<p>Good question. To address some of your concerns:</p>

<blockquote>
  <p>but I still see lot of courses about technical analysis, and even people using it. </p>
</blockquote>

<p>Sadly, this is meaningless; simply because courses, journals, and practitioners exist for any given field doesn't validate that field. </p>

<blockquote>
  <p>They have the advantage of being easy to learn and they claim themselves as following the "behavioral economics" theory.</p>
</blockquote>

<p>Behavioral economics is distinct from technical analysis. The former is based on empirical data stemming from psychological study; the latter, off strict historical price data, <strong>and nothing else</strong>. In fact, the "founder" of technical analysis specifically said he wouldn't let <em>any</em> outside factors- anyone's mood, the weather, a catastrophe, etc.- get in the way of his analysis. </p>

<blockquote>
  <p>Is the traditional &amp; simple TA somehow valid? I'm asking about the one that uses moving averages, graphs, momentum lines to try to predict market moves.</p>
</blockquote>

<p>The answer to this question carries a survivorship and success bias; you're <em>much</em> more likely to hear from traders whose luck turned out well with technical analysis, rather than traders who haven't done too well. For success bias: suppose you had 10 traders who did well/poorly with technical analysis strategies. That doesn't really prove anything. Some really long and detailed studies have shown that tech analyst traders haven't really outperformed anyone.</p>

<blockquote>
  <p>The behavioral economics theory is valid and 2 people won Nobel prizes because of that, so I'm not arguing its validity, </p>
</blockquote>

<p>Unfortunately, winning the Alfred Nobel Prize in Economics doesn't validate a theory either. </p>

<blockquote>
  <p>...but its consequences or usefulness as an investment method.</p>
</blockquote>

<p>A good question. I highly encourage you to ask this on other StackExchange sites <em>in addition</em> to this one. </p>

<blockquote>
  <p>Please take into account not only a highly efficient market (eg, the US), but other smaller and less efficient markets (I'm from Argentina).</p>
</blockquote>

<p>Here's the thing: fundamentally, I think the intellectual grounds supporting technical analysis is, at best, very weak: you can't drive forward by looking at your rearview mirror, and that's effectively what technical analysis is. Empirical study has shown that trying to predict the price movement of a stock isn't that beneficial with tech analysis; however, many traders use the techniques anyway. I believe that if one was to use tech analysis to gauge the positions of <em>other</em> traders who use tech analysis, that trader/investor could hedge accordingly. In other words, if you and I are traders at different firms, and I know you use tech analysis, I will use tech analysis to guess what <em>your</em> position is on some security. When I call you up to make a deal, I'll have a good idea what <em>your</em> valuation is of the security, and I could negotiate a price accordingly (or not bother at all), while you may not necessarily know my position. Think "game theory." </p>

CC BY-SA 3.0
2014-11-21T00:50:45.677Z
2014-11-21T00:50:45.677Z
daOnlyBG
<p>As I mentioned in my comment, I would start by looking at chapter 2, "The Predictability of Asset Returns," in the book by Campbell, Lo, and MacKinlay's book, "The Econometrics of Financial Markets."</p>

<p>Also, some papers that you might want to take a look at are "The Dog That Did Not Bark: A Defense of Return Predictability" by Cochrane or "Predictive Regressions: A Present-Value Approach" by Koijen and Van Binsbergen. Cochrane makes a point about distinguishing "predictability" from "forcastability." I'll have to read more to get a better idea, but this should be a good start.</p>

<p>Also, you might find this paper enlightening: "Luck versus Skill in the Cross-section of Mutual Fund Returns," by Fama and French. The idea is to try to figure out the the distribution of mutual fund alphas that we would expect to observe if fund performance were just a result of luck. They then compare it to the actual observed distribution of fund alphas and we see that it's likely that funds are performing worse than what you would expect by just luck (over the distribution). As they say in the abstract:</p>

<blockquote>
  <p>The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark-adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true α) in the extreme tails of the cross-section of mutual fund α estimates.</p>
</blockquote>

