The Profitability of Technical Analysis: A Review
The purpose of this report is to review the evidence on the profitability of technical analysis. To achieve this purpose, the report comprehensively reviews survey, theoretical and empirical studies regarding technical trading strategies. We begin by overviewing survey studies that have directly investigated market participants’ experience and views on technical analysis. The survey literature indicates that technical analysis has been widely used by market participants in futures markets and foreign exchange markets, and that about 30% to 40% of practitioners appear to believe that technical analysis is an important factor in determining price movement at shorter time horizons up to 6 months. Then we provide an overview of theoretical models that include implications about the profitability of technical analysis. Conventional efficient market theories, such as the martingale model and random walk models, rule out the possibility of technical trading profits in speculative markets, while relatively recent models such as noisy rational expectation models or behavioral models suggest that technical trading strategies may be profitable due to noise in the market or investors’ irrational behavior. Finally, empirical studies are surveyed. In this report, the empirical literature is categorized into two groups, “early” and “modern” studies, according to the characteristics of testing procedures. Early studies indicated that technical trading strategies were profitable in foreign exchange markets and futures markets, but not in stock markets before the 1980s. Modern studies indicated that technical trading strategies consistently generated economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 92 modern studies, 58 studies found positive results regarding technical trading strategies, while 24 studies obtained negative results. Ten studies indicated mixed results. Despite the positive evidence on the profitability of technical trading strategies, it appears that most empirical studies are subject to various problems in their testing procedures, e.g., data snooping, ex post selection of trading rules or search technologies, and difficulties in estimation of risk and transaction costs. Future research must address these deficiencies in testing in order to provide conclusive evidence on the profitability of technical trading strategies.
|Date of creation:||Oct 2004|
|Date of revision:|
|Contact details of provider:|| Postal: 326 Mumford Hall, MC-710, 1301 West Gregory Drive, Urbana, Illinois, 61801|
Phone: (217) 333-1810
Fax: (217) 333-5538
Web page: http://www.ace.uiuc.edu/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ags:uiucrr:37487. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.