Head to head: technical and fundamental trading systems
A few years ago I changed into operating at a quant hedge fund with the wonderful task title of Head of Fundamental Trading Models. It sounds grand I realize, however it changed into just 3 of us: me, a mad Canadian guy and a madder Italian man; every so often augmented with a few terrible interns. When we weren't constructing and coping with buying and selling strategies we used to amuse ourselves with turf wars with the Head of Technical Trading Models, and his merry band of rocket scientists.
Fast forward to the contemporary and I entrust a massive chew of my internet well worth to a merely technical buying and selling gadget (the rest is in a gaggle of shares and alternate traded price range which I 'control', or alternatively idly forget, on a vaguely discretionary essential basis).
So that's higher?
First some context
Systematic trading strategies vary in the source of data they use, using either technical or fundamental information. Strategies which are technical use only prices as an input. Technicians believe that all necessary information is already impounded in the market price, and other inputs are futile.
Non price, fundamental data, comes in two main flavors. Micro data is about a specific asset, for example the yield of a particular bond or the Price Earnings ratio of a companies stock. Macro data is about entire economies and could include inflation or GDP growth. There are also forecasts available for many kinds of fundamental data.
It's time for the big face to face: Technical vs Fundamental systematic trading structures. Who might be positive?
Data series and cleaning
Technical:
We get a rate. Sometimes it might be a bit dodgy, however given an estimate of ordinary variability of rate among collection points, we will installation easy computerized filters a good way to trap sudden actions.
Fundamental:
We get a fee. And an entire bunch of other stuff. Accounting ratios for stocks, interest costs, inflation,... The list is going on. So if I even have 10 variables for every device I'm trading, then I want to collect 10 instances as a whole lot information. Right now I spend about two minutes in line with month checking every of the 50 plus futures contracts I exchange, or more or less five minutes a day in total (essentially while the aforementioned filters are caused). Do I really need to make that fifty mins an afternoon? When could I actually have time to watch TV?
Technical 1. Fundamental 0. First blood to the chartists!
Data bias and manipulation
Technical:
It's a charge. Unlike sure different financial variables, in order to continue to be nameless, traded prices are often tough to control or normally muck approximately with. Well okay, there are some video games you can play, however they don't circulate prices enough to seriously intrude with the signal of a trading device.
Fundamental:
Anyone who thinks that accounting information cannot be manipulated needs to examine The Smartest Guys in the Room, at the least two times. Economic statistics might be reasonably ok, in least in developed countries. But it is able to be biased. And there are those cute indices which try to predict / embody other fundamental variables, which sooner or later within the beyond had their weights outfitted with an in pattern regression
Technical 2. Fundamental zero. The technical guys are absolutely showing their high-quality.
Data frequency, lags and revisions
Technical:
Even if you have no money you can get a price with a 15 minute delay free from at least 8 million websites on the internet. If you're prepared to stump up for a live feed, or you're broker will give you one in exchange for the vast amounts of commission you are paying them, you can get your price within milliseconds. And once you have the price, it isn't going to get changed. And within a fraction of a second of getting it, you can get a new price (well it might not have moved, but in principle you can get a new one).Fundamental:
You want GDP? Sorry you're going to have to wait sir, it's only quarterly. Yes, four times a year, the clues in the name. It's the end of the quarter? You're going to have to wait a few weeks have elapsed. We need to, add a bunch of stuff up, or something. And just when you think you've got it, we're going to change it in 3 months time. Then we'll change it again. And again. And so on for several years. You want to know what the original number was, so you're backtest isn't biased? Sorry we don't have it. Or we'll charge you an arm, a leg, and a kidney for it.By the way did you know that 10 years ago the booklet put off become 3 months, no longer 3 weeks? You'll have to factor that into your backtest as well. If you can even discovered that element out...
Technical 3. Fundamental zero. They're honestly on the ropes now.
