Contrary
to popular opinion, there are a few traders who use technical analysis and have
made $ billions.
Top 7 Technical
Analysts of All Time Share Their Secrets
My
first brush with Technical Analysis was not a good one and I
was left asking the question “Does Technical Analysis work?”. There was plenty
of evidence to suggest Fundamental Analysisworked
(Warren Buffett has Billions of evidence). But Fundamental Analysis really
doesn’t suit my personality so what were the other options?
Everywhere
you go online there is another guru selling the latest TA system accompanied
with confusing looking charts. I decided that if there wasn’t a long list of
very rich Technical Analysts out there then I had lost enough money using TA
and was ready to quit. To my delight I discovered many successful traders and
investors who had the track record to prove that Technical Analysis does work.
Here is a list of the traders I found particularly noteworthy:
The Worlds Best TA Traders:
Marty Schwartz
Originally
a stock analyst but got sick of having to write bullish investment advice on
overpriced companies. He developed and combined several technical indicators in
an effort to determine lower risk entry points for his trades. Schwartz found
success when he shifted to technical analysis and focused on mathematical
probabilities.
He
ran his account up from $40,000 to $20 Million and also won the U.S. Investing
Championship in 1984. When asked if Technical Analysis works he replied “I used
fundamentals for nine years and got rich as a technician”. A big advocate of moving
averages, Schwartz identifies healthy stocks by looking for positive
divergences in price action over the broad market.
They
(traders) would rather lose money than admit they’re wrong… I became a winning
trader when I was able to say, “To hell with my ego, making money is more
important” - Marty Schwartz
.
Mark D. Cook
Lost
all his capital several times while learning to trade including one occasion
when he lost more than his entire net worth. In 1982 he sold naked calls on
Cities Service that expired deep in the money. His account dropped from
$165,000 to a deficit of $350,000 in a matter of days; a total loss of $815,000
when taking into account for the money that he lost in his family’s accounts.
Not
one to give up, after five years Mark had totally recovered from the losses but
vowed never to sell another naked option. He attributes his turn around in
success to the development of what he calls the ‘Cumulative Tick Indicator’.
There
is a widely used indicator called the ‘Tick’ that measures the number of NYSE
stocks whose last trade was an uptick minus the number whose last trade was a
downtick. When the ‘tick’ indicator is above or below a neutral band the
‘cumulative tick indicator’ starts to add or subtract the ticks from a
cumulative total. This works as an over brought and over sold indicator. When
it reaches extremes of bullish or bearish readings the market tends to reverse
direction.
In
1989 Cook finished second in the US Investing Champi onship trading stocks and
in 1992 after shifting to options he won the championship with a return of
563%. Now he trades options holding them 3-30 days and day trades S&P 500
and NASDAQ futures.
To succeed as a trader, one needs complete
commitment… Those seeking shortcuts are doomed to failure. And even if you do
everything right, you should still expect to, lose money during the first five
years… These are cold, hard facts that many would-be traders prefer not to hear
or believe, but ignoring them doesn’t change the reality. -
Mark D. Cook
Victor Sperandeo
An
options trader and technical analyst who had a string of 18 profitable years
clocking an average return of 72%. His first loss was in 1990 with a 35%
drawdown.
He
described his style as only taking risks when the odds are in his favor. After
an extensive two year study he identified ‘life expectancy’ profiles for market
moves. For example he noticed that an intermediate swing on the Dow during a
bull market is typically 20%. After that 20% has been realized the odds of
further advances are diminished significantly.
Understanding
this makes a big difference he says, like when a life insurance policy is
written the risk profile of an 80 year old is very different from that of a 20
year old. Sperandeo believes that the most common reason for failure with
technical analysts is that they apply their strategies to the market with no
allowance for the life expectancy of the bullish or bearish move.
Theses
days Victor is the President and CEO of Alpha Financial Technologies which is
widely known for its trend-following, futures-based indices: The Diversified
Trends Indicator, The Commodity Trends Indicator, and The Financial Trends
Indicator.
The key to trading
success is emotional discipline. Making money has nothing to do with
intelligence. To be a successful trader, you have to be able to admit mistakes.
People who are very bright don’t make very many mistakes. Besides trading,
there is probably no other profession where you have to admit when you’re
wrong. In trading, you can’t hide your failures. -
Victor Sperandeo
Ed Seykota
THE
pioneer when it comes to computerized trading systems. Inspired by the work of
Richard Donchian he began developing futures trading systems in the 1970s.
Seykota tested and implemented his ideas using an IBM 360. This was well before
the days of online stock trading, back then such computers were the size of a
large room and were programmed using punch cards.
Originally
he wrote trend following systems with some pattern recognition and money
management rules. By 1988 one of his clients’ accounts was up 250,000% on a
cash-on-cash basis. Today it is rep orted that his daily trading efforts
consist of the few minutes it takes him to run his computer programs and
generate the new signals.
Ed
attributes his success to good money management, his ability to cut losses and
the technical analysis based systems he created. He refers to fundamentals as
“funny-mentals” explaining that the market discounts all publicly available
information making it of little use.
