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Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals Hardcover – November 3, 2006
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"…his book is well written and contains a great deal of information that is of value…." (The Technical Analyst, May/June 2007)
From the Inside Flap
As an approach to research, technical analysis has suffered because it is a "discipline" practiced without discipline. In order for technical analysis to deliver useful knowledge that can be applied to trading, it must evolve into a rigorous observational science.
Over the past two decades, numerous articles in respected academic journals have approached technical analysis in a scientifically rigorous and intellectually honest manner, and now, Evidence-Based Technical Analysis looks to continue down this path. Organized into two parts, this valuable resource first establishes the methodological, philosophical, and statistical foundations of evidenced-based technical analysis (EBTA), and then demonstrates this approach—by using twenty-five years of historical data to test 6,400 binary buy/sell rules on the S&P 500.
Evidence-Based Technical Analysis examines how you can apply the scientific method, and recently developed statistical tests, to determine the true effectiveness of technical trading signals. Throughout these pages, expert David Aronson details this new type of technical analysis that—unlike traditional technical analysis—is restricted to objective rules, whose historical profitability can be quantified and scrutinized.
Filled with in-depth insights and practical advice, Evidence-Based Technical Analysis provides you with comprehensive coverage of this new methodology, which is specifically designed for evaluating the performance of rules/signals that are discovered by data mining. Experimental results presented in the book will show you that data mining—a process in which many rules are back-tested and the best performing rules are selected—is an effective procedure for discovering useful rules/signals. However, since the historical performance of the rules/signals discovered by data mining are upwardly biased, new statistical tests are required to make reasonable inferences about future profitability. Two such tests, one of which has never been discussed anywhere heretofore, are described and illustrated.
If you want to use technical analysis to navigate today's markets, you must first abandon the subjective, interpretive methods traditionally associated with this discipline, and embrace an approach that is scientifically and statistically valid. Grounded in objective observation and statistical inference, EBTA is the approach to technical analysis you need to succeed in your trading endeavors.
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Top Customer Reviews
I do agree with reviewers and find it disheartening that a test of 6400 binary buy/sell rules did not find a tradable system. But they were simple, single rules. In chapter 9, he does make suggestions on next steps.
This book is going to save me time in my backtesting. I found several things that I will do differently. Related to this, I liked his explanation of data mining and the right and wrong way to go about it.
The 40 pages of footnotes give you an idea of the amount of thorough research that went into this. I added a couple books to my reading list from the notes.
If you found books by Pardo, Kaufman and LeBeau valuable, then you are going to like this book. I have read many dozens of trading books, most of them systematic, and this has been the most important one for me.
The long (over 100 pages) psychology "preface" is extremely important to Aronson's body of work. I found it hugely interesting, but fear that others may not, or worse. In fact, the psychology preface itself indicates that this work will be reviled (my words) by the multitude. People do not like their sacred cows criticized.
The problem is that most market practitioners use methods with little or no scientific basis. Even if shown evidence of faulty logic, people continue to believe its validity. This is also true in the medical profession as Aronson illustrated and which scared the daylights out of me.
For anything to be scientifically testable, it must be possible to prove it wrong. However, many of the technical analysis disciplines cannot be defined. Thus they cannot be disproved. Consequently they have no scientific validity. They may have some anecdotal importance, but true science is lacking.
Let us say that one of the market gurus espouses that when the chart of XYZ resembles "Pattern A", the stock is destined to rally. To test that we have to define Pattern A and we have to define "rally", and we should provide some time parameters in which to work or fail. The trouble is that the guru cannot define any of that. But the guru still believes in his work, and all of the investors who pay monthly fees for his expertise believe it also. Anyone who criticizes the guru or the validity of Pattern A is looking to get flamed.
EBTA preaches that technical analysis research should be conducted like quantitative analysis research. Those who treat TA as a casual discipline will get casual results. The book is not an easy read, but it is an easier and much more interesting read than the "bible" of the CFA community, Quantitative Methods for Investment Analysis (DeFusco, et al.). I own both books and certainly consider EBTA more valuable than the CFA manual, worshipped by thousands. Don't expect to download all of Aronson's knowledge the first time - read it again. I did and learned more the second time through.
Aronson is meticulous and provides "service after the sale". I had recently traded emails with him about an article he had cited. He was prompt to respond and discus the implications of our expanded research. I have the feeling that he is like this with everyone.
In conclusion I have to say, that if you cannot do what EBTA preaches, at least get yourself a money manager who does.
Mathematical Investment Decisions, Inc.