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by greatwave1 1056 days ago
I think a more compelling argument against technical analysis can be found by considering the outcome of a semi-efficient market, and how unlikely it is that simple, purely momentum-based signals haven't already been arbitraged away by the other participants in the market (who have significantly more sophistication and speed-of-execution than anyone publishing technical analysis strategies online)
2 comments
the88doctor 1056 days ago
The Market Wizard series has several good interviews with traders with verified records that significantly outperformed for decades. The ones who used TA invariably say that it used to work but became less and less effective as computers became more prevelant.

I wonder if the crossover strategy would still outperform (on a Sharpe Ratio basis) starting in 2005 instead of 1998.

I also wonder if the crossover strategy would fail to outperform (on a Sharpe Ratio basis) once transaction fees were considered.

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zer0tonin 1056 days ago
It still overperforms after 2005 (0.63 sharpe vs 0.55 for buy&hold). It gets kinda awful after 2015 (0.47 sharpe), with the V-shaped 2020 crash and recovery.
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ethbr0 1056 days ago
I always assumed any momentum effectiveness was arbitrage on trader volume scales differing by order of magnitude.

E.g. a major player rebalancing a position created distortions that allowed much smaller players to profit, but no distortion on the scale that would allow others trading at major volume to profit

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throw0101c 1056 days ago
> I always assumed any momentum effectiveness was arbitrage on trader volume scales differing by order of magnitude.

It's an area of active research:

> Students of financial economics have largely attributed the appearance of momentum to cognitive biases, which belong in the realm of behavioral economics. The explanation is that investors are irrational,[4][5] in that they underreact to new information by failing to incorporate news in their transaction prices. However, much as in the case of price bubbles, other research has argued that momentum can be observed even with perfectly rational traders.[6]

* https://en.wikipedia.org/wiki/Momentum_(finance)

* https://en.wikipedia.org/wiki/Carhart_four-factor_model

Though the market, size, and value factors appear to explain >90% of returns (at least using US data):

* https://www.ifa.com/articles/momentum_fourth_factor

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