There are old traders and there are bold
traders, but there are very few old, bold traders. -
Ed Seykota
Worlds
Richest TA Traders:
I
was very happy to discover that the Forbes Rich List was scattered with
investors and hedge fund managers who have profited handsomely despite giving
fundamentals a back seat. Here are my favourites from the 2012 list:
2012 Forbes – #82 James Simons – 11.0 Billion
Sometimes
referred to as the “Quant King” he is also a maths guru and a very smart cookie
who studied maths at MIT and got a Ph.D. from UC, Berkeley. Simons deciphered
codes for U.S. department of defence during Vietnam and went on to found
Renaissance Technologies in 1982 and at the start of 2013 was managing over 15
billion.
He
Co-authored Cherns-Simons theory in 1974; a geometry based formula now used by
mathematicians to distinguish between distortions of ordinary space that exist
according to Einstein’s theory of relativity. In addition to this it had been
used to help explain parts of the string theory.
Renaissance
Technologies is a quantitative hedge fund that uses complex computer models to
analyze and trade securities. A $10,000 investment with them in 1990 would have
been worth over $4 million by 2007.
We are a research organization… We hire
people to make mathematical models of the markets in which we invest… We look
for people capable of doing good science, on the research side, or they are
excellent computer scientists in architecting good programs. -
James Simons
The
flag ship Medallion Fund trades everything from Pork Bellies to Russian Bonds.
In 2008 the fund forged ahead another 80% even after the 5% management and 44%
performance fee. More recently 9.9% returns were seen net of fees through the
end of July 2012. Unfortunately the Medallion fund is now only open to
employees, family and friends.
The
key to the success of Renaissance Technologies has much to do with the people
they hire; PhDs and not MBAs. About a third of their 275 employees have PhDs.
Those on the payroll include code breakers and engineers, people who have
worked in computer programming, astrophysics and language recognition.
They
also look for people with cr eativity. Simons says that creativity is about
discovering something new and you don’t do that by reading books or looking in
the library, you need ideas.
Everything’s tested in historical markets.
The past is a pretty good predictor of the future. It’s not perfect. But human
beings drive markets, and human beings don’t change their stripes overnight. So
to the extent that one can understand the past, there’s a good likelihood
you’ll have some insight into the future. -
James Simons
Forbes 2012 #88 – Ray Dalio – 10 Billion
Placed
his first trade at the age of just 12, studied finance at Long Island
University and got and MBA from Harvard in 1973. Dalio traded futures early in
his career and founded Bridgewater Associates in 1975 when he was just 25. From
the moment he started managing money Dalio kept notes in a trading diary with
the hope that his ideas could later be back tested.
Now
king of the rich hedge fund industry, Dalio controls the worldâ �™s biggest hedge fund
Bridgewater Associates which has about $130 billion in assets. His flag ship
fund ‘Pure Alpha’ has had an average annual return of 15% from 1992 – 2010 and
has never suffered a loss over 2%. Big bets on U.S. and German government bonds
saw his funds surge about 20% in 2011; a year where most hedge funds struggled.
Dalio
focuses heavily on understanding the processes that govern the way the
financial markets work. By studying and dissecting the fundamental reasons and
outcomes from historical financial events he has been able to translate this
insight into computer algorithms that scan the world in search of
opportunities. He says by doing this research it provides “a virtual experience
of what it would be like to trade through each scenario”.
Ray
is particularly interesting because he does not believe in an approach devoid
of understanding fundamental cause-effect relationships. He has however been
able to use technical analysis to identify mispriced assets based on
fundamental information. So to say that Ray gives fundamentals analysis the
back seat to technical analysis would not be entirely accurate.
Well
defined systems, processes and principles are his key when is comes to making
investing decisions. All strategies are back tested and stress tested across
different time periods and different market around the world to ensure that
they are timeless and universal. The strategies are all about looking at the
probabilities and extreme caution is exercised; for a hedge fund Bridgewater
uses relatively low leverage of 4 to 1.
While
the hedge fund industry as a whole has an average correlation to the S&P
500 of 75% Dalio claims to have discovered 15 uncorrelated investment vehicles.
Bridgewater focuses mostly in the currency and fixed income markets but uses
powerful computers to identify mispriced assets on dozens of markets all over
the world. To find so many different uncorrelated investments requires stepping
well beyond the realm of the stock exchange.
I learned to be especially wary about data
mining – to not go looking for what would have worked in the past, which will
lead me to have an incorrect perspective. Having a sound fundamental basis for
making a trade, and an excellent perspective concerning what to expect from
that trade, are the building blocks that have to be combined into a strategy.
- Ray Dalio
2012 Forbes – #106 Steven Cohen – $8.8 Billion
Now
a well know force on Wall Street due to his world class performance and high
volume of trading which accounts for about 2% of the daily volume on the New
York Stock Exchange. Steven started trading options in 1978 and made $8,000 on
his first day.