Surprise, Surprise
Technical:
Is the price now what we expected it to be yesterday? Possibly. Is it what the market expected it to be? What does that even mean (except in the rare case of forward prices being unbiased predictors of future spot price movements...)?Fundamental:
Are non farm payrolls today what we expected yesterday? I can tell you the expectations, mean and distribution, and how they've changed since the last number (though that data isn't free). Same thing for the earnings announcement of Google that's coming out (free on Yahoo finance, et al).Forecasts are another source of data. Comparing forecasts against reality - surprise - adds yet another dimension we can investigate.
Technical 3. Fundamental 1. It's half of time and the technical group are in a strong lead.
Comparability
Technical:
The changes in the price of US 10 year bond futures can be easily compared against the same for German 2 year bonds, or live hogs for that matter; and they can also be compared against the price of US 10 year bonds thirty years ago (once you've done some volatility normalisation anyway).Fundamental:
Can we compare US inflation towards UK? Not easily. Investment banks lease entire team of monetary analysts to understand this type of stuff. It's tough to write down automatic software program that could address this issue. Similarly can you evaluate the rate ebook ratio of a UK bank, in opposition to a German manufacturer, versus a Japanese Retailer? Probably no longer. What about profits charge ratios now, versus a time whilst the level of percentage buybacks turned into distinct? Tricky. The simplest way to cope with that is either to ignore it and live with the outcomes, or be cautious simplest to compare like for like (eg UK banks against their peers), which reduces the scale of portfolios you may exchange.
Technical 4. Fundamental 1. What a cushion. Can the basics pull it again?
Variety of trading techniques
Technical:
I am constantly surprised by the number of technical trading rules that are out there, and even more amazed by some of the very silly names they have. Especially since nearly all of them are just trying to pick up trends. Something you can do very easily with one or two rules.Fundamental:
It can be proven mathematically that the number of feasible techniques is loads larger if you have more than one variable you may degree.
Number of technical techniques = Number of variables (1) x Human potential to provide you with silly names
Number of essential strategies = Number of variables N! X Human capacity to run panel regressions.
Technical 4. Fundamental 2. A comfort charge for the losers, or the start of a fightback?
Rich go section of records
Technical:
Suppose you've got twenty years of daily price data for instrument X. That means you've got about 5000 data points. Collecting it more frequently will give you more data points, but not much extra information. Pooling data across X, Y and Z will also help. But there's limited change of finding something interesting, that hasn't already been discovered and given a silly name, without full on data mining.Fundamental:
So with ten variables you've got 50,000 data points for X. Loads more once you've pooled it with Y and Z. That's a very meaty data set. Lots to dig into before running up against the boundary of statistical significance.Technical four. Fundamental 3. We're into more time, and it is able to be all people's recreation!
Fun and know-how
Technical:
Oh look its a wavy line. I don't really need to understand why its wavy, just predict the next wave. I can hire any old Phd to analyse it. They don't have to have any knowledge about trading markets, and there is no point in them learning anyway. And after a few years of looking at the wavy line they're going to be bored sick, and go back to something useful like looking for Higgs Bosons and landing stuff on comets.Fundamental:
You want to trade oil futures, with fundamentals? You need to know about peak oil, weather, Saudi Arabian politics, Shale Gas,oil rig maintenance cycles, electric car take up rates, Putin's psychological state and a hundred other things.Then you need to work out a manner of setting that right into a fundamental version. You can spend the rest of your existence getting to know the way to do these things, its fascinating. You'll never lose interest.
Technical 4. Fundamental four.
And there is the very last whistle...
It's a draw. And no, there are no consequences. Are you actually surprised?
I actually have worked considerably with both varieties of records and I don't have any sturdy choice. Technical structures are less difficult to construct and run, but the extra attempt required for inclusive of fundamental rules will generally be rewarded with extra earnings.
Unfortunately as I don't have any personnel, the additional effort isn't always some thing I am willing to put in right now, so I am sticking with my simple technical systems.
