Talk:Technical analysis/Archive 1

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Contents

Criticism section

The arguments in the criticism section seem rather pat; the logical fallacies are not being eliminated leaving what may be rather a high level of POV even though "both sides are represented". Blair P. Houghton 04:57, 5 Apr 2005 (UTC)

I agree with this comment and I don't think the comments below really reflect this, nor does the criticism section itself -- it is heavily biased in favor of TA, which a lot of people consider little more than stock market astrology. TA is not in opposition of EMH, it depends on it completely. It assumes and requires equities be priced accurately, then attempts to predict future performance based on past performance. By ignoring fundamentals, journalism, news, exogenous events, foreign affairs, accounting irregularities, etc., it leaves its proponents vulnerable. Take for example British Petroleum. Nothing in its charts would have suggested it was going to get slammed after shutting down its Alaska pipeline. But a fundamental investor well-versed in the energy markets and reading the trade journals might well have seen trouble down the road. Ad nauseum across the markets. If I get a chance, I will try and present a much more detailed and less of a "straw man" critique of technical analysis. But if someone else would like to, by all means. The current section is really just a ringing defense of voodoo. --Valwen 23:57, 3 September 2006 (UTC)

I've modified the criticism section a bit. Feel free to comment about the changes. Here is what I have changed and why:
-Although many chartists believe that their techniques provide excess returns over time, this has not been proven through academic research. I removed this because it is impossible to "prove" something like technical analysis. The best anyone could do is provide _evidence_ that certain analysis is effective in indicating how a price will move. This has been done by some studies. However, others studies say the opposite. The general consensus is, quite simply, "no one is sure." Thus, I have replaced the above text with the following, which more accurately portrays the current state of knowledge: "Although chartists believe that their techniques provide excess returns over time, not all research agrees with this conclusion. "
-Technical analysts point out that just like any other non-indexing investment strategy, trend-following returns will typically deviate from a passive benchmark. Sometimes, they will do better and other times they will do worse. It is notoriously difficult, for example, for a technical analyst to make money in non-trending markets. This could distort the returns of technical analysis. I removed this paragraph completely as I do not believe it to be NPOV. Paragraphs like this one seem to create a back-and-forth-debate kind of article, while articles on Wikipedia should simply present the facts and avoid trying to force certain interpretations on readers. Let me know if you disagree.
-Also, according to chartists, technical analysis can be subjective so a comprehensive study of every element of the practice is untenable. Removed for the same reason as above.
-While technical analysis is widely used by both traders and investors as a means of forecasting future market moves, it is generally not used by economists in any academic sense. Technical analysis has, however, been studied extensively at the academic level. I removed this paragraph as it seemed out of place to me. I tried to incorporate the facts it contains into the paragraphs I added.
-I added the following paragraph: "Proponents of technical analysis, however, maintain that academic research has validated their theories [1]. Many large financial institution employ technical analysts to aid them in making investments."
-I added the following paragraph: "Some scrutinies of the method's technical analysts use have failed to substantiate their claims. This has lead many to reject charting as folly. Critics of technical analysis include some major investors. Warren Buffett once exclaimed, "If past history was all there was to the game, the richest people would be librarians." Most economists do not use technical analysis, but rather rely on analyzing such factors as production, distribution, supply and demand, capital, competition, and resource allocation."
I also think that the 'Inconsistencies with Popular Market Theories' section needs a slight reworking as it seems to be fostering that back-and-forth style.
--69.241.37.86 03:10, 2 December 2005 (UTC)
Could someone please provide a citation that validates this statement (or delete it): "Many large financial institution employ technical analysts to aid them in making investments." I call BS on this. And use of singular ("institution") where the plural should apply.203.103.221.41 22:18, 17 January 2006 (UTC)

Weak to non existent form efficiency

"Technical analysis implicitly assumes weak-form efficiency of the markets as understood in the efficient market hypothesis." Uh. I would say that TA implicitly rejects EMH.


Yes, OF COURSE, charting rejects EMH !!!!!!!!!!! Well said. In fact that should be mentioned in the article. - JP May


If you go to efficient market hypothesis, that's what it says there. Can you explain? Axlrosen 21:07, 3 Oct 2003 (UTC)
I was under the same impression. I thought TA rejected weak EMH. I see no reason why it couldn't accept semi-strong EMH though. Maybe [209 . . .] could explain what he/she means. mydogategodshat 16:35, 4 Oct 2003 (UTC)
Well, the semi-strong form is a superset of the weak form, so if TA rejects weak then it certainly rejects semi-strong (and strong). Since chart data is publicly available, and semi-strong version says that no publicly available data will help you make money, then TA must reject semi-strong too. Axlrosen 16:51, 4 Oct 2003 (UTC)
Yes, the three EMHs are typically presented as an hierarchy, but a trader need not accept this classification system. He/she could accept the perfect discounting of present and future information (semi strong EMH) while maintaining that past info (weak EMH) is useful. mydogategodshat 18:06, 4 Oct 2003 (UTC)
Axelrosen:
I edited the technical analysis and charting page immediately after it had been merged. Whoever did the job had linked remarks about technical with the EMH. I then tried to make sense of what had been written. In fact technical analysts don't talk about the EMH and woujld hardly know what it is. It is for that reason that I wrote that they IMPLICITLY assumed (actaully without knowing it) weak form efficiency (or actually completely inefficient markets...that few people espouse belief in). It would probably be wise to alter the text to disconnect the EMH comments from chartism as the practitioners do.
King Brosby.
I left the EMH link in because I knew you were here to fix it :)
Great name by the way. I presume you are either the king of the Brosby household or you are Bing Crosby using a psuedonym. mydogategodshat 18:26, 4 Oct 2003 (UTC)

