# Evidence Based Technical Analysis – David Aronson

February 10, 2014 | Posted by Oddmund Grotte under literature |

I have finished rereading David Aronson’s book *Evidence- Based Technical Analysis, Applying the Scientific Method and Statistical Inference to Trading Signals*, a book I bought back in November 2007. This is no easy read and a bit technical, but worthwile it’s money. The book is very good for those who have no background in statistics. It’s a great book to get to know statistics without having to learn the mathematics behind the theory.

The book is divided in two parts. The first part examines how you can apply the Scientific Method to test your strategies. Aronson writes how you can apply the scientific method and statistical tests to determine the significance of your trading signals:

- Observation
- Hypotheses
- Prediction
- Verification
- Conclusion

The scientific method is the only rational way to extract useful knowledge from market data and the only rational approach for determining which TA methods have predictive power. He calls this evidence-based technical analysis (EBTA).

The first 7 chapters are all about statistics and how to use that in testing/trading. It gives a good explanation about statistical inference, frequency distributions, standard deviation, confidence intervals, data mining, probabilities and p-value. Esspecially the chapter about data mining are interesting. Aronson is good at explaining in a simple manner so all these technical concepts are easy to understand. He also explains how it’s possible to derive sampling distribution on back tested results: the Bootstrap and Monte Carlo simulation.The author argues that these two metods are the most important test you can perform on your sample to identify the degree of randomness.

The second part of the book consists of tests of 6402 trading rules.

I see noe reason to elaborate further on the book as there is lots of reviews on the web. This one is a really good review.

The author has also made companion website.

Hello,

I also read this book and I only regret that my english is not so good to understand all contents. Nonetheless I also recommend this book.

I am going to buy his second book – ” Statistically Sound Machine Learning for Algorithmic Trading of Financial Instruments: Developing Predictive-Model-Based Trading Systems Using TSSB”

TSSB is free software. Now I am working only on excel so it will be nice to take a look for other possibilities. I have tried to learn R or Python but it is difficult in self-study mode.

P.S.

Have you ever tried Model Risk add-ons in excel? It is something like Solver with much more functions (optimalization is very simple) and you can also make Monte Carlo analysis. You can grab trial version for 15 days.

Lukasz

Hi, no I have never tried Model Risk addon, not even heard aout it I’m quite satiesfied with the simple equipment/software I have.

Oddmund, thanks for Y post. Because I am new on your website, could you remind what kind of software do Y use in backtesing and trading?

thanks

Hi, In backtesting I use mainly Excel. in Trading I use Sterling trader and Interactive Broker.

Hi,

do you use API to trade? I know you have someone that write the codes for you but my question is how do you set the orders every day? Do you need someone to write the execution codes every time you build a new strategy?

Hi,

No, I use Excl for execution. I have a simple API code there, and I can just change my formula in Excel. No need to change code for every strategy

Hi Oddmund,

I guess this is only possible because you trade at the same market time in all your trading strategies(market open and close), right?

No, i use open, close and limit during day.