DAYTRADING Fundamentals Message Board

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Strategies & Market Trends : DAYTRADING Fundamentals

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To: Eric P who wrote ()	8/8/1999 10:50:00 PM
From: bajasurf	Read Replies (3) of 18137

Is anyone aware of any statistical analysis of trade setups and their probabilities of follow through that refute the following statement in Burton Malkiels, "A Random Walk Down Wall Street"? "In one elaborate study, the computer was programmed to draw charts for 548 stocks traded on the NYSE over a five year period. It was instructed to scan all the charts and identify any one of 32 of the most popularly followed chart patterns....head and shoulders... wedges...diamonds...channels etc. Whenever the computer found a bearish signal that was followed by a downturn it recorded a sell signal...on bullish breakouts a buy signal was recorded. The computer then followed the performance of the stocks for which buy and sell signals were given and compared them with the performance record of the general market. There seemed to be no relationship between the technical signal and the subsequent performance of the stock. Indeed, the strategy that came closest to beating a buy and hold strategy was buying right after a bear signal." Why do I bring this up? We are all searching for the same thing, specifically, an edge in determining the next direction of the market. Daytraders evolved to the shortest period possible because the longer the trading period the larger the risk of reversal. Daytraders with Level II screens can at least see the bids and ask that may affect the market for the next two minutes, but beyond that what else can possibly predict the direction of a stock. There are simply too many variables. How do we improve the odds to more than a flip of the coin and can it be statistically proven. Even trading the tape you are looking at some signal whether it be increased volume on upticks or something. Gut feel won't hold up over the long term. If somebody has actually back tested technical signals please post your results. It would be nice to know that were not wasting our time looking for all these signals in they don't in fact increase the probability of a successful trade. bajasurf

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