A Conceptual Framework for the Evaluation of Agent-Based Trading and Technical Analysis

The major part of research dedicated to technical analysis and active trading (i.e., the management of financial portfolios using chartism or moving average indicators for instance) generally focuses on single “signals” giving the opportunity to buy or sell a financial commodity frequently a well diversified portfolio (see the extensive survey of |Park and Irwin, 2004). In this context, it has been extensively argued that technical analysis is useless in order to outperform the market (Jensen and Benington, 1969). The reason for that is, assuming informational efficiency (Fama, 1970), all relevant piece of information is instantaneously aggregated in prices. Therefore, there is nothing to extract from previous quotations relevant for one willing to trade on this basis. Since information is, by definition, unpredictable, next price fluctuations will be driven by innovation and the price motion will fluctuate randomly as a result. Nevertheless, empirical investigations tackling this question of “technical trading” exhibit heterogeneous results. On the one hand, a large part of these researches shows that, once risk taken into account, no-one can seriously expect any rate of return over what can be earned with a simple Buy and Hold strategy (henceforth B&H). On the other hand, some intriguing results seem to attest that technical analysis is useful to a certain extent (Brock et al., 1992; |Dempster and Jone, 2005; Detry and Gregoire, 2001).