What's up guys and welcome back to wall street millennial on this channel, we cover everything related to socks and investing you've probably heard a lot about technical analysis during your time as a stock investor. If you're like me, the idea of looking for quantitative indicators and stock price data to find good stocks and when to buy them seems like an incredibly promising and exciting idea. Many traders and investors to this day use things like candlestick charts, moving average crossover, analysis and other techniques to predict. Unless talk will go into an uptrend or a downtrend, they then enter into and out of positions to try to benefit from the predicted stock movements, usually with time horizons.

On the order of days, weeks or months, some even use technical analysis for day trading, but does technical analysis really work or are the stock gurus on youtube, the candlestick trading books and even the technical analysis tools on big name brokerages just blowing smoke? Luckily, with an arsenal of historical stock data and documentation of well-defined rules-based technical analysis techniques, we can definitively find out if technical analysis is legitimate today, we'll go over the numbers of how technical analysis has done historically and an argument for why technical analysis shouldn't be expected To work at all at the end, we'll also discuss some alternative strategies that are much more logically rigorous than technical analysis. Keep in mind that we are not financial advisors and this video is, for entertainment purposes, only make sure to consult with a qualified professional before making any investment decision before we get into it, make sure you subscribe to our brand new podcast the wall street millennial podcast. You can take us with you and listen on the go just search for wall street millennial on spotify or apple podcast. First, we'll take a brief look at one of the most important time tested tools in the technical analysis, playbook moving average convergence and divergence or macd.

This set of indicators and techniques are what's called trend, following momentum indicators to calculate a macd, you calculate two moving averages of a stock's price. One moving average has a short window and one has a long window. For example, you might have a two week moving average and a four-week moving average. The macd line is calculated by taking the short-term moving average minus the long-term moving average.

The idea is that the shorter window will result in a curve that more closely follows a stock's price than a longer window by analyzing the relationship between the two moving averages. You can get a sense of whether the stock's momentum is positive or negative. How much so and if the momentum has been changing most experienced technical traders don't just use a simple moving average for their macd analysis. Usually they would use an exponentially weighted moving average to put more weight on the more recent trading days.

So once traders calculate their macd curves, what do they do with them if the short-term moving average is greater than the long-term moving average? In other words, if the macd is positive, then the stock has positive momentum. This could be used as a buy signal for a momentum following strategy. Likewise, if the macd is negative, that could be an indicator of negative momentum and plus a cell signal. Sometimes, a strategy seeks to know when momentum is first changing, for example, when a stock with negative momentum is starting to gain positive momentum.

If a traitor can accurately measure this, they could buy at the beginning of a period with positive momentum. That's where the convergence divergence part of macd comes in when the short-term moving average crosses above the long-term moving average. That's an indicator that the short-term price action has become more positive compared to the long-term price action and, conversely, for the opposite case, when the short-term moving average crosses below the long term moving average. Some traders take it yet another step further they'll calculate the macd and then calculate the moving average of the macd itself.

This moving average of the macd is called the signal line. The difference between the macd and the signal line can be interpreted as the measure of the rate of change in momentum of the stock, because it's the rate of change. It provides a more leading indicator of a change in momentum than a simple macd. So when the difference between the macd and the signal line is positive, that's seen as a technical buy signal and when it's negative, a technical cell signal moving average convergence divergence analysis sounds great, but does it actually work to answer that question? We'll look at the three common rules based training strategies built off the macd that we just discussed.

We've back tested each of them using data from the s p, 500 and two other popular stocks in different industries, apple and exxon mobil. The way we'll evaluate the strategies is by looking at the annualized return during times when the strategy sets the longest talk and comparing that with the opposite strategy, where you sell the stock when the strategy says to buy and buy when it says to sell. If the strategy is sound, its average return should be higher than the average return of the opposite strategy for this test, we'll use a 14 day and a 28 day exponentially weighted moving average. The first strategy is to simply buy the stock whenever the macd is positive and sell the stock whenever the macd is negative.

