Home Trading Strategies Technical Analysis: Does it Work? (It’s Not What You Think)

Technical Analysis: Does it Work? (It’s Not What You Think)

Technical Analysis: Does it Work? (It’s Not What You Think)

hey hey what’s up my friend so in today’s video we’ll find out whether does technical analysis work I’m sure you’ve heard before I did traders telling you that hey you know what you need technical analysis that’s all you need to become a successful trader and at the same time you’ve heard of traders right telling you that hey you know what you can’t just rely on technical analysis you could adopt fundamentals as well so when you combine fundamental and technical analysis only then can you succeed as a trader so now the question is who is right and who’s wrong right so now let’s find out whether does technical analysis work to find out whether it works we have to compare it to a benchmark okay so the benchmark that we will compare against is the SMP 500 so we can see that historically the SMP there’s about an average of 9 10% a year with a maximum drawdown of 55% so there are two ways right we can support beat the benchmark number one we can either achieve similar returns but with a lower level of risk let’s say for example our strategy returned 10% as well but I’ll risk right our maximum drawdown is only 40% so in this manner we actually beat the markets because we have similar returns but a lower level of risk alternatively right you can also have higher returns by with the same level of risk let’s say you have another strategy now that achieve about 15% a year but the maximum drawdown is also 55% like the S&P 500 in this case you also beat the markets because you have achieved a higher return but with a similar level of risk so now to to find out whether we can beat the markets we are going to go with a simple strategy and this strategy that I choose R is a momentum strategy okay so basically it looks to buy high and sell higher momentum so these are the rules of the momentum trading strategy right we’ll go along when a stock hits a 40 week high ok this means that if the stock right is at a highest price over the last 40 week we simply buy the stock we have a 10% trailing stop loss this means right ok let’s say for example the stock breaks out let’s say this is a 40 week high the stock breaks out at $100 so with the 10% trailing stop loss right your stop-loss or it will be 10% of $100 right that is the value of a $10 so you take $100 – $10 in your trailing stop losses at $90 when you buy the stock now what if the stock moves up to let’s say a hundred and fifty dollars what is your trailing stop loss very simple right you take 10% $150 which is $15 right so you then you take 150 – $15 and your trailing stop loss is now one three five simple right that’s what we mean by a 10% trailing stop loss now here’s the thing right sometimes you will get many stock steady breaks out of the 40 week high so what we’re gonna do is we’re gonna pick the top 20 stocks the top 20 stocks that has moved the most over the last 40 weeks right basically the top 20 stocks with the largest price increase over the last 40 weeks this is how we define momentum right the more and move over the the 40 week period right those are the stocks that we will favour and choose to buy so other things to take into consideration the transaction cost $10 per trade right we want to know keep it as close to no reality as possible test universe is all the stocks in the Russell 3000 index execution is on the market open on a Monday maximum open positions is 20 positions at one time so let’s say we are having 20 positions in a portfolio another stock gives a buy signal we will ignore it because we only have a maximum of 20 positions our test period is from 1990 to 2017 about 28 years of back testing data including the dot-com bubble and the oeid online financial crisis and position size is 5% what this means right is let’s say you have a portfolio of 100k all right so 5% 100k is $5,000 5k so this means right for every stock that you buy you can only buy $5,000 worth of stocks so you have 20 stocks right that’s where your 400k is used up all right so that is what I mean by position size 5% so now let’s have a look at the results of this strategy so as you can see right we took 4630 treats over 28 years the winning rate is a forty five point eight three percent profit factor is one point five so what this means right the profit factor is basically right how much return you’re getting for every dollar you risk so let’s say you risk a dollar right and you get back 150 this is a profit factor of 1.

