The trading world is littered with anecdotal evidence of cause and effect from various technical indicators and signals. I cringe when I hear something like the following: “As you can see, last time the 19-week moving average crossed the 52-week moving average, this stock moved 18.5%.”

This statement has absolutely nothing to do with anything. It’s an observation of a single occurrence. Even worse, this statement can probably do more harm than good since it has no context or risk management involved.

Technical indicators are not a cause. They are a measurement and a tool. You cannot build a house with a single measurement, you have to have a blueprint with hundreds of measurements. You cannot build a house with a single tool, you have to have a tool box.

Just as an engineer uses computer systems to help design blueprints, it becomes enormously beneficial for a trader to use computer systems to build, back test, forward test, and execute a series of strategies that take advantage of a number of tools (indicators).

On Thursday evening at 6:00 PM ET, I will explain more of the benefits of using automated systems to perform these functions. With these systems, you can turn signal ideas into a multi-year back test in just a few minutes. This provides statistical evidence that is much more valid than a single observation.

Andrew Falde

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