Stage Chart Investing

I removed Stage Chart Investing as it gets only two google hits, and is obviously not popular enough to warrant a mention. DJ Clayworth 21:02, 13 Sep 2004 (UTC)

Studies

Lane's Stochastics

  • Lane’s Stochastics - Indicates entry signals based on reactions of professional traders on the close.
    • The correct Lane configuration is to use 5 periods for %K.
    • Plot it with a 3 period exponential moving average of %K for %D
    • Plot it with a 3 period exponential moving average of %D for SlowD
    • Show all three lines over price.

[1] Lane's Stochastics by George C. Lane, M.D.

MACD

  • MACD - Moving Average Convergence/Divergence

The Moving Average Convergence-Divergence Trading Method by Gerald Appel ISBN: 9991453571

Technical Analysis – MACD

RSI

Parobolic

  • Parabolic SAR - Trailing stop based on prices tending to stay within a Parabolic curve during a strong trend.

The concept draws on the idea that time is an enemy, and unless a security can continue to generate more profits over time, it should be liquidated.

New Concepts in Technical Trading Systems

Trend line penetration

"" - when a price crosses Bollinger bands, or some other measure of the range of standard deviation of the trend line.""

What is this suppose to mean?

- a trend line penetration occurs when prices break through a sloping line of support or resistance. I don't see what moving averages and standard deviation have to do with a simple trend line break. GT

Pseudoscience

Charting is a pseudoscience


I suppose it's interesting that you think so.
Vast numbers of extremely rich people, traders, brokers, etc, think that fundamental anslysis doesn't even deserve the sophsiticated term "pseudoscience" - their only opinion of "fundamental analysis" would be "what a load of crap."
Similarly, as you suggest, vast numbers of extremely rich people, traders, brokers, etc, think that technical anslysis doesn't even deserve the sophsiticated term "pseudoscience" - their only opinion of "technical analysis" would be "what a load of crap."
If you think charting falls in the category "pseudoscience," then put that clearly in the article. How does that affect anything?


since it a) gives the impression of being based on science ..


Note that no-one, ever, tries to suggest charting has anything to do with "science."



while b) there is no empirical evidence that charting works.


I suppose other than that vast numbers of people make lots of money from it.
That is logically invalid, as some number of people are bound to be lucky, and you completely ignore the large number of people who have lost money. --Benna 20:18, 3 April 2007 (UTC)


(The case is actually even stronger; there is empirical evidence that charting has not worked historically.) This should be stated in the article, e.g. in the section on criticism.


You should definitely state that in the criticism section, and list the empirical evidence showing that charting has not worked historically. Don't hold back!


The classic book..


LOL !


"A Random Walk Down Wall Street" by Princeton economist Burton G. Malkiel surveys the various ways in which charting has been tested scientifically.  Filur 04:58, 9 August 2005 (UTC)
Although I agree that charting is mostly useless and unscientific, I disagree about labeling it a pseudoscience. Few have claimed that technical analysis is based on the scientific method. I am also moving this discussion to the bottom of the page. Rhobite 05:31, August 9, 2005 (UTC)
Lack of empirical evidence and failure to comply with the scientific method is by itself enough for charting to be a pseudoscience. I suppose few proponents of Astrology or Creation Science claim that these are based on the scientific method, but these fields are pseudoscience none the less. In any case, the article as it now stands is POV and appears to make no distinction between the pseudoscience of charting and legitimate scientific research aimed at discovering patterns in the stock markets. Filur 05:52, 9 August 2005 (UTC)
That's not true at all. Astrology is not a pseudoscience, it is a superstition. Astrology practitioners don't claim that it conforms to the scientific method. Simple creation accounts are also not pseudoscience - they do not attempt to reconcile biblical accounts with modern scientific evidence. However, creation science is a pseudoscience because it purports to use the scientific method. I'm not aware of many technical analysis proponents claiming that TA is backed up by scientific proof. I could be wrong - please cite evidence if I am. Not every belief that lacks empirical evidence is a pseudoscience. In order for something to be a pseudoscience, there needs to be an active (and erroneous) claim that it is based on the scientific method. I agree with you that this article is biased in favor of TA, I just don't think that TA is a pseudoscience. You may also want to look at the article on day trading - it presents a similar, unpleasantly optimistic view of "beating the market". Very depressing. Rhobite 06:05, August 9, 2005 (UTC)
Charting meets almost every criteria under "Classifing pseudoscience" in the Wikipedia article on pseudoscience and astrology is indeed listed later on. In any case, my intentions were not to debate the definition of a pseudoscience, but to point out that the complete lack of empirical evidence (to say the least) should be reflected in the article. Thanks for the suggestion about day trading -- apparently a general NPOV drive seems to be needed for finance related articles. Filur 06:17, 9 August 2005 (UTC)
All the above be that as it may, all banks (and many many other financial institutions) employ boths quants and chartists and aren't at all worried about the fact they work from mutally contradictory starting points. Pcb21| Pete 15:08, 27 August 2005 (UTC)
I'll admit I've got my personal reservations about the charting/technical story, but calling it a pseudoscience is pretty harsh, isn't it? And its certainly not constructive on an issue that's still (really) in debate. Just because we have a method without a theoretical explanation does not make it pseudoscience. Also worthy of note is that technical analysts or chartists do not refer to their methods as science. I note the following from the pseudoscience article:
"Pseudoscience is any body of knowledge, methodology, or practice that is erroneously regarded as scientific"
"Systems of thought that rely upon "divine" or "inspired" knowledge are not considered pseudoscience if they do not claim either to be scientific or to overturn well-established science."
Cheers,
--Jason 03:58, 7 September 2005 (UTC)

