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Four Basic Qualities of Great Technical Indicators & The "Stochastics Default Club"
- Advanced Technical Analysis
- Chart Patterns
- Constance Brown
- default
- Design Development
- Exchange Traded Fund
- Fibozachi
- fixed
- Fixed Period Drop-off Effect
- Fourth Estate
- Head and Shoulders
- MACD
- Mark Jurik
- Moving Average Methodologies
- Moving Averages
- Multiple Confluence
- Paper Street Soap Company
- Price Action
- South Park
- Stochastic Calculus
- Stochastics Default Club
- Systematic Trading
- Technical Analysis
- Technical Indicators
- Tishman Speyer
- Trading Systems
- Tyler Durden
- Volatility
- Welles Wilder
Four Basic Qualities of Great Technical
Indicators
& The "Stochastics Default Club"
After a long weekend spent polishing off a sweet box o' wine … shut-up ... it’s recession-chic … while piecing together research for an upcoming article about the possible alternation of cyclic patterns surrounding both the Madoff scandal as well as the Oracle of Omaha himself, I began to sift through the digital heap of articles/links bookmarked ‘non-actionable’ from the past week. With my computers in the midst of a full backup, I had hoped to catch up on some non-technical, ‘funny-mental’ as well as distinctly out of left field research while my brother took a much-deserved break in the cesspool that is Atlantic City.
Where 57-year-old men at the Taj, who apparently just don’t show enough doggone respect to their 61-year-old elders at $1/2 No-Limit Texas Hold ‘Em games, sometimes “go Wayne Brady on a …” and shank someone in the neck like Keller from OZ got done while stacking paper. Then again, what point is there in keeping a switchblade in your shoe if you don’t use it when you’re being bludgeoned atop the skull by the walking cane of an elderly attacker, like Sen. Charles Sumner on the floor of the Old Chamber of Congress? The original police report noted that the walking cane might have been an umbrella. Apparently, details were hazy as onlookers could only be heard muttering things like, “but I had Kings”, “how could he call me, he wasn’t even suited” and various aneurysm-inducing iterations of Lewis Black’s “… and without that horse, I never would’ve spent that year in college” (1:35 in).
Just beyond 6 am, I concluded my self-imposed ‘weekend at Bernie’s’ (& Buffett’s), got the papers/bagels and stumbled upon Tyler Durden’s “For the Low, Low Price of $29.95, You Too Can Run Your Own Plunge Protection Team.” Having read my entire digital heap by noon, screamed like a six-year-old around 3 pm when my cat tried to carry a common garter snake into our house and uttered something at 6 pm which was previously unfathomable (“Man, I miss John Madden”), I felt compelled to passionately trace out a comment to Tyler’s TMJ-inducing, tongue-in-cheek ‘highlight.’ Having bit firmly upon this lure of personally sensitive topicality many hours ago, I finally submit this full-fledged rant-comment-turned-article.
Like so many other prior tenants of 16th & C no longer in Stuy Town, who have left Tishman Speyer to wither away in their self-afflicted Waterloo, I now reside further north. From within the heart of the Bermuda Triangle of vanishing bonus-based quant salaries that spans from Fairfield to Fishkill to Fort Lee, I present a long-winded rant about design development and the four basic qualities of great technical indicators, as espoused by Mark Jurik.
Ya Just Gotta Love Plug-and-Play 'Systems' That:
(1) feature nice, big multi-megabyte, umpteen page user guides replete with uber-glossified pics of basic screens within Excel, TS and Word, whose prominent use of a single defining term (such as fractal) is not once ever defined, let alone exhibited;
(2) omit any description of the modifications to accepted technical methodologies within their 'proprietary' technical indicators or designer tips about how to most effectively identify, isolate, time, execute and manage ideal trades using them;
(3) appear to be constructed around two singular, lagging and confluent indicators (such as Balance-of-Power and a multitude of moving average methodologies) with structural input values based upon entirely subjective, discretionary and wholly non-systematic conditionals; without either initial quantification or the additional guidance provided by GA (Genetic Algorithm) optimized EAs (Expert Advisors) that are powered by a neural network;
(4) register just a limited number of long-only trades (such as 100 - 200) over several decades of a continuous data series without factoring in any slippage or commissions;
(5) and which, ultimately, serve to further muddy the already collectively murky waters of technical analysis for truly unique, accurate and robust design developers whose technical work is founded upon not only merit but also extensive strategy backtesting and detailed personal use.
