As an approach to research, technical analysis has suffered because it is a "discipline" practiced without discipline. In order for technical analysis to deliver useful knowledge that can be applied to trading, it must evolve into a rigorous observational science. Over the past two decades, numerous articles in respected academic journals have approached technical analysis in a scientifically rigorous and intellectually honest manner, and now, Evidence-Based Technical Analysis looks to continue down this path.

Organized into two parts, this valuable resource first establishes the methodological, philosophical, and statistical foundations of evidenced-based technical analysis (EBTA), and then demonstrates this approach—by using twenty-five years of historical data to test 6,400 binary buy/sell rules on the S&P 500. Evidence-Based Technical Analysis examines how you can apply the scientific method, and recently developed statistical tests, to determine the true effectiveness of technical trading signals. Throughout these pages, expert David Aronson details this new type of technical analysis that—unlike traditional technical analysis—is restricted to objective rules, whose historical profitability can be quantified and scrutinized. Filled with in-depth insights and practical advice, Evidence-Based Technical Analysis provides you with comprehensive coverage of this new methodology, which is specifically designed for evaluating the performance of rules/signals that are discovered by data mining.

Experimental results presented in the book will show you that data mining—a process in which many rules are back-tested and the best performing rules are selected—is an effective procedure for discovering useful rules/signals. However, since the historical performance of the rules/signals discovered by data mining are upwardly biased, new statistical tests are required to make reasonable inferences about future profitability. Two such tests, one of which has never been discussed anywhere heretofore, are described and illustrated. If you want to use technical analysis to navigate today's markets, you must first abandon the subjective, interpretive methods traditionally associated with this discipline, and embrace an approach that is scientifically and statistically valid. Grounded in objective observation and statistical inference, EBTA is the approach to technical analysis you need to succeed in your trading endeavors.