He
founded hedge fund SAC Capital in 1992 with $25 million in assets. By the end of
2012 SAC had about $13 billion under management across 9 funds and had averaged
36% net return annually. It is reported however that SAC suffered a loss of
approximately 15% in 2008. Its flagship fund was up 8% in 2011, a year in which
the average hedge fund was down 5% and up again in 2012 8% through to August.
Steven
keeps his activities very secretive but his style is understood to be high
volume hair-trigger stock and options trading.
The old guard wasn’t crazy about me, I used
to hear it all the time… Most of the old-school had no belief in anything that
wasn’t based on fundamental analysis… We were trading more than investing, and
people frowned on it, they looked at it and didn’t want to partake. Finally,
they said, ‘Shoot. He’s making money.’ And they started copying me. -
Steven Cohen
He
believes that 40% of a stocks price fluctuations are due to the market, 30% to
the sector and 30% to the stock itself.
Despite
the great performance of SAC Capital their best trader makes a profit on 63% of
their trades while most of the traders are profitable 50-55% of the time.
Interestingly 5% of their trades account for virtually all their profits.
Something to keep in mind the next time you get a spam email claiming that your
can buy a 95% accurate ‘Stock Trading Robot’.
Steven
attributes the success of SAC to the breath of experience and skills found in
the people working for the firm. They look for traders who have the confidence
to take risks, those who wait for someone to tell them what to do never
succeed.
You have to know what you are, and not try
to be what you’re not. If you are a day trader, day trade. If y ou are an
investor, then be an investor. It’s like a comedian who gets up onstage and starts
singing. What’s he singing for? He’s a comedian.-
Steven Cohen
Forbes 2012 #330 – Paul Tudor Jones II – 3.6 Billion
Both
a discretionary and systems trader who had his early success trading cotton
futures. Jones maj ored in economics at the University of Virginia in 1976 and
got a job working for the cotton speculator Eli Tullis not long after
graduating. The greatest lesson that he learnt from Eli was emotional control
but was later fired for falling asleep on the job after a big night out on the
town with his friends.
In
1983 Jones began the hedge fund Tudor Investment Corp with $300,000 under
management. At the end of 1012 the fund was estimated to be managing $12
billion and had achieved an average annual return of 24%. His firm’s flagship
fund, BVI Global saw a gain of 2% in 2011 and 3.8% net of fees through to
August 2012.
Much
of his fame came from predicting the 1987 stock market crash from which he
pulled a 200% return or roughly $100 million. Jones claims that predicting the
crash was possible because he understood how derivatives were being used at the
time to insure positions and how selling pressure on an over priced market
would set off a chain reaction. He says that you need a core competency and
understanding of the asset class you are trading.
He
attributes his success to a deep thirst for knowledge and strong risk
management. Jones is a swing trader, trend follower and contrarian investor who
also uses Elliot Wave principles. Most of his profits have been made picking
the tops and bottoms of the market while often missing the ‘meat in the
middle’. Jones believes that prices move first and fundamentals come second.
A
self professed conservative investor who hates losing money. He tries to
identify opportunities where the risk/reward ratio is strongly skewed in his
favor and does not use a lot of leverage. In his eyes a good trader is someone
who can deliver an annual return of 2-3 times their largest draw down.
Don’t be a hero. Don’t have an ego. Always
question yourself and your ability. Don’t ever feel that you are very good. The
second you do, you are dead… my guiding philosophy is playing great defense. If
you make a good trade, don’t think it is because you have some uncanny
foresight. Always maintain your sense of confidence, but keep it in check. -
Paul Tudor Jones II
Top
Traders Secrets
It
is clear that Technical Analysis has worked in the past and continues to work
for many successful traders and investors today. But what are the common
aspects that are being were used by these successful market technicians?
Unfortunately
due to the extreme secrecy surrounding nearly all of these traders, the
specific methods that they use are not known. However I did uncover the
following:
Common Themes
·
Mechanical
trading models were used my many of the most successful.
·
They
all used clearly defined systems and stuck to their rules.
·
Many
of them back tested their ideas before implementing them in the real market.
·
Most
of them surrounded themselves with exceptional people who had the expertise
they needed.
·
Many
of them lost money for the first few years before hitting their stride.
·
Each
trading system suited their personality.
Common Personality Traits
·
Low
Emotional Reactivity – Staying calm; experiencing neither major highs nor lows.
·
Detached
– Understanding the market does what it does that they have no control over it.
·
Humble
– With little ego they have no challenge taking losses or letting profits run.
·
Decisive
– They reach decisions quickly and take action without second guessing.
·
Conscientious
– Self-controlled, disciplined, consistent, and plan-driven, they persevere.
·
Confident
– They have faith in their system and their ability to implement it.
It
is undeniable that Technical Analysis does work so ignore all those who try and
tell you otherwise. The next step is to make Te chnical Analysis work for you
and that first requires identifying or creating a system that suits your
personality.
What has your experience been with Technical Analysis? Did I leave anyone off
the list? Let me know in the comments section below. (Also I realize that I
listed 8 traders not 7)
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