Designing A Technical Analysis Indicator

Prototype technical analysis Indicator on Genting Singapore stock

Technical Analysis is just visual analytics. If you approach it from this perspective, forget about prediction and cut the mumbo-jumbo about Heads and Shoulders, Gann, Elliot Waves etc, it helps make the mind clearer. Although the past cannot predict the future, I think is fairly safe to say that the greater the frequency or regularity of a pattern occuring, the greater the probability that it will occur again. It is my belief that the proliferation of algorithmic high speed trading programs makes technical analysis more relevant. Prices are out of equilibrium with fundamentals for a longer time, and inevitably, computer generated trades leave more distinct footprints that can be detected by sophisticated programs. Long term is for dinosaurs and the markets are really casinos. The equities market is beginning to resemble the Forex and commodities market in characteristics. The individual investor has been marginalized.
So, in that sense I am a born-again technical analyst. But I will do technical analysis with technologies that break away from the linearity and Gaussian distribution assumptions of traditional technical analysis.
Technical analysis 'wrings out' information from Open, High,Low, Close and Volume data. It does this by de-noising, smoothing, compressing, and normalizing the countless possible combinations of O,H,L,C,V. All these pre-processing techniques are well-known to practitioners of data mining.
But there is a limit to what anyone can do with just OHLCV. If used as input to a neural network, any group of technical analysis indicators will suffer greatly from collinearity. That is, much of their information content overlap; and there is no point feeding so many indicators into the network. This week I try my hand at constructing a technical analysis indicator. Tentatively, it will be known as the Singapore Flyer and is to be used only for the Singapore market.
It is a trend-folowing indicator. I don't believe in oversold/overbought indicators. It is important to catch a reversal. At least with the trend, we admit we don't know when it will end, but ride it for part of the way. The Singapore Flyer Indicator is to be used in conjunction with Tushar Chandes' Q-Stick Indicator. Go Long when SF crosses zero upwards AND Q-Stick is >zero. Go Short when SF crosses zero downwards, AND Q-stick is <>Technical analysis indicators if they are to be any good , will have to be customized for each market. Markets like Singapore are more affected by other financial markets from the DJIA, to the Hang Seng, to US$, Commodities and Bonds. Whereas for NYSE/NASD, domestic developments are more important. Hong Kong market is highly correlated with events in China, and Shanghai Exchange while not totally insulated from the the rest of the world, has a life of its own. To my many friends and ex-colleagues in the United States, if they are individual investors. I urge them to trade the Singapore and Hong Kong stock markets. There are better opportunities here for the individual investor who trades short term.