5 okay let’s say you risk a dollar and you get back three dollars this is a profit factor of three simple so with that said and no written we have about twenty three point four seven percent and no return with a maximum drawdown of fifty three percent so you can see that this simple strategy beats the market so yes technical analysis work but but wait right you can see that this NO written twenty three point four seven is more than double of the S&P 500 maximum drawdown is slightly lesser than the SMP 500 as well and to look at the results right one on one year one year this is 1990 right this is the results for you know like for example October November December and end of the year we made seven percent right for example 2013 right January made two percent 2013 February mid put my minus 0.

5 percent 2013 March up 6.5% and at the end of the year about up forty seven point nine percent so as you can see right clearly this strategy beats the market clearly technical analysis what so yes technically Nellis is what but but I want you to think about something right is that all you need well the answer is no and here’s why number one risk management if you recall earlier okay your maximum drawdown on this strategy is about fifty three percent and this right is without using any leverage okay so now imagine if you are using leverage say say use a one to two leverage okay if you use I want to to leverage now your drawdowns and your returns will probably you know be almost double so your maximum drawdown now will pretty much exceed one hundred percent right because now you’re using a leverage of one is to two and you go bust your account go bust so clearly right you are trading with an age but you do not have proper risk management okay technical analysis it wouldn’t save you right so this risk management is important even if you know you’re trading with a niche the second thing psychology why do I say that because imagine this imagine right at this point in time right over here 2002 all right in me you’re down three point nine percent you might think oh it’s nothing right like I can survive looking it’s only four percent come on curry lap to you is here then you down another point five percent in June uh and by a scratch right I can do this in July boom negative sixteen percent this is where your psychological mine is kind of messed I’m like what the beep right I’m down sixteen percent this month plus my earlier losses I’m down almost 20% what’s going on has the strategy stopped working right but you decided you know just the bite your teeth ain’t carry on the next one you’re down another 1% slightly better than the previous one but still is a down one I really hate trading man what is this all about then you just hold on you know persevere this discipline follow your rules in the next month boom down 8.

6 percent and you pretty much you know give up right I surrender right what is this down 30% drawdown or maybe even more alright this strategy doesn’t work right market has changed the strategy has stopped working and you can see that you are pretty much down a 17.

5% for the year okay and at this point in time you read if you know Tron Tron in power you because from your equity high right to the lowest point of your drone I think you have probably suffering about a 30% 40% drawdown and you give up and the following year a return of 60% so can you see that yes you are trading with a niche yes you might apply proper risk management but if you do not have the right psychology to handle the drawdown technical analysis isn’t gonna save you as well so this is important right the psychological aspect of trading there you know too many traders neglect so let’s do a quick recap right number one yes technical analysis it can work and I just shared with you a very simple momentum strategy that actually beats the market over the last 20 years very simple strategy even you know a 13 or 14 year old kid understand but I share with you that you know if you don’t apply proper risk management if you’re over leveraged if you’re risking too much portrayed right you will not survive the drawdown that’s a fact another thing is a psychology right you can have the best trading strategy in the world but if you cannot handle the emotional drawdown it comes with it you cannot handle the the losses right year- punches that the market is giving you even a trading strategy with an edge right will not save you as well so oh by now you can understand it yes right technical analysis can work by in itself without fundamentals we don’t send him an analysis without anything but you must have the proper risk management and the right trading psychology okay so with that said right I have come towards the end of this video if you learn more about we know what I do trading strategies and techniques right go down to my website over here trading with Rainer calm okay and you can just scroll down to the bottom right somewhere here I got a couple of trading books that you can download right in the ultimate trend-following guide to right massive trends in the market and the ultimate guide to price action trading so what we’ve covered earlier is is more of a trend following like momentum trading so if you are if you’re more of a discretionary trader alright you learn more about you know market structure support resistance right then the ultimate guide to price action trading is for you click on this blue button and I’ll send it to your inbox so with that said right I have come towards the end of this video any feedback comment let me know it in the comment section below and if you’ve enjoyed this video hit the like button boom right and subscribe to my youtube channel so you can get more of such videos every single week so with that’s it I wish you good luck and good trading I’ll talk to you soon you


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