Evidence-Based Technical Analysis" is a breakthrough book in that it rigorously applies the scientific method and recently developed statistical tests to determine the true effectiveness of trading strategies, rules or systems discovered by data mining. Traditional technical analysis - as currently practiced - is more like a faith-based folk art than a science, the author asserts. These subjective interpretive methods cannot be back-tested or evaluated, yet many believe that they are effective. The author explains that because of various cognitive biases and illusions, such as hindsight bias, illusory correlations, etc., people often adopt beliefs that are unsupported by evidence or even contradicted by evidence. For example, the famous head and shoulders pattern - a cornerstone of traditional TA when tested objectively - has been shown to have no predictive power. Yet many TA texts and most TA experts believe in the pattern's efficacy. To move technical analysis forward, the author proposes a new type of technical analysis, which he calls: evidence-based technical analysis or EBTA. Unlike traditional technical analysis, EBTA is restricted to objective methods whose historical profitability can be quantified and then rigorously scrutinized. The author provides a new statistical methodology specifically designed for evaluating the performance of rules that are discovered by data mining, a process in which many rules are back-tested and the best performing rule(s) is selected. Experimental results presented in the book show that data mining is an effective approach for discovering useful rules. However, the historical performance of the best rule(s) is upwardly biased - a combined effect of randomness and data mining. Thus new statistical tests are needed to make reasonable inferences about the future profitability of rules discovered by data mining. Most importantly, in a data mining case study the author evaluates more than 6,400 signaling rules applied to the S&P500 Index using these new tests. For technical analysts and traders, the book is a wake-up call to abandon subjective, interpretive methods and embrace an approach that is scientifically and statistically valid. For other traders, the rigorous testing of trading signals/rules may make their data mining efforts more productive and stimulate the development of new systems, signaling rules. "Professor Aronson has done yeoman's work incorporating established statistical practices into the analysis and interpretation of technical analysis and other market theories. I can say without qualification that this book should be in every serious market practitioner's collection." - Victor Niederhoffer, Chief Speculator, Manchester Partners, and author of "The Education of a Speculator and Practical Speculation". "EBTA provides a detailed analysis of the absolutely critical question so many practitioners fail to ever ask: Are the methodologies employed valid? In clear language, Aronson demonstrates the theoretical flaws in interpretative technical analysis methodologies (e.g., chart analysis, Elliott Wave analysis, Gann techniques, etc.), the flawed premises and conclusions of the Efficient Market Hypothesis, and the appropriate techniques for developing and testing technical analysis methods that do have validity. Readers will learn a lot from this book." - Jack Schwager, author of "Market Wizards" and the "Schwager on Futures" book series. "Everyone who expects to thrive in the business of trading must be certain that their strategy has been tested soundly and that they have uncovered an edge that will lead to profits. Instead, many traders rely on faith and annecdotal evidence rather than a rigorous process for system development. Aronson offers compelling evidence that, without the correct methods, you are most likely to go down the path to ruin than to wealth. His explanation of data mining is a must-read for every analyst, and his overall discussion of statistical inference is critical to success. The book is filled with common-sense examples and provides a testing and validation process that saves time, frustration, and money." - Perry Kaufman, author of "New Trading Systems and Methods, Fourth Edition". "This book debunks many of the myths of technical analysis. One should read this book before buying a technical system. The book is a good reference to the literature on the subject with extensive footnotes and bibliography." - Sandor Straus, Managing Member, Merfin, LLC. "You may not agree with everything David Aronson says in this controversial but compelling new study. Still, every trader who wants to invest technical analysis with the dignity of a great science should read this discerning account." - Nelson Freeburg, Editor, "Formula Research". "There is an emerging trend in the technical analysis community toward a new, more rigorous type of analysis that utilizes the scientific process and depends on statistical testing to gauge the quality of one's results. Just as quantitative analysts have long used the tools of technical analysis, market technicians are taking up the quant's tools. "Evidence-Based Technical Analysis" is a welcome milestone on a road that leads toward a better, more dependable type of analysis." - John Bollinger, CFA, CMT.
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