Even then, any asset will have periods when it acts the opposite of the major trend. For example, a stable trading stock that tends to revert to the mean in price movement, probably trended down in late 2008 and the rally from March 6, 2009. This asset will probably start exhibiting narrow ranges of trading back and forth around a mean in a short period of time.
Emerging Markets, EEM is an example of an asset that trends as its major technical characteristic. For a period of time, an asset like this may oscillate when forming a bottom after a large trend move in either direction, only to start trending again.
There is “No Holy Grail” in a system. The secret is to use the right system with the right asset.
To ask a question or contact the writer, mark@seleznovcapitaladvisors.com