POV

I think this article has a POV slant in favor of technical analysis. I just finished reading "A Random Walk Down Wallstreet" which is much more agressive in its opposition of charting. Those beliefs should be represented. I'll try fixing it up myself. This link is Broken 15:01, 27 August 2005 (UTC)

By the way, the article used to be fairly balanced (see e.g. the last time I made an edit to the article). I think it was GolderTrader who excised every whiff of the efficient market hypothesis. Pcb21| Pete 15:18, 27 August 2005 (UTC)
I'm not sure it's necessary to "be aggressive" about charting, one way or another. Merely commenting on the objections on academics and fundamentalists (pun unintended ;) should be sufficient, shouldn't it? Sure, I think it's rubbish myself, but the article does describe the objections.
--Jason 03:52, 7 September 2005 (UTC)

I'd like to suggest you reading another book: "A non-random walk down wall street", by Andrew Lo and A.Craig MacKinlay ^_^

Comments from the Author of the Page

Hello all, I rewrote most of this technical analysis article in April/May of this year. It was originally written as a very negative article on technical analysis referring to it as "hocus pocus" or similar. I left many of the links and the overall make-up the same, but I changed most of the text. I am not sure who many of the people on this page are commenting about the article because I wrote almost all of it.

Anyway, it was not my intention to boost technical analysis at the expense of fundamental analysis, but it seems like people think that is what I did. I'll rewrite some of the article to take out a little of the implied slant. Still, I dont think it is incorrect to describe how fundamental analysis is often at odds with technical analysis or other types of analysis.

Some quick comments though about what people write.

1) Regarding EMH, I reiterate that technical analysis accepts the basic principles of the theory. I point you to John Murphy's "Technical Analysis of the Financial Markets," which states explicitly that the view of many technicians is that TA is in broad accord with EMH. EMH states all available information is incorporated in a security's price. TA says that because of that truism, one only needs to study price.

2) There is an over-reliance of A Random Walk Down Wall Street in much of the criticism entered here. That book sought to almost completely discredit TA so it is biased in itself. Moreover, the theory is not completely sound. If one follows that Random Walk is supreme, then Warren Buffett is wealthy by luck, event driven trading is bogus, etc, behavioral finance is meaningless, etc. In short, Random Walk is a separate theory, not perfect, and only one of several explanations of the market. The intention of this article was just to explain TA and its most popular criticisms.

I think I addressed the popular broad-based (not theory-specific) objections to TA. Namely, that patterns actually dont exist (i.e., prices move in a more random manner), and that TA is not grounded in any scientific discipline.

3) A user mentioned pseudo-science which I think is inappropriate. I specifically wrote, "technical analysis' reliance on past price data is not grounded in any scientific discipline." I am not sure what more needs to be said.

4) In terms of "no empirical evidence to support TA" as was mentioned above, this is also incorrect. I included a link to a Federal Reserve study that supported TA. Also, the MIT economist Paul Krugman once wrote that the mass mentality of the trend-focused shareholder distorts prices and results in inefficiencies in the stock market. He was able to isolate trend-followers implying there was a "method to their madness".

5) Allow me to state that much of the criticism here seems rooted in POV as well. I see the words "rubbish" and "pseudoscience" scattered above. You need not have to agree that TA works. Some people think it does. Others dont. Something need not be grounded in a hardcore scientific theory in order to work. Perry Kaufman's book "Trading Systems and Methods" is an excellent resource for people really interested in what trading styles work and which ones dont. Perry studied all sorts of systems some generally accepted and some that many would think are absurd. For instance, he concluded that there actually is a reasonable correlation between the markets and the orbits of the planets. Yes, the planets. That is not to say, buy when Jupiter is highest in the night sky, but it does open the possibility that not everything in the market can be boiled down to a series of equations.

