“The Encyclopaedia of Technical market Indicators” by Robert W Colby. Published by McGraw-Hill. 2nd Edition About £35-£45 2003. ISBN 0-07-012057-9 A thick heavy book with 820 pages. I find it stimulating and well worth a read. Overview Colby reviews and tests 127 technical analysis indicators. He used Metastock to produce his results. He concludes that market prices move in trends and price trends persist. The best indicators for profit are Exponential Moving Average & Weighted Moving Average, plus Percentage Hughes AD oscillator with 8 parameters and some others. Many indicators were worse than buy-and-hold even though some gave very high win rates. Although high win/loss rate is an obsession of novices, Colby favoured high reward/risk ratio (total net profit to maximum equity drawdown). Colby describes how many of the top traders in the world, like Jack D Schwager, use back testing to prove their trading strategies. He mentions Richard Dennis turned $400 into $200M in 16 yrs dealing in the Chicago Futures market. Dennis taught his trading rules to 23 raw trainees whom he called his turtles. 20 out of 23 got average returns of 100% pa. Indicator table Each indicator is described in detail with the Metastock formula and system testing report (P&L summary stats). Colby trades using purely mechanical signals with no subjectivity, no sophisticated technical analysis and no judgement. He provides a 4 page table to rank the indicators by: • Versus buy & hold = Overall percentage superiority of the indicator compared with buy-and-hold net profit amount. • Annual relative advantage (percentage) compared with buy-and-hold. • L & S % win (Long & short percentage win) • Short % win (Short percentage win) • Average trades per year – results showed huge variation from 0.2 trades pa to 141 trades pa. (Helpful for day traders and long term swing traders to see which indicator best suits their trading style). • Profit loss index = $ amount of winners to losers. Worst performance is –100. Best is +100; zero when profit equals loss. Colby’s Methodology - Nine steps to walk-forward simulation. 1. Form hypothesis. Both long & short trades are taken where possible. Dealing costs are ignored. 2. Get data – he used the DJ Ind Avg from 1900-98 3. Check data 4 Segment data in fixed length time periods. He used various periods such as DJ 1900-15, 1915-37, 1937-92, 1992-98 5 Optimise the earliest data segment to avoid curve fitting. 6 Walk-forward – the indicator is projected forward in time on next and more recent segments – to test the out-of-sample & unseen data. 7 Add walk-forward data segment from step 6 to optimised from step 5. 8 Repeat steps 5-7 until all unseen data is used. 9 Evaluate results. Reviewed by Alphateam – Jan 2005

I found that every system tested was optimized, they all lacked the use of a latch or system device to only test the first occurance of the signal. The best ideas that can be found from this book are the odd indicators that can be derived and then traded