This is a simple momentum. Following strategy going back to 2000, the strategy doesn't work well at all the annualized return of the s p 500. During times when the strategy is long to saw was actually slightly worse than during times when the strategy was not along the stock between 2010 and 2020, the strategy was especially bad with a five percent average annualized return. When long, this talk compared to a 23 average annualized return when not long the saw, but maybe the strategy just doesn't work well for broad indices and we need to look at individual stocks.

Unfortunately, when we look at apple, the story is still not good, although since 2000 the average annualized return when the strategy is long apple is higher than the opposite strategy. 28 compared to 19. The viability of the strategy reversed around the year 2020. since 2020, apple's average annualized return when the strategy is long, this thought is about 14 percent.

Worse than the opposite strategy, that's a pretty massive underperformance exxon mobil is a mirror image between 2000 and 2020. The strategy would have worked very poorly, losing about 10 annualized return, but since 2020 it would have worked wonderfully with the strategy's average annual return 65 higher than the opposite strategy. That's incredibly, inconsistent performance. The story is no different.

When we move on to the next strategy, where one buys the stock, when the short-term moving average crosses above the long-term moving average for the s p, the strategy overall worked going back to 2000, but in the five years, between 2015 and 2020, the strategy underperformed the Opposite strategy by more than 11 percent five years is a long time to endure that level of underperformance a trader would have likely thrown in the towel and moved on to a different strategy long before it started working again in 2020.. The final strategy is also the most advanced and that entails buying the stock whenever the macd line crosses above the signal line. Remember the signal line is nothing more than a moving average of the macd line itself running the strategy on the s. P would have yielded worse results in the opposite strategy in almost all periods since 2000, since 2020, its annualized return was almost 10 percent.

Worse than the opposite strategy, however, for apple, the strategy would have worked in most of that period. The exception is between 2010 and 2015, when the strategy underperformed the opposite strategy by three percent. The results of exxon mobil are mixed between the s, p and apple. The strategy worked great since 2020, how performing by an astounding 86 percent? However, that's just about the only good period from 2000 to 2010, the strategy underperformed by 15 and from 2010 to 2015, it underperformed by 5.

Overall, none of the macd strategies that we tested seemed like solid, reliable strategies. In almost all cases, the performance is too inconsistent to make a strategy better than just buy and hold. Sometimes the strategy works well in some periods, but not others, and sometimes it works for some stocks, but not others of the three variations of macd technical analysis. From most basic to most advanced, none of them had sufficient consistency to make it a viable trading strategy.

This inconsistency is the ultimate killer of any trading strategy. There are very good reasons why we shouldn't expect technical analysis tools like macd to work. Firstly, these methods are completely rules-based algorithms that require nothing but a little bit of historical price data. Therefore, it is 100 automatable, in other words, high-tech hedge funds, with billions of dollars, and the smartest mathematicians and researchers in the world should dominate the space.

If there was money to be made in technical analysis, they would be the first and the last ones to make it for the rest of us we're the ones who they're making the money from. After all, the stock market is a zero-sum game. One person's gain is another person's loss trying to face the quant hedge funds and prop trading firms as an individual retail investor is a losing battle. Secondly, there's no good justification for why technical analysis should work trying to infer where his talk is going to go in the future, based on where it was in.

The recent past is too simplistic of an approach. Macd analysis or any other kind of momentum based strategy is ultimately just drawing lines on a stock chart and extrapolating into the future. A more fundamentally sound principle to build a strategy around might involve something like looking at publicly available insider trading, information or analyzing. The fundamentals of the underlying company's earnings: you can access a whole host of these fundamental analysis tools on our website at wallstreetmillennial.com.

These tools help you view insider trading, look up what stocks hedge funds are buying and selling, and graph fundamental metrics, like total revenue and net profit at the annual or quarterly granularity. In the end, investing and trading is each individual's decision, but nothing in the markets is ever free. If technical analysis worked that'd be as close to free as you could imagine, so it should come as no surprise that it doesn't seem to work. But if you disagree with this position, let us know in the comments section below also let us know what other technical analysis methodologies you'd like to see us analyze in the meantime.

Thank you so much for watching and we'll see in the next one wall, street millennial signing out.