Technical Analysis

I will admit that there was a time when I was chart gazer
too(1996-98). I never made money by it but I was so much interested
that I wrote an AI software called Autotrade. The hypothesis was that
if a technical trader can make money an optimzed software program can
make far more money due to quicker decisions. I set out to design this
money making machine. That software had 30 technical analysis signals
which used to act as Fund Managers and each had his weight in combined
decision. There was a controller who will change the weightage of the
signal based on past performance(there were promotions, demotions and
firings of fund manager!). I ran that program on the Sensex data for
last 10 years. The results were interesting.

The signals made huge money when there decisions were right and lost a
little bit on false signals. But overall the false signals far
outnumbered the right signals. The net result was that with the
highest level of optimization I was able to reach 8% gain per annum
level before brokerage. I was good enough for a financially dumb
program but I was not inclusing brokerage. As soon as I added
brokerage the returns were down to -4.78%.

I spent countless nights to improve the results. I separated leading
indicators from lagging indicator but there was simply no way to beat
the odds stacked against the technical trading.

I concluded the excercise by proving the anti thesis.
IT IS NOT POSSIBLE TO MAKE MONEY FROM TECHNICAL ANALYSIS IN LONG RUN.

Those who still think that they can make money through charts can
purchase this software from me. It will cost you $11.5 in cash and all
your investment money in long run.

Posted: Nov 25,2004
http://in.groups.yahoo.com/group/lawarrenbuffet/message/1067