Where there is much smoke there is no roast left. On the contrary when the roast is delicious then there is no smoke. The same in trading. What most traders debate about in the forums over the Internet is pointless. The rule is that those methodologies encircled by silence are often gold. The following is the tale of the smoke and the roast. A true tale that happened a long time ago somewhere in Europe. There was a discretionary trader that at a certain point of his career felt he could not longer trade his discretionary methodology, a methodology up to that point quite successful. So this trader came to me and said: I would like to start some mechanical work because if my mind fails nor will fail trading systems. My reply was frank: my friend, I said, you know that your discretionary methodology, if translated into a programming platform, will produce mediocre results. Yes, I know, he said, then please tell me what works and what does not work in technical analysis and I will try to build a system over it. Again my reply was frank: my understanding of the markets is limited and it costed a life in terms of personal involvement so that I will never tell you even under torture what works and what does not works. But I will indicate the direction you need to take. All the tools that put under scientific scrutiny do not work are the most known, the most publicized, the most taught in seminars and books. Do you want an example ? Stochastics, RSI, moving averages, Elliot Waves etc. etc. Ok, he said, so let’s write down what is not much known or in any case what is forgotten by the literature. A methodology that almost nobody uses or better that nobody pretends not to use is the point and figure charting. What is worst is that there are really few studies about its efficacy, something that was only touched in the book “The complete guide to Point and Figure Charting”, by Heinrich Weber and Kermit Zieg, Harriman House Publishing, 2003, which is a masterpiece of the topic not because the almost ordinary explanation of the point and figure methodology but because the authors for the first time summarize the tests performed so far by the different researchers. And all these tests are deeply luring for the statistically oriented trader. Another topic which is absolutely untouched is the Kagi: did you never see a test about Kagi ? And Renko ? And Three Line Break ? Renko is forgotten by most traders and when you find an article is always a cursory explanation of the methodology and never a statistical test of it. The list goes on but I will stop here. Point & Figure, Kagi, Three Line Break, Renko are methodologies that nobody talks about with a serious approach, that is with a statistical test. Would you find it suspicious ? Maybe the tests were performed but they were so nice that were kept secret. Do you agree ?
Emilio Tomasini is Chief Editor of the Italian edition of TRADERS’ MAGAZINE (www.traders-mag.it), the leading monthly publication in Europe for trading and investment, and since 1999 he organizes the TRADERS’ CUP the most important real money European trading competition (www.traders-cup.it). His personal weekly free newsletter L’Indipendente di Borsa (www.indipendentediborsa.it) is one of the most reputable Italian financial media and counts more than 100.000 readers. His website in English is www.emiliotomasini.com