I am learning about quantitative finance, and I am struck by how different it is from the techniques that make it into magazines and TV, particularly technical analysis. Specifically, if they say an indicator (RSI, TRIX, etc.) can predict even short term future prices, then you should be able to run some analysis to see if this was at least true in the past.
So my questions are:
If I wanted to learn the statistics used to calculate if there is any correlation between an indicator and any future price tendencies, what methods do I use?
Are any of these indicators known to have been verified quantitatively?
Answer
Remember that there is almost no point in predicting market movements if you cannot use it to trade and generate P&L. Thus, backtesting a stat arb strategy based on the indicator is best option.
Don't let yourself fooled by correlation or even directional forecast percentage accuracy as a few wrong predictions can blow your capital.
You will need a set of entry and exit rules in addition to your indicator. (enter when indicator 1 is crosses 0.5 from below etc)
Don't forget to account for all types of transaction fees you will have to pay.
If it's purely academic research you are doing then what I just said is of course not true.
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