CC BY-SA 3.0
2014-11-20T19:10:14.373Z
2014-11-20T19:10:14.373Z
jmbejara
<p>The Lo, Mamaysky and Wang paper <a href="http://www.nber.org/papers/w7613" rel="nofollow">Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation</a> is probably the best investigation of this question. He found there were some patterns that seemed to be useful, notably the Head and Shoulders pattern. </p>

CC BY-SA 3.0
2014-11-20T23:54:18.410Z
2014-11-21T00:42:00.963Z
2014-11-21T00:42:00.963Z
Lumi
<p>I personally think technical analysis (TA) is not useful at all but I still see lot of courses about technical analysis, and even people using it.  They have the advantage of being easy to learn and they claim themselves as following the "behavioral economics" theory.</p>

<p>Is the traditional &amp; simple TA somehow valid?  I'm asking about the one that uses moving averages, graphs, momentum lines to try to predict market moves.  </p>

<p>The behavioral economics theory is valid and 2 people won Nobel prizes because of that, so I'm not arguing its validity, but its consequences or usefulness as an investment method.</p>

<p>Please take into account not only a highly efficient market (eg, the US), but other smaller and less efficient markets (I'm from Argentina).</p>

CC BY-SA 3.0
2014-11-20T18:26:01.020Z
How is stock Market Analysis economics?
skv
CC BY-SA 3.0
2014-11-20T18:53:54.903Z
I would argue that this IS economics. This is essentially about the efficiency of capital markets---of which there is a huge literature (in economics). Also, it deals more specifically with the predictability of asset returns. Look at chapter 2, "The Predictability of Asset Returns," in the book by Campbell, Lo, and MacKinlay's book, "The Econometrics of Financial Markets." Campbell is an economist.
jmbejara
CC BY-SA 3.0
2014-11-20T19:02:52.080Z
The question is definitely economics. It's about whether weak form efficiency works in practice. The answer might not be economics, depending on whether "valid" means "does technical analysis work?", which is a question to ask the quant finance guys, or "is there an economic theory that validates it?"
jayk
CC BY-SA 3.0
2014-11-20T23:56:37.470Z
It's certainly within the scope of economics - partly for the efficiency reason as j-kahn says, and also since if there is anything to it, it's something that monetary/market theory needs to be able to explain.
Lumi
<behavioral-economics><efficient-markets>
Is technical analysis somehow a valid method for investment?
Diego Jancic
# Is technical analysis somehow a valid method for investment?

(Asked by: username_0 on 2014-11-20)

I personally think technical analysis (TA) is not useful at all but I still see lot of courses about technical analysis, and even people using it. They have the advantage of being easy to learn and they claim themselves as following the "behavioral economics" theory.

Is the traditional & simple TA somehow valid? I'm asking about the one that uses moving averages, graphs, momentum lines to try to predict market moves.

The behavioral economics theory is valid and 2 people won Nobel prizes because of that, so I'm not arguing its validity, but its consequences or usefulness as an investment method.

Please take into account not only a highly efficient market (eg, the US), but other smaller and less efficient markets (I'm from Argentina).

**Tags:** behavioral-economics, efficient-markets

> **Comments:**
> **username_1**: How is stock Market Analysis economics?  
> **username_2**: I would argue that this IS economics. This is essentially about the efficiency of capital markets---of which there is a huge literature (in economics). Also, it deals more specifically with the predictability of asset returns. Look at chapter 2, "The Predictability of Asset Returns," in the book by Campbell, Lo, and MacKinlay's book, "The Econometrics of Financial Markets." Campbell is an economist.  
> **username_3**: The question is definitely economics. It's about whether weak form efficiency works in practice. The answer might not be economics, depending on whether "valid" means "does technical analysis work?", which is a question to ask the quant finance guys, or "is there an economic theory that validates it?"  
> **username_4**: It's certainly within the scope of economics - partly for the efficiency reason as j-kahn says, and also since if there is anything to it, it's something that monetary/market theory needs to be able to explain.  