This article was just designed to explain some of the popular notions of TA. If it came across as too favorable to TA, then I can make changes. co94

I don't know what to say. Saying that there is some correlation between planets and the markets is proof that we must look at other things to add to standard equations is silly and baseless. The article isn't tough enough on TA as it is. Including a paragraph about how they are now considered "research analysts" doesn't show that they are being accpeted but that they are begrudgingly being allowed to exist. The criticism section has a point and then a counter point from TA. In no cases is a counter-counter point included. I would add them myself, but I am no scholar on this subject (which I will freely admit along with my bias). Besides the POV issues, many of the articles paragraphs are a bit on the small and need some stiching together. As to, EMH, our EMH article says that, weak form of the EMH says that, "Weak-form efficiency implies that Technical analysis will not be able to produce excess returns", one of these articles must be wrong. This link is Broken 20:16, 7 September 2005 (UTC)
It doesnt sound like you are getting the point. It seems some of the criticism here is based on the premise that EMT is supreme. It isnt. It does not explain everything. There are many theories to why the market acts the way it does. Some are as seemingly outlandish like financial astrology (see Kaufman pp 371-379), others are more followed like the January Effect, while others are still more commonplace. The point being that something at odds with EMH is not automatically false. Warren Buffet wasnt lucky. Neither was John Henry. They followed strategies at odds with EMH.

I reiterate, for the last time hopefully, that TA is broadly in line with EMH, but not completely. EMH argues that all information is immediately incorporated into a security's price. Thus it is impossible to generate any edge from the information. TA mandates that the information is also quickly incorporated into a security's price but also argues that there is information in the price action that could predict price movement BEFORE new information is released. It's just that simple. That's what TA argues. You may not agree with it, but thats what a technician would say.

You lost me when you wrote that the NYSE and NASD recognition of TA as a meaningful area of research does not mean TA is "accepted". Accepted by whom? Academia? No, TA is not accepted by academia at large. Behavioral finance is though. Interesting. Plus, if the two largest stock exchanges in the world sign off on TA, then I think, yes, that lends TA substantial credibility. Why are you saying that technicians are "begrudgingly" allowed to exist?

As I said in the article, there is no scientific basis that prices must trend. I never hid that. I stated clearly that TA relies heavily on the empirical notion that prices do trend. Today is Septemer 8, 2005. TXN, MO, OSX Index, LEH, SX6E Index, TOTF.PA are all stock symbols. Anyone who looks at them can see that these stocks are clearly trending. A TA nay-sayer can argue with me until he is blue in the face that there is no scientific reason why these securities are trending. To a technician, it doesnt matter. The stocks are trending. Pure and simple. As an active trader, I honestly couldnt care less what Brownian motion or whatever predicts how the stk should move. I care about the trend and the chart. Walk onto a trading floor and ask a trader whether they should buy or sell a stk. You wont ever hear a peep about Random Walk Theory. You will hear, "What does the chart look like?" Plain and simple.

I read A Random Walk Down Wall Street myself several years ago. After reading it, I thought TA was complete crap as well. But having traded now for close to 10 years, I definitely see the relevance of TA in real trading. ARWDWS explicitly states that it is impossible to beat the market. But, hello people, not every dollar in the world is invested in an index fund. There are a ton of people out there who disagree with the bsaic tenets. Heck, even CAPM separates stock price movements as "market related" and "stock-specific related". Could there not be a way of studying the alpha, then?

There is no way a Random Walker will sign off on TA. I know that. The two theories are largely at odds. But said Random Walkers must understand that regardless of how popular the theory is, it is not all knowing and there are alternatives. I conclude with a quote from Kaufman below.

If the Random Walk Theory is correct, many well-defined trading systems based on mathematics and pattern recognition will fail....The strongest argument against random movement supporters is one of price anticipation. Once can argue academically that all participants know exactly where prices should move following a news release. However practical or unlikely this is, it is not as important as market movement based on anticipation of further movement. For example, if the the prime rate was raised twice in 2 months, would you expect it to be raised in the third month? Do you think that others will have mized opinions or that they assesst the likelihood of another increase at different levels? Unless the whole market view expectations the same way, then the price will move to reflect the majority opinion. As news alters that opinion, the market will fluctuate. Is this random movement? No. Can this appear to be random movement? Yes. co94 (Kaufman pp3-4)

I think it suffices to make two points: a) There is no empirical evidence that TA has resulted in excess returns. b) There is empirical evidence that the most common techniques of TA has not returned excess returns. I would gladly compare TA with astrology but it seems unnecessary as the primary author of the article has already brought up correlations with the orbits of the planets.
The statement that "there is no scientific basis that prices must trend" can be strengthend. Detecting trends in time-series is a fairly easy task and such analyses have been carried out for the stock market. The result? Once the long-term increasing trend has been accounted for, any trends that remain are so weak as to be negliciable in practice. Filur 01:27, 13 September 2005 (UTC)

