Chapter 8

Trading in Trendless Markets

Invincibility lies in the defense; the possibility of victory in the attack.

—Sun Tzu

Many investors use momentum indicators to make their trading decisions. Despite the confidence they place in these indicators, most refuse to make a rigorous assessment of their reliability. Unfortunately, without back testing, they have no knowledge of an indicator’s measurement error, and without knowing its flaws, making the necessary improvements becomes pure guesswork.

This chapter examines the reliability of a moving average indicator by using a quantitative approach to assess its accuracy as a predictor of future price movements.

Applying a quantitative approach does not prevent you from being a technician. They ...

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