From the October 2013 issue of Futures Magazine • Subscribe!

Computerized technical analysis: History lessons

Technology-based vocations constantly evolve. As tools improve, how we do our work changes. Most of the time, this is for the better. Sometimes, we take a step back. But one thing is certain: Change happens. This certainly has been the case in trading, where technology has redefined nearly everything. In this series, we will explore the birth and growth of technology in trading and, it is hoped, learn lessons that will help us better navigate what the future brings.

The concept of applying technical analysis to the markets has existed since the early 1900s in the Western hemisphere. Hand-drawn charts were used, as well as manual calculations of price averages. As time went by, companies sold chart book subscriptions, printed on Fridays and delivered on Mondays.

For many traders, though, this was not good enough. Contemporaries such as Larry Williams and Perry Kaufman began exploring using mainframes to calculate technical indicators at what seemed like lightning speed.

Interviewed for this article, Williams recalled backtesting strategies using punch cards in 1966. Kaufman said he worked with aerospace engineers from Rand Corp. and TRW during the early to mid-1960s, using moving-average-based systems to trade equities. A few years later, in 1970, Richard Donchian first published results of his four-week rule, optimized using powerful machines.

Tech drivers

The backtesting and hard coding of trading rules tracked the growth of computer accessibility in corporate and educational settings. The main player was the PDP-8, introduced by Digital Equipment Corp. This was the first commercially successful minicomputer, selling for $18,000, one-fifth the price of a small IBM 360 mainframe. The speed, small size and reasonable cost enabled the PDP-8 to go into thousands of manufacturing plants, small businesses and scientific laboratories.

Engineers began exploring the functionality of these machines, and it wasn’t long before many recognized the applicability to trading. For the first time, the tools were driving the trading, and spawning new traders in the process. Technology was so powerful that not traders, but engineers and technicians who had access to cutting-edge mainframes, were shaping how market analysis would evolve.

In 1966 Hewlett-Packard entered the general-purpose computer market with its HP-2115, offering computational power formerly found only in much larger computers. It supported a variety of languages, among them BASIC, ALGOL and FORTRAN. Now computers could be programmed and rules could be written in these languages and tested. Still, computers cost $15,000-$20,000 (more than $100,000 in 2013 dollars). Despite the limited availability, those with access still developed a taste for analysis, working after hours on experiments.

While professionals were applying the power of mainframes, computerized technical analysis for the general public was ushered in by the hand-held calculator. On June 25, 1974, the U.S. Patent Office granted Texas Instruments patent No. 3,819,921 for a “miniature electronic calculator.” By 1975, the technology was widely used by students as simple, inexpensive four-function calculators. Calculators improved rapidly, and by 1977 the TI-30 scientific calculator with LED display began selling for less than $20. 

During this same time, the personal computer came to market. The period of 1976-78 saw the birth of the Apple I, II, the TRS-80 and Commodore Pet computers, as well as VisiCalc, the first commercial spreadsheet program that sold more than 100,000 copies within the first year of its release.

Also by 1978, the 5.25-inch floppy drive began to spread. In 1980, Seagate Technology created the first hard disk drive for microcomputers, the ST506. The disk held five megabytes of data, five times as much as a standard floppy disk, and it fit in the space of a floppy disk drive. These first early hard disks were expensive, about $5,000. In 1981, the IBM PC machine that would change the world was introduced. MS-DOS and the 3.5-inch drive followed. In 1982 Lotus 1-2-3 was released and VisiCalc, which did not offer an IBM PC version, faded away. IBM clones were launched by Compaq in 1983, manufacturing costs plummeted and IBM’s architecture became the industry standard.

Meanwhile, retail-oriented technical analysis software was being developed for the Apple II. Trader Tim Slater realized that the Apple II could access large amounts of data capably, calculate technical indicators quickly and display them on its 10-inch monochrome screen. Loyola University Computer Science Professor James Schmit was engaged for his BASIC programming skills, and they planned, programmed and completed the first commercial CompuTrac, version 1.0, in July 1977.

To finance the development of CompuTrac, Slater commercialized the first version with three fellow market technicians who had been following the product’s early development. The Technical Analysis Group (TAG) was incorporated with Tim Slater as its founder and Richard L. Redmont, Jim Sibbett and Walter Bressert as original members. Shares were floated and issued. 

CompuTrac was the first to implement and popularize many of the technical indicators used today. An example is the stochastic oscillator, which was programmed using the work of Ralph Dystant and George Lane with the indicator’s lines named “%K” and “%D.” However, Slater wanted a more marketable name; hence, the study became “stochastic,” and the term has persisted since. Another example is the “moving average convergence/divergence,” or MACD, study by Gerald Appel.

This rapid birth and popularity of computers, along with their affordability to private traders, led to the development of personal computer backtesting software. Two traders created the first commercially available software around 1982-83. Working independently, Louis Mendelsohn and Robert Pardo became the forefathers of modern day testing software. 

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