Article Edited by Author on September 10, 2005

New comments welcome. co94

I rewrote the opening paragraph to emphasize that TA has nothing to do with science, and removed the link to the Fed-report. This last step may have been a bit drastic as the Economic Policy Review may very well be peer-reviewed when I think about it. Thus, perhaps the link can be added again, but I would recommend pointing out that the result of the article applies only to currency markets and also to check what other papers cite the article and what they say about it. Filur 01:46, 13 September 2005 (UTC)

I also made some changes to the criticism section. Comments welcome. I had a bit of difficulty describing the Random Walk hypothesis. From what I know the literature that usees this phrase mean only that prices are a Markov process, not a Brownian motion. I looked briefly on the net and found only this paper www.sbe.org.br/ebe24/072.pdf. I will read up on the subject however, and ideally I think we should locate a good review of these hypotheses. Also, the criticisms section previously stated that chartists point to articles discrediting the random walk theory. It would certainly be nice to have links to such articles published in peer-reviewed journals. However, please make sure that what the articles discuss is significant. Often the trends or patterns tend to be so weak that they cannot be used practically. Filur 05:06, 13 September 2005 (UTC)

And now it's POV the other way!
As Paul Wilmott, author of all those quant texts built on the EMH, says "IMHO if you believe in market efficiency you really ought to get out more!" [2]. Pcb21| Pete 07:19, 13 September 2005 (UTC)
Hardly. The statement in the opening paragraph is objectively true. If you intend to argue that charting is scientific and supported by sound empirical research we would have to reopen the discussion on pseudoscience. Also, what on earth does this have to do with the EMH? Even though they cannot both be true, the EMH may be false and charting still useless. Filur 07:25, 13 September 2005 (UTC)
Not withstanding that there is a book that criticises TA, there are research papers that support TA (the noted Fed Reserve paper). I'll also note that my lecturers were critical of their peers misapplying TA in order to report that TA doesn't work. It seems to me that, if the Fed is researching it (and reporting some positive results) and that banks and investment houses are using it, then the issue is far from resolved. And just because academics feel good about fundamentals and bad about TA (assuming they do), this does not make them right either.
I'm not sure if I completely agree with the formulation of TA in terms of EMH. TA doesn't make any reference to the efficiency of the market in terms of information usage. Fundamental analysts often miss this point, because they are information driven. A technical analyst is not; they are solely concerned with finding price trends. Indeed, they don't care about EMH; they simply believe that you can find trends in historical prices and trade on these trends to make a profit. Sure, you can reformulate that in terms of the EMH, but that's not how the idea works. And I might add, it's not hard to explain TA in terms of behavioural finance, if you're desperate for reasons.
I note that TA tends to deal not just with trends and cycles, but also with floors, caps, moving averages, and so on. It's labourious to use the EMH to interpret what these mean.
There should be a tendancy here to just report the contrast between technical versus fundamental analysis. I'm getting the feeling that there are quite a few people writing here who have strong beliefs (and that's what they are) about the subject.
It shouldn't be necessary to state that TA is not scientific, because no financial or economic methods are scientific, really (if you think they are, I have a great stock portfolio for you...).
Don't get me wrong, I'm not a strong supporter of TA (I like fundamentals, personally), but it seems that this article is being mutilated by people who don't understand EMH or TA :)
I also smile at that astrology reference. A fellow named Stanely Jevons in the 1800's tried to find a link between sunspots and business cycles, to the ridicule of everyone around him. At one point, a paper appeared entitled "University Boat Races and Sun-spot cycles" appeared as well. That being said though, just because we have a method that lacks a theory doesn't mean the theory is wrong.
--Jason 09:03, 13 September 2005 (UTC)
The key point is that you are asserting that technical analysis is scientifically unsound and not supported by empirical evidence. To state that, without references to the literature, makes for a POV article. You need sources to back up what you are saying. Pcb21| Pete 09:41, 13 September 2005 (UTC)


Whoa. I just rewrote the opening paragraph to this article because it is flat out unequivocally wrong. People PLEASE UNDERSTAND THIS: TA is NOT limited to identifying simplistic price patterns on a chart like a "head and shoulders" or similar. I dont think many people have made money doing only that. EVERY trend trading system has its roots in technical analysis. I worked for a $6 billion dollar hedge fund in the US whose entire investment strategy was to identify trends. There was a team of PhDs there researching how to identify market trends. I dont think they would appreciate being told that they are involved in some sort of nonsense. Needless to say, the fund has impressive returns.

