Technical Indicators Backtest

Do you remember the first time you were introduced to technical analysis? Maybe you were browsing around online or reading a book about trading when everything just clicked. “This is it! This is the golden ticket to successful trading and investing! After all, the pros are using it!”
Forget about trading the news, “guessing” the fundamentals, etc. All you need to do is use indicators, draw support/resistance lines, and stare at charts to make money from the stock market!
Then fast forward a few years, and you’re thinking “wait a minute, all this stuff hasn’t even allowed me to beat buy and hold! What’s going on? I thought the professionals used this!”
Technical analysis really became popular in the 1990s with the rise of the everyday trader (thanks to the internet and computers), and has become increasingly popular ever since. Even the biggest financial media networks like CNBC focus on technical analysis now.

“The S&P 500 has now made a death cross!”
“This breakout points to further gains for the Dow, according to one technical analyst!”
“Netflix seems to be forming a head and shoulders pattern, according to Bank of America!”
“A lot of technical damage has been done to this market.”

With such large media organizations promoting this kind of trading and investing, it becomes hard for the everyday investor and trader to question this kind of thinking.
Does this stuff actually work in the long run? Or is it just a bunch of high-IQ people reading the tea leaves and stroking their chins over hocus pocus?
In today’s world, independent thinking is a rarity. No one bothers to question whether the mainstream way of investing and trading actually works.
In other words, nobody has bothered to backtest the reliability of these indicators. Everyone is just “guessing” and “hoping” that this stuff works.
Here’s the kicker: much of technical analysis is just hocus pocus. It works great with 20/20 hindsight because people see what they want to see on a chart. But in real time, most technical indicators are no better than a coin toss. The times that they work do not exceed the times that they fail.

In this Technical Indicators Backtest, we answer 2 questions:

  1. Which technical indicators beat buy and hold for the S&P 500 from 1950 – present?
  2. For each specific technical indicator, what is the best setting that yields the maximum profit?

Let’s get into the facts and data.

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