As someone who practices what sometimes seems like a fleeting pursuit to help demystify technical analysis and explain the merit of game theory as applied to a multiple confluence of qualitative chart patterns and quantitative technical measures (whose vernacular is veritably plagued with an already-overly-verbose-and-idiosyncratically-beleaguered-non-recurring-fractal-tendency), this is an issue near and dear to me. Either Tyler Durden's ‘highlight’ struck a nerve within me or that sniper who tagged me on the second to last step on the way up the stairs earlier this morning must have upset my sciatica; most likely both.
Defining the Term 'Fractal'
- practical aspects of structural composition -
From our vantage point at Fibozachi, anything that claims to be truly "fractal" must, by its very definition, exhibit a similar bi-directional integrity that remains both accurate and robust across not only a multitude of various trading instruments but also interval periods of time, tick and volume. Throughout the multi-faceted landscape of the Hedgehog complex there exist innumerable, wholly fractal, trading systems whose cumulatively comprehensive structural compositions diagnose:
(1) an optimized trading instrument (e.g. stocks, options, ETFs, bonds, futures or FOREX);
(2) and a singularly defined trading vehicle/issue therein (e.g. futures vs. common stock and all subdivisions such as @NQ vs. @ES, @NQ vs. QQQQ, AAPL vs. RIMM or GS vs. XLF vs. UYG; or ‘simply,’ @GC vs. @SI, GLD, GDX, ABX, FCX, AUY or SLW, so on and so forth);
(3) with a specific interval period length of time, tick or volume bars (e.g. 3-minutes, 610-ticks or 10946 shares);
(4) alongside multiple global variables and similarly specific conditionals that span everything under the sun from the basic requirements of multi-staggered entry / exit parameters and uniquely segmented volume filters to such seemingly mundane tertiary functions of inactivity periods and daily max win allowances.
What's the Big Deal ?
- why does any of this matter -
Distinctly tongue-in-cheek, I ask, “Why utilize some of the core methodologies within the field of technical analysis which are employed by some of the very best, biggest and brightest decision makers across the Hedgehog landscape? This rhetorical question is posed in the same vein as 1-2 and Marla Singer's dexterous missive within "An Open Letter to the Financial Media", and the ostensibly leaked internal memo from Marla to Tyler, modestly entitled "Learning to Love the Carrot and the Stick of Personality Journalism".
These position pieces cunningly detail the self-serving ‘virtues’ of today's hollow half-life of a Fourth Estate, juxtaposed against the backdrop of, gasp, actual decision makers with AUM that number well into twelve figures! In similarly pointed fashion, I ask, “How could you not strive to emulate the most readily scalable (technical) methodologies of these immensely successful Hedgehoggers who privately solicit the opinions of Tyler, Marla, Travis, Cornelius, Sacrilege and whomever else may be contained within the innermost sanctum of the deep, dark, mysterious, batcave-y confines that comprise ZH's nucleus.
My simple, beaten-to-death point being: please do not allow the loose use of the term "fractal" to tarnish the true nature of the term itself or the innate value that is inherent within technical analysis; such would be rather “loosey-goosey.” Click this sentence for a "Snake Oil Tutorial" about "How to Sell Worthless Strategies" by Mark Jurik, who, I consider one of the greatest design developers of both commercially available structural 'system' components as well as proprietary technical trading indicators.
Within the category of accurate and robust proprietary technical indicators, which are truly fractal, Jurik’s work is some of the very best that is commercially available to both retail traders and boutique firms. Merely for perspective: in terms of revolutionary constructs, Jurik’s work does fall well shy of the heights reached by J. Welles Wilders’ groundbreaking momentum oscillator studies within his seminal work, New Concepts in Technical Analysis, which burst upon the trading scene some thirty-one years ago in June of 1978; which, happens to be exactly 377 months from today.
Welles Wilder is single-handedly responsible for the design development of the: Relative Strength Index (RSI); Average Directional Index (ADX); Directional Movement Index (+/- DMI); Parabolic Stop and Reverse (PSAR); Average True Range (ATR); and many other noteworthy additions to the cumulative body of knowledge surrounding both the effective measurement as well as the efficient management of various functions of volatility. We at Fibozachi firmly believe that Wilder’s numerous contributions are the most fundamentally critical studies published within technical analysis over at least the past four decades; we highly recommend that any aspiring technician visit his website deltasociety.com, buy a brand new copy of New Concepts … and start marking it up asap!