This article is constantly being pulled apart by theorists, most of whom appear to have a definitive axe to grind against TA. Random Walk, the most vocal opponent of TA, is a theory and nothing more than that. Note that there are no "Random Walk" trading strategies other than essentially indexing. RW calls basically everything else "luck". We all know just by opening the WSJ or the FT that there are oodles upon oodles of alternative trading strategies. The people running these investment vehicles are not idiots. They are people who have an idea, concept, or whatever that they think will enable them to outperform the market. As an example, in 2004 convertible arbitrage funds performed remarkably. According to RW, there should be no arbitrage opportunities. So what gives? If I take one of the conclusions of RW as true and that you cannot beat the market over the long term, does that mean that there are no "pockets of opportunity" in the meantime? Of course not and surely all would agree to that. Well, if you allow that there are peiods when statistical arbitrage will work, periods when sector specific investing will work, can there not be periods when trend following works?

Anyone who has read the article in its entirety should note that I never referred to TA as a scientific study. But there is some support in academia. In fact, there is a Journal of Technical Analysis that actively seeks contributions from academics. I left that out entirely to avoid the wrath of the Ivory Tower. co94

It is of course correct that views presented in the article should be supported with references to the literature. I therefore suggest that we collect recent and classic references that discuss technical analysis and charting, in particular reviews. I will gladly do my part but unfortunately I have a series of upcoming conferences. However, I hope I will be able to contribute at least a few solid references and that the proponents of TA and charting can do the same.
I think co94 has a point that it is useful to distinguish between more basic methods such as charting that have been disproved in the literature (shown not to work even historically on developed financial markets) and more sophistaticed techniques that have not been disproved but not proved either. It is the former that one may label a pseudoscience. Finally, I think the argument that more sophisticated techniques must work because a hedge fund employs PhD's is ridiculous. If it was that easy the PhD's could write a paper and disprove the EMH once and for all, but this has not yet happened. Filur 11:42, 13 September 2005 (UTC)


I included the bit about PhDs at the hedge fund not to say that sophisticated techniques must work or that because PhDs are involved means TA is "for real", but to refute the often repeated criticism that appears here that TA is based on "rudimentary mathematics" or simplisitc and therefore incorrect thought. (A concept need not be complex to work, everyone.) People here have for whatever reson have it drilled in their heads that TA is akin to a bunch of old men with graph paper plotting and studying charts. TREND FOLLOWING IS A VIABLE TRADING STRATEGY!!!! TA is a means to identify trends! I note with a raised eyebrow that in Wiki's entries on convertible arbitrage and statistical arbitrage there is no disclaimer that, in theory, neither of these investment strategies should work. There is a bit of smugness here (sorry people) that looks down upon TA and related concepts because of the simplicity of the basic premises. Again, I point you in the direction of Warren Buffet and John Henry. These two men have made billions for investors using two different techniques. Neither technique jived with RW. It seems that the critics here are more willing to give Buffet the benefit of the doubt because he is a fundamental analyst and calculated things like EBITDA. John Henry is a trend follower who developed many techniques that he used to identify trends and largely ignored the fundamentals. Obviously, both men did something right.
Perhaps it would be helpful if people read what John Henry's trading philosophy is direct from him. http://www.jwh.com/templ009.cfm After reading this and noting his returns, are you theorists still going to beat the drum that there is no way to beat the market? I am not prepared to sign off on this TA article labelling TA and trend following as basically nonsense. co94


Certainly not every attempt to forecast price moments is based on rudimentary analysis, so perhaps this particular statement should be reserved for chartism only.
I made a quick search for reviews this morning and find one which is both recent and comprehensive, but unfortunately not peer-reviewed. http://www.charttricks.com/Resources/Articles/AgMAS04_04.pdf In short, the authors find no evidence that technical analysis has been profitable in developed financial markets after 1980 and in any market after 1990, but some evidence of profitability before this. However, all studies that have shown positive returns can be biased because by chance alone some rules will yield excesss returns (in fact rules developed after 1980 cannot be accurately tested on pre-1980 data because of this).
Filur, I am not trying to be argumentative here, but that is not what the authors said. Admittedly, I did not read this report; I only went to the author's conclusions, but the last paragraph of their study (p58) reads,"In conclusion, we found consistent emphasis that simple technical trading strategies were profitable in a variety of speculative markets at least until the early 1990s." They continue by saying there could be problems with the testing procedures etc. What they dont say is what you wrote above that, "the authors find no evidence that technical analysis has been profitable...." That's one thing. That also essentially negates your comment earlier that, "there is no empirical evidence that says TA is profitable." (sic)
Secondly, I am unsure why this study by two graduate students (smart as I am sure they are) should be given any particular credibility. And I certainly do not think we should be allowed to cherry pick which academic studies should be allowed and which ones shouldn't. If I am not mistaken (if I am I apologize), was it you that dismissed the Federal Reserve study supporting TA?
I also note on page 55 of the referenced study the following quote which I think is applicable to all sorts of the criticism levied here: "Despite positive evidence about profitability and improved procedures for testing technical trading strategies, skepticism about technical trading profits remains widespread among academics."
It is still unclear to me why people are so determined to throw TA and its concepts into the trash bin of investing. I've pointed out time and time again that TA is primarily concerned with trends. Trends, trends, trends. It is stated clearly in the second line of the article. Perhaps we need to reiterate that TA is NOT limited to looking at chart patterns and whatnot although that is definitely part of TA. And again, no one has answered my question as to why either the entries on stat arb or convert arb or whatever have any sort of disclaimer saying along the lines, "theoretically, these strategies should not work."
Lastly, for now :), yes Warren Buffet and John Henry are certainly outliers. Nevertheless, they have consistently followed (and refined) a particular trading strategy that has worked well. Slice it any way you want it, but Buffet is right more often than he is not. And there are a lot of other Buffets out there, maybe who have not made nearly as much money as he has, but who certainly have had success investing. En masse, have all of them made money? Unlikely. And maybe after all is said and done, many of those people might have been better off in an index fund. But I know one thing, I wouldnt want my money parked in an index fund for the past two years. And seriously, read John Henry's methodology. It is very informative. It gives a good glimpse of trend following thought. co94 Sept 15, 2005
The example of Warren Buffet and John Henry is interesting, but given the number of players on the financial markets the null-hypothesis that they are rich merely due to chance cannot be ruled out. Filur 02:36, 14 September 2005 (UTC)
Rich due to luck? C'mon Filur. Do you really believe that? If they were merely lucky, they would have rolled over a long long time ago. Bill Gross at Pimco. Luck again?
The link to Henry's website does not work for me. Problem my end or yours? Pcb21| Pete 10:15, 14 September 2005 (UTC)
Pete, Just follow the links to the trading methodology at www.jwh.com co94 Sept 14, 2005

