I usually consider two styles of trading/investing based on technical analysis.
First is system based, where certain definite parameters which can be fitted into a system can be used. e.g Certain moving averages, RSI, MACD, All time highs, 52 week highs… etc… In these cases, backtesting works well because most of the stuff used is objective and hence a computer program can be used to provide test results without ambiguity and these can be used to formulate a strategy. Most of the algo trades work based on rigorous backtesting.
The second system is the pattern recognition based trading/investing. Here, patterns like flag, cup and handle, inverted head and shoulders, triangles, rounding formations etc are used. Here there can be a lot of variation in interpretation of patterns and hence these are not amenable to backtesting.
I many a times combine both the systems wherein I use patterns and then incorporate some parameters which I have found useful over the years in an effort to get better results. And to narrow down the stocks further I use fundamental analysis as an additional filter.
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