Examining Proprietary Fractal Tools:
- moving average methodologies -
Mark Jurik’s work is best known within a small circle of quant design developers for the creation of his proprietary "JMA" (Jurik Moving Average), the single most accurate and robust moving average methodology the world over, which, in its attempt to track price:
(1) minimizes group delay (lag) much better than the GMA (Gaussian Filter);
(2) dampens the effect of smoothing much better than the TMA (Triangular) or any WMA (Weighted);
(3) exhibits virtually no overshoot whatsoever, unlike the HMA (Hull) and the vast majority of AMA’s (Adaptive), whose conditionally coded inertia filters tend to sharply overshoot actual price action when utilized on either small time frames or similar interval periods comprised of either tick or volume bars. This prohibits the employment of second or third derivative threshold ratios as either actual trade filters or simple conditional functions. Ultimately, this central flaw becomes massively problematic within "Cash" products that have fixed daily interval periods of time, where there is not a futures-like continuously streaming data series to analyze without arbitrary interruption. This effectively prohibits any application to equities because the inertia filters employed within both the HMA and the vast majority of AMA’s become fatally distorted by their tendency to drastically overshoot price action whenever a gap appears in the data series.
(4) does not fall victim to what we at Fibozachi call the “fixed period drop-off effect,” like the SMA and other moving average methodologies. This “drop-off effect” can become exceptionally pronounced when an outsized data point within a fixed interval length of “N” periods is immediately replaced with new data from the opening plot of an “N + 1” bar. For example, this occurs when a “10” period interval length setting with an extreme data point 10 bars ago effectively “drops-off” that reading upon the opening of the very next (11th) bar; causing predictably marked shifts within an indicator, oscillator or function’s cumulative value reading. Whenever you hear a technician proclaim that the “10-day A/D line or the McClellan is about to drop a large reading," this “fixed period drop-off effect” is what they are referencing. To this practical end, a technician can significantly augment his/her understanding of stochastic calculus by further examining not only how various types of moving averages plot and how different stochastic formulas function but also how each of their unique deficiencies differ.
(5) and, bottom line is more accurate and robust than any other moving average methodology the world over (at least that which is publicly known to be commercially available).
Four Basic Qualities of Great Technical
Indicators
- and the "Stochastics Default Club" -
As Jurik details within his highly technical website, Jurikres.com (a veritable treasure trove of freely available information for any aspiring design developer), there are, "Four [basic] qualities of great technical indicators … [where] Accuracy can be measured …”
(1) Proximity
(2) Timeliness
(3) Overshoot
(4) Robust Behavior
These are the four fundamental reasons why so many technicians wince when they hear others talk about "moving averages" when they are simply referencing the Simple Moving Average (SMA) as if it were the only moving average methodology available, oblivious to both:
(1) the existence of an Exponential (EMA), Double Exponential (DEMA), Triple Exponential (TEMA or “T-3‘d”), Weighted (WMA), Triangular (TMA), Hull (HMA), Gaussian (GMA), Jurik (JMA) or dozens of other variously customized Adaptive Moving Average (AMA) methodologies; and
(2) the belief that the SMA's most useful as well as unique purpose is as a function of the "Stochastics Default Club."
This loaded term points squarely to today’s incessantly repetitive and insultingly comical commercials from discount-brokers-disguised-as-charting-platform-providers; which, between nearly every other Prime Time network program and professional sporting event, tell us that it is ‘so easy to buy stock’ that even a baby can do it; never mind the fact that the baby vomits upon itself merely seconds after having clicked ‘buy.’
Our favorites are the ones that feature either some cheeky-looking dentist who is examining option spreads instead of making his patients’ teeth hurt, or some soccer mom who ostensibly ‘loves to be home with the kids,’ but whose naggingly bruised sense of self-worth leads her to try her hand at ETF pair trading. Each similarly extol the ‘liberating empowerment’ of having "the 12, 26, 9 MACD right here in front of me ... right next to XYZ’s ‘patented’ chart scanner that automatically diagnoses trendlines and ‘technical’ patterns like the cup and handle and the head and shoulders.” BLECH!!
If you are aware of the commercials that I am referring to then you will surely understand why I would not want to mess with an Executive Assistant D.A. Although I am sure that I could channel my inner Terry Bollea and dance with Belzer in the basement of the Paper Street Soap Company; at least based upon how tough he looked while holding a permed, white Pomeranian across the street from Keens back
in March. In any event, in the absence of detailed charts on a Sunday,
it does bring to mind a handful of classic skits linked below. Enjoy!