Any New Post-Sept 20, 2005 Comments?

Many revisions were made to the article. Are people more comfortable with it? Does it have a NPOV and is there a consensus on content? co94

And, hey, just as a side note and nothing else!! (haha) Crawford Perspectives in its September newsletter had the following predictions. Mind you, this is more for a chuckle than anything else.

The week of Oct 3 would be a significant down week for the market because of the Solar Eclipse.

Short term peak in gold during the week of Oct 3 with a higher peak on Nov 6-7. This is due to a "series of trines" between Jupiter and Neptune.

On Oct 11, Saturn squares the New Moon position to occur Nov1. Look for markets to drop sharply this day. (Incidentally, Oct 11 is historically the worst trading day for the market.)

Oct 25: Jupiter enters Scorpio. Do not buy on this day.

co94 Oct 6, 2005

I would like to see the article start with a tighter description of what TA is and its use, and leave controversies about its basis etc to the end. By way of concrete suggestions,
  • Trending seems to be somewhat over-emphasised, in particular the intro could mention patterns and ranging stuff like overbought/oversold.
  • Support/resistance could be mentioned explicitly under "history repeats".
  • Bring "interpretation" up before the list of terms, move "proponents" down after that list.
  • Mention open interest in the description somewhere too.
---Kevin 7 Oct 2005
Kevin, I will try to incorporate your suggestions. I dont like having too  :::much controversy in the beginning either but the majority of people :::thought criticism belonged in the beginning.
I also think that TA is primarily concerned with trends and that aspect should be emphasized.


      • Andy 14 Oct 2005

Malkiel now concedes that price is not a pure random walk, but rather has some short-term momentum. For example, in the latest paper-back edition of "Random Walk" (W. W. Norton, 2003), p251, he says "Several later studies have been inconsistent with this pure random-walk model. They show that there is some degree of momentum in the stock market and that price changes over short periods of time do tend to persist."

Can someone add an entry for the Elliot Wave theory? Also Fibonacci as a predictive tool? Could someone who understands these write a page on each? Thanks. Alex.

Technical Analysis as a Technology

Personally I think technical analysis is just technology to aid in decsion making. Generally people want as much information as possible when making a decision. Imagine a world with two day traders, one has indicators, and charts, the other has nothing. Which is more likely to choose better entry and exit points? Take this a step futher, imagine one has a ticker and one has no idea what the price is. Yet both have to buy and sell a stock within a defined time frame. It would be hard to argue that the person without even a ticker would make a better decision than a person with a ticker. To me a ticker is where technical analysis first started, I don't think any trader anywhere would think about abandoning it.

I am bring this up as just another view point on technical analysis. I don't think it is so much about "predicting" where a price will go, perse, as it is about giving you an idea of what is likely to happen. Science tends to deal more with 99% confidence, technical analysis, IMHO deals with much wider probabilities, and is there more as a guide as opposed to a definite statement.

Masparasol Oct 22, 2005


A way forward?

I agree with the view above. I see it as a method of analysis. "Beliefs" don't need to come into it, and would be generalisations anyway. I would like to see the article focus on the method, less on the criticisms, less on the beliefs. A suggestion of article layout is:

  • a general description of the method
  • some of tools used (with links to a comprehensive list of tools)
  • the history of the method
  • users of the method today
  • comparison with other analysis methods (include alternative/similar theories here. Don't think in terms of criticism anymore, as it's not working for this article clearly!)

