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Most important, they fail to account for decision-making inputs such as insight into market psychology, trading expertise, and rational judgment that only a human being can possess. Technical analysis results generated by today's trading software should be viewed as decision support information and cannot substitute for sound decision-making itself. It is foolhardy to think that an intelligent trader would ever want to turn over to his computer software the responsibility for making trading decisions. |
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Neal: That is a controversial viewpoint in light of system trading. |
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Louis: Traders assume needless risk when they restrict their analysis to a single market's past price history, no matter how much back-testing is performed or how many single-market indicators are examined. Now, I believe, the surest way to be successful on a consistent basis and to protect trading capital against large losses is to incorporate intermarket analysis into the trading decision-making process and for the trader himself to assume the active role of decision-maker. |
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Neal: Traders could use moving averages, though, right? |
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Louis: I believe most traders would agree that moving averages are an excellent tool for smoothing out short-term and random fluctuations in prices. However, traditional single-market moving averages are a "lagging" indicator because they are slow to react at turning points. They typically get in and out of trades after a change in market direction has occurred, often by several days, giving back profits and often turning winning trades into losers. In addition, there are serious pitfalls involving "curve-fitting" when reoptimizing the sizes of the moving averages. Another problem involves the occurrence of false signals during sideways or nontrending markets. |
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