Zack Morris “Time Out” (6:18 in, random);
Cracked.com’s “The 7 Greatest Superpowers”
SNL – the talented Baldwin as a broker
SNL – MS broker
South Park – Episode 3 of Season 13, “Margaritaville”, won a 2009 Emmy award for its sharp and hilarious insight, which displayed a much greater conceptual understanding of both modern finance and socio-economic theory than either Mr. ‘Dry Eyes’ or “keep doubling down on those DITM calls” Nails ever have. The links below from southparkstudios.com are the funniest 1 - 2 minute snippets from the episode; please do check them out, if not the full episode via the last link below for a good laugh. And keep in mind that since Margaritaville first aired the night of 3/25/09 that Primary wave 1 (circle) could not have beaten its script to completion by more than a week.
“The Importance of Saving Money”
“Water, Bread, and Margaritas”
“Improbable but not Impossible”
“Plastic Cards and Paper Money”
“Bailout!”
Full Episode: South Park, S13, E3, “Margaritaville”
Comedic interlude aside: Game On ! Game On !
The "Stochastics Default Club"
Such basic ‘nice-ities,’ billed as ‘expert software’ within the charting platforms of discount brokers, simply do not account for the actual issues of timing, execution and management within a hybrid rule-based / mechanical systematic trading strategy any more than a single dose of Head & Shoulders would prove useful for the Encino Man’s chances of getting laid. And were he not famously wealthy, I would say the same about the guy who played him with the ginormous forehead, Seinfeldesque smirk just prior to delivering a punch line and such a complete inability to intone effectively that he makes Jeremy Siegel’s mid-morning seminars sound like R. Kelly’s “Trapped in the Closet,” but I digress.
As George Lane, one of the primary mentors to the legendary design developer Constance Brown, writes within page ix of the foreword to Connie's seminal work, Technical Analysis for the Trading Professional:
"In a theme she returns to frequently, she kids the "Stochastics Default Club" - both the uneducated public that accepts the default values in software and tries to use them to trade without a clue as to why and the educated but lazy trader who knows better but does it anyway."
If I wasn't already sold by the ‘missing-piece-of-the-puzzle’ and the ‘world-in-the-palm-of-her-hands’ graphics, then the question "Did you ever wish for a crystal ball that could tell you when the market was going up or down,” and the statement "In fact, XYZ is so effective and easy to use that a trader with literally no experience can be up and running in one day," must have been what hooked me.
Having digested the content within Tyler Durden’s “For the Low, Low Price of $29.95, You Too Can Run Your Own Plunge Protection Team,” it would make perfect sense were Tiny Tim or Uncle Ben and Co. to order a full brick of them for the NY Fed's new guppy-fed Turtles. Surely the PPT et al. practice ‘advanced technical analysis’ when they machine gun the tape with basket orders surrounding the ‘press conferences’ of their four principals, which are blatantly scheduled around the effective employment of their REPO agreements that serve as the literal open spigot force providing full fire hose-like liquidity the world over.
All that said, even if John Thain himself told you in an elevator that the weather outside was warm and clear but that a rabid dog was running around the first floor of the building, you cannot simply assume that it will be cold and rainy outside after you walk through the first floor without incident. Meaning that just because you cannot trust a single word that someone says, it does not necessarily mean that everything that they say/produce will necessarily prove to be bogus.
Ultimately, without having thoroughly examined a proprietary technical indicator we cannot definitely say whether it is the best thing ever or even just good enough to write home about, to a cousin, or to that aunt who still sends you $20 on your birthday even though you are 46. Either way, a great snag that directly spurred an off-hours weekend rant from out of left field; Tim and Eric's Awesome Show, Great Job! - style. Thanks for taking the time to read this cryptic, technical and viscously written rant about moving average methodologies, the “Stochastics Default Club,” the “fixed period drop-off effect” and the four basic qualities of great technical indicators. Have a great trading week and never stop learning!
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Excellent commentary. I completely agree with comments on moving averages.
this is a great post. Glad I caught it.
The existence of and advertising for these "you can be a quant too!"
systems make me sick. Just watching 10 minutes has me dreaming up ways
their creators might intentionally producing a trading block
of sheep they can fleece.
tell us that it is ‘so easy to buy stock’ that even a baby can do it; never mind the fact that the baby vomits upon itself merely seconds after having clicked ‘buy.’
Such an accurate description of trading :)