Technical analysis

Technical analysis is the rather solid sounding name given to what is also called chartism: the attempt to predict financial markets purely by looking at past financial data (securities prices, indices and other trading data). Its practitioners are sometimes called chartists.

This flies in the face of the efficient markets hypothesis. Even the weak form of efficient markets requires that all information in historical prices is reflected in current prices.

Technical analysis may appear to be given some justification by behavioural finance but it does not use the results of the latter. The details of some techniques have their own self-evident justifications, however it still lacks sufficient theoretical underpinnings to be credible.

The most serious objection to technical analysis/chartism is that if it works, it should be possible to use it to set up purely automatic trading strategies. These could be back-tested. If technical analysis worked, it would be possible to produce evidence that it worked. The chartists have so far failed to produce much evidence.

Many advocates who accept the objections to technical analysis, suggest that it is used in conjunction with fundamental analysis. This is most commonly done by using fundamentals to pick stocks and technical analysis to decide on timing. However, even this implies rejection of even the weak form of efficient markets.

A better use of price data lies in more conventional measures such as volatility, beta and correlations.

Copyright © 2005-2016