Technical Analysis: Books and Tools
January 27th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
In the wake of a pretty good live call on gold, several emails came in that were related to technical analysis. How did I learn technical analysis? What tools do I use? What books do I recommend?
Before continuing, I want to clarify something: As of right now, I’m not using any set of indicators, tools or techniques that actually work in a statistically significant way. As far as I can tell, I’m not doing anything that would hold up against rigorous back testing. My success in the market is, unfortunately, akin to a winning streak at a black jack table. While it’s nice to be winning, I’m only playing with what I can afford to lose, which is not much. (Actually, working systems for black jack are well known. Casinos simply won’t let you get away with implementing them. See: The classic, Beat the Dealer: A Winning Strategy for the Game of Twenty-One by Edward O. Thorp, and more recently, Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone.)
The tone of some of the emails I’m reading leads me to believe that some of you are getting the wrong idea about my capabilities. One person even asked me to explain my “system” in greater detail.
Gather round’, folks: I don’t have a system.
While profitable systems do exist, I don’t have one. After 12 years of doing this, on and off, I wish I could report otherwise, but I can’t. When you see me refer to my technical analysis as: trying to eat soup with a knife, my Magic 8-Ball, flinging chicken entrails against the wall and Cryptogon’s Reckless Speculation and Pachinko Lounge, there’s a damn good reason for all of that skepticism:
I am trying to make sense out of phenomena—that I have no chance of understanding—by applying mathematical and interpretive models of dubious statistical value.
That is the brutal reality of technical analysis.
The fact that I’ve been right so often might seem impressive, but I’ve seen red come up 33 times in a row on roulette. (See: Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb.)
That’s why I harp on endlessly about diversification and risk management. Put too many eggs in too few baskets and rely too heavily on technical analysis and you’re almost certainly going to get wiped out, or wind up walking funny. The point is, you don’t need to have a statistically valid system in order to be a decent trader as long as you manage risk properly and diversify.
Now, none of my cynicism about my own failure to devise a working system should discourage any of you for looking for something that works! The answer is out there. People have working systems. I’d say that, given enough time with the tools, there’s a solid 53% chance that I could do it! HA.
The analytical tools available to the technician are like a Lego set with about 10 billion pieces. There are endless approaches to take. I find it fun and interesting to work on this challenging puzzle. Indeed, I see it as an adult version of Legos. I’d say that if you’re interested and have a playful attitude about it, go for it. Learn the basics of technical analysis and start building stuff with the tools. I strongly encourage backtesting, so you’ll get an idea of whether or not your just pissing into the wind, or if you actually have something. (See: Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David R Aronson.)
On the other hand, if you’re looking to make a quick and easy buck, you’re in for the shock of your life if you think trading presents that opportunity. That’s simply not the case.
A note on getting lost in the machine: Watch Pi and A Beautiful Mind. If your research along these lines starts to resemble what you see in either of those films, you’ve got a problem. For me, part of keeping the work “playful” is: A) Knowing that I don’t need it to succeed; and B) accepting the strong possibility that I simply might not be able to accomplish what I’m trying to do.
Ok, books and tools.
Books on Technical Analysis
I learned the basics of technical analysis by reading, Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications by John J. Murphy. If there’s a better book on technical analysis, I don’t know about it.
The Encyclopedia Of Technical Market Indicators, by Robert W. Colby is also very good. I don’t own it, but I’ve looked through it several times.
Options
A few people are asking me for help with options. I encourage you to learn more about options, as they can be useful and rewarding. It would, however, be irresponsible of me to try to explain options strategies. I’ve been familiar with how options worked for years, in general, but I only started using them in my own trading recently, and as a compliment to the technical analysis I was already doing on stocks. I’m encouraged by the possibilities. Truth be known: I use options mainly for speculation because I’m not willing to allocate the capital necessary to buy or short stocks at face value.
Books on options:
Options Made Easy: Your Guide to Profitable Trading by Guy Cohen
The Bible of Options Strategies: The Definitive Guide for Practical Trading Strategies by Guy Cohen (Exhaustive reference on strategies.)
The Options Playbook by Brian Overby (Quick reference on strategies, but I could do without the humor.)
Tools
—TradeStation
The best tool available to the technician is TradeStation. I have used it in the past and it is the ultimate platform.
TradeStation is the default environment for the development and backtesting of custom strategies and automated trading systems. If you work intraday setups I don’t even know of anything that compares to their radar screen. If you can think it up, TradeStation can do it. (Whether or not you can do the programming is another issue.)
—MultiCharts
MultiCharts is a bargain. It has TradeStation-like powers, but you can own the software outright for $899. It includes an EasyLanguage interpreter, so you can program custom indicators and strategies, just like in TradeStation. (It doesn’t have a TradeStation Radar-like system, though.) I used the MultiCharts demo for a month and it was excellent. I shelled out for MCFXPro (a Forex only version of MultiCharts) when I was investigating automated Forex systems recently. I was impressed. It’s not TradeStation, but when you look at the costs involved, MultiCharts offers a lot of value for the money.
I happen to be an affiliate with TS Support, the company that sells MultiCharts and MCFXPro. I decided not to try to promote the products because they are so arcane. But this is that type of post. So… If you decide to purchase or lease any of their products and would like me to get a commission, these are the links to use:
MultiCharts Semiannual License
MCFX Basic – monthly lease plan
—Stochcharts.com
Since I’m not working on stocks intraday anymore, I’ve been getting away with using stockcharts.com. Of course, once you’ve used a professional platform, having to use a web based tool flat out sucks. But the price is right… It’s free.
The stock and etf charts that I’ve been posting on Cryptogon recently have been from stockcharts.com. If you know of a better source for free and good charts, send it over. Also, if you know of a decent chart application that doesn’t cost a fortune, send that over too. I’d buy MultiCharts, but I’m too cheap.
—Netdania’s FinanceChart
Netdania’s FinanceChart is where I get all of my realtime gold and Forex charts. It is remarkably good for a tool that’s free to use.
—Stockfetcher
Wow, Stockfetcher is a great screening tool for stocks! They offer strategy backtesting too. It’s end of day data only, but that’s ok for what I’m doing. I signed up for their premium service, which allows longer backtesting periods. I’m getting up to my old voodoo antics of bottom fishing and this tool is perfect.
The Stockfetcher language is really, really simple and there are lots of examples for you to use in your own screens. Again, this isn’t TradeStation, but the price is definitely right.
—Yahoo Finance
I mostly use Yahoo Finance to look at the global stock indices, but I also use it to look up company information.
Well, I hope that answers some of your questions along these lines.
Wow. I don’t trade and have no intention to but what a great post Kevin! Some of the best writing I have seen in a while, pithy and engaging while being really loving with those great big flashing warning signs.
A perfect example of why cryptogon is top of my daily blog reading list.
ThinkOrSwim’s thick-client Java platform can be used for free. Anyone can papertrade on it without opening a brokerage account. It even runs on Linux!
I’m using that for testing and charting and then trading on TradeKing.