Evidence-Based Technical Analysis: Statistical Analysis

Automated Trader Magazine

The following excerpt is from Chapter 4 of David Aronson's recently published book "Evidence-Based Technical Analysis". Together with Chapters 5 and 6 of the book (which will be available as excerpts later) it addresses aspects of statistics that are particularly relevant to evidence-based (as opposed to subjective) technical analysis.

Statistics is the science of data. In the late nineteenth century, renowned British scientist and author H.G. Wells (1866–1946) said that an intelligent citizen in a twentieth-century free society would need to understand statistical methods. It can be said that an intelligent twenty-first-century practitioner or consumer of TA has the same need.

Statistical methods are not needed when a body of data conveys a message loudly and clearly. If all people drinking from a certain well die of cholera but all those drinking from a different well remain healthy, there is no uncertainty about which well is infected and no need for statistical analysis. However, when the implications of data are uncertain, statistical analysis is the best, perhaps the only, way to draw reasonable conclusions.

Identifying which TA methods have genuine predictive power is highly uncertain. Even the most potent rules display highly variable performance from one data set to the next. Therefore, statistical analysis is the only practical way to distinguish methods that are useful from those that are not. ...

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