---

## 3 answers

### Answer by username_4 on 2014-11-20. Score: 3 | Accepted answer

The Lo, Mamaysky and Wang paper [Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation](http://www.nber.org/papers/w7613) is probably the best investigation of this question. He found there were some patterns that seemed to be useful, notably the Head and Shoulders pattern.


---

### Answer by username_5 on 2014-11-21. Score: 1

Good question. To address some of your concerns:

> but I still see lot of courses about technical analysis, and even people using it.

Sadly, this is meaningless; simply because courses, journals, and practitioners exist for any given field doesn't validate that field.

> They have the advantage of being easy to learn and they claim themselves as following the "behavioral economics" theory.

Behavioral economics is distinct from technical analysis. The former is based on empirical data stemming from psychological study; the latter, off strict historical price data, **and nothing else**. In fact, the "founder" of technical analysis specifically said he wouldn't let *any* outside factors- anyone's mood, the weather, a catastrophe, etc.- get in the way of his analysis.

> Is the traditional & simple TA somehow valid? I'm asking about the one that uses moving averages, graphs, momentum lines to try to predict market moves.

The answer to this question carries a survivorship and success bias; you're *much* more likely to hear from traders whose luck turned out well with technical analysis, rather than traders who haven't done too well. For success bias: suppose you had 10 traders who did well/poorly with technical analysis strategies. That doesn't really prove anything. Some really long and detailed studies have shown that tech analyst traders haven't really outperformed anyone.

> The behavioral economics theory is valid and 2 people won Nobel prizes because of that, so I'm not arguing its validity,

Unfortunately, winning the Alfred Nobel Prize in Economics doesn't validate a theory either.

> ...but its consequences or usefulness as an investment method.

A good question. I highly encourage you to ask this on other StackExchange sites *in addition* to this one.

> Please take into account not only a highly efficient market (eg, the US), but other smaller and less efficient markets (I'm from Argentina).

Here's the thing: fundamentally, I think the intellectual grounds supporting technical analysis is, at best, very weak: you can't drive forward by looking at your rearview mirror, and that's effectively what technical analysis is. Empirical study has shown that trying to predict the price movement of a stock isn't that beneficial with tech analysis; however, many traders use the techniques anyway. I believe that if one was to use tech analysis to gauge the positions of *other* traders who use tech analysis, that trader/investor could hedge accordingly. In other words, if you and I are traders at different firms, and I know you use tech analysis, I will use tech analysis to guess what *your* position is on some security. When I call you up to make a deal, I'll have a good idea what *your* valuation is of the security, and I could negotiate a price accordingly (or not bother at all), while you may not necessarily know my position. Think "game theory."


---

### Answer by username_2 on 2014-11-20. Score: 1

As I mentioned in my comment, I would start by looking at chapter 2, "The Predictability of Asset Returns," in the book by Campbell, Lo, and MacKinlay's book, "The Econometrics of Financial Markets."

Also, some papers that you might want to take a look at are "The Dog That Did Not Bark: A Defense of Return Predictability" by Cochrane or "Predictive Regressions: A Present-Value Approach" by Koijen and Van Binsbergen. Cochrane makes a point about distinguishing "predictability" from "forcastability." I'll have to read more to get a better idea, but this should be a good start.

Also, you might find this paper enlightening: "Luck versus Skill in the Cross-section of Mutual Fund Returns," by Fama and French. The idea is to try to figure out the the distribution of mutual fund alphas that we would expect to observe if fund performance were just a result of luck. They then compare it to the actual observed distribution of fund alphas and we see that it's likely that funds are performing worse than what you would expect by just luck (over the distribution). As they say in the abstract:

> The aggregate portfolio of actively managed U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark-adjusted expected returns sufficient to cover their costs. If we add back the costs in fund expense ratios, there is evidence of inferior and superior performance (nonzero true α) in the extreme tails of the cross-section of mutual fund α estimates.


---

