Trading with Charts for Absolute Return

TECHNICAL ANALYSIS

Hundreds of books are available on technical indicators. The best minds in the industry, supported by millions of dollars for research, try to outperform the markets. If there are trends in the products traded, most technical indicators perform well as long as they are designed in trend-following fashion. However, in sideways markets, most technical trend following systems do not perform well.

Opposite to the trend followers are the contrarians, to be named. They perform exceptionally well in sideways markets but have problems in trending market conditions.

Technical Analysis versus Chart Pattern Analysis

I have worked for more than 20 years trying to come up with reliable and profitable technical indicators. I succeeded, but I was never really happy with the results, because the drawdowns were too high and I was always struggling with optimization. In 2005, I went back to where I originally started: pattern recognition.

Supporters of the technical analysis may say that optimization is no problem because there are enough methods to test whether optimized parameters hurt the performance. But when aiming at an absolute return strategy, there should be in my opinion no optimization at all.

Every major hedge fund or stock fund has its own research department where trading strategies are developed to outperform products or markets. A quick look at the performance profile shows that most big hedge funds perform very much the same.

Key differences between technical ...