Systematic Trading With Technicals and Fundamentals

Over the past couple of years, I have been collaborating with a few programmers who deal with big data. Our first mission is to organize and manipulate data to identify patterns that commonly precede acute vertical moves. In my 30-plus years in the markets, I have worked for and with many traders from both schools of thought. Some are technical in nature while others rely solely on fundamental analysis. I have researched and evaluated many technical tools as well learned the fundamentals of supply and demand that drive price action. I believe the ultimate trading system would incorporate fundamentals and chart patterns. With artificial intelligence using price action and volume generated dimensions (technicals), the dream of creating robust systematic trading strategies is more attainable now than ever.

Fundamentals Supersede Technicals

When testing theory there is one goal in mind and it never changes: We want profitable trades/investments with as little risk or drawdowns as possible. The origin for technical analysis lies in the available components of price and time. For every period or time frame (hour, day, etc.) there is an open, high, low and close (OHLC). Technical tools and indicators are derived from these facts. Fundamentals, also known as “event risk,” generally have more impact on prices than technics. Thus, it is best to wait until an event (earnings, economic report) is released before making a technical trading decision.

Dimensions and Logic

Of the four components (OHLC), the question is, does one have more impact than the others? Alone, none of them lead to consistent profits. Logically the best time to interpret whether bulls or bears are in control of momentum is when the major players are trading. Volume and liquidity are high early and late in the day. To create a short-term systematic approach, start analyzing data in the first and last 30 minutes of a trading session. When bulls are in command there is a tendency to make lows early in the day and highs late in the session. When bears are in charge daily highs are often seen in the first half hour of trading and lows are often made quite late.

This explains why candlesticks are so popular. The reason for this is logical. The open and closing 30-minute periods of the trading day are traditionally the high-volume periods of the day. This allows professional traders to execute large orders without manipulating price. An attempt to fill a big-ticket order during a low volume period, say lunch time, will likely move the market against the position. Thus, paying more to get long or pushing price lower when trying to get short. And when institutional traders enter long positions, lows are frequently made early and highs late, and vice versa when the pros are selling.

This phenomenon is also true from a weekly perspective. When a market is trending upward there is a tendency to make the low for the Monday or early Tuesday. Conversely, in a downtrend the high for the week if often made by Tuesday morning.

Capital flows move markets, so it is best to build directional strategies focusing on when the professional traders are apt to be most active.

John Seguin, Market Taker Mentoring

Trader Education