Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation
AbstractTechnical analysis, also known as "charting", has been a part of financial practice for many decades, yet little academic research has been devoted to a systematic evaluation of this discipline. One of the main obstacles is the highly subjective nature of technical analysis---the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and apply this method to a large number of US stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution---conditioned on specific technical indicators such as head-and-shoulders or double-bottoms---we find that over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 402.
Date of creation: 19 Mar 1999
Date of revision:
Publication status: Published, Journal of Finance, 55:4, August 2000, 1705-1765.
Other versions of this item:
- Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," Journal of Finance, American Finance Association, vol. 55(4), pages 1705-1770, 08.
- Andrew W. Lo & Harry Mamaysky & Jiang Wang, 2000. "Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation," NBER Working Papers 7613, National Bureau of Economic Research, Inc.
- NEP-ALL-2000-08-02 (All new papers)
- NEP-ECM-2000-08-02 (Econometrics)
- NEP-ETS-2000-08-02 (Econometric Time Series)
- NEP-FIN-2000-08-02 (Finance)
- NEP-FMK-2000-08-02 (Financial Markets)
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