How does that sound for a NPOV article?

CrazyGoldy 06:14, 7 November 2005 (UTC)


Sorry, but I disagree. According to John Murphy's, "Technical Analysis of the Financial Markets," (widely considered the best starter volume on technical analysis) technical analysis is defined as, "the study of market action, primarily through the use of charts, for the purpose of forecasting price trends." (p. 1) That is the definition that I sought to expand upon in this article.

There is no single "method" that technical analysis uses. Some technicians use moving averages, others use price patterns, others use oscillators, etc. However, at all these various methods core is the same principle: that trends and patterns exist in the market and TA helps to identify and exploit them.

As far as the "history of TA" is concerned, I do not even know what is meant by this. The origin of TA was described via the links to Dow Theory.

Regarding users of technical analysis, again, I am not sure of the relevance of this. There are literally thousands of market participants who use TA. There are probably just as many who rely soley on fundamental analysis too. There isnt a "champion" of TA or similar.

Comparing TA with other analysis methods (assumingly fundamental analysis) is simply untenable. People have been trying to prove or disprove that TA "works" for years. Academics produce reams of reports on it. One study comes out in support of it and another comes out panning it. Regardless of whether it is "proven" or "disproven", TA is still widely used by market participants. I felt it was best to say that TA has its critics, namely followers of EMH or Random Walk. Comparing trend following strategies to arbitrage strategies, to indexing, to value investing, etc. is, to me, wayyyyyy beyond the scope of an article on TA.

Much, if not all, of the POV criticism on this article was levied by people who explicitly disagreed with TA's concepts. If it was written that "prices trend in the market," they would jump up and down and say that prices DO NOT trend because such and such academic theory says that is not possible. Some critics did not remember that TA is a theory (with beliefs and principles) just like Random Walk is. One cant go to the Random Walk theory article and slap a non-NPOV tag on the article because it doesnt give equal time to TA. Yet, that is what people essentially did here. co94 Nov 11, 2005

Pseudoscience?

Calling Technical Analysis pseudoscience is simply bullshit in the sense that its competitor: EMH is more like pseudoscience. By Thomas Khun's definition, a theory or paradigm is scientific only if it can be proved false. And the problem of EMH is exactly it can't be proved false. It's well known in financial economics any test of EMH is just a joint test of EMH and the asset pricing model we assume investors are using. So even if EMH is rejected in the empirical test, we don't know whether we really reject EMH or whether we reject the asset pricing model. The implication is EMH can never be rejected, and for this reason we can never call it scientific.

Further more, many recent researches find investors are not really rational, emotions and conitive bias indeed have strong influence on investor's behaviors. These finding damages the foundation of EMH. Of course it's true even if investors are not rational the overall market could still be efficient, but at least the irrationality of investors implies Technical Analysis is equally plausible.

A well-documented financial phenomenan, which is called Momentum Effect, favors more for technical analysis against EMH. Momentum effect says in the stock market the winner of last year is more likely to be winner this year, and loser last year is more likely to be loser this year. This obviously refutes the idea that stock returns follow a brownian motion, or more broadly speaking, a Markov Process. On the other hand, momentum effect implies there are trends in the market, which is exactly the foundation for techinical analysis.

Statistically Techinical Analysis is difficult to test, since to test TA we need to use pattern recognition techniques, which is still not quite powerful enough to deal with chart patterns. So TA has the same problem with EMH. But overall it's just ridiculious to call one of them scientific while the other pseudoscience.

Post-November 22, 2005

I changed the industry representation segment. I think someone keeps going in to say that the IFTA represents the industry globally. This is untrue. While the IFTA does have chapters all over the world, the US chapter is based in San Francisco only. The MTA has chapters all over the US. Considering that the US is the largest equity market in the world and the MTA is the largest US technical analysis group, it is a bit of a stretch to say that the IFTA represents the industry globally. It might be better to say that the IFTA represents most of the industry outside of the US.

Someone wrote a bit about behvaioral finance which I also removed. The segment describing behavioral finance was included merely to counter the claim that the EMH is supreme. If EMH were true, then neither technical analysis nor behavioral finance could exist. That is all. I dont think a description of BF's view of TA is appropriate in the article.

2006 Comments!

I notice that someone edited the criticism section regarding Random Walk theory. Reference is given to an MIT professor and that he disproved Random Walk theory. Does this belong in an article on technical analysis? Moreover, I do not know if this person's work has been peer reviewed and is considered factual. I.e., does the academic community now discredit Random Walk? I am not sure if this portion belongs in this article. I do not think it is too wise to go into too much detail regarding RW in this article.


Could someone please either provide a citation that validates this statement, or delete it (in Criticism section): "Many large financial institution employ technical analysts to aid them in making investments." I suspect this to be anecdotal only. And use of singular ("institution") where the plural should apply.203.103.221.41 22:18, 17 January 2006 (UTC)