Note: We have sourced more articles on the effectiveness of TA; this section will be extended.
Technical Analysis is the systematic method of analysing financial instruments, including securities, futures and interest rate products, with only market-delivered information such as price, volume, volatility and open interest. The tools of technical analysis are measurements and derivatives of price, for example on-balance volume, price oscillators, momentum measurements and pattern recognition. A Technical Analyst applies such tools for forecasting and timing the trading and investing in financial instruments. Technical Analysis is a universal discipline. (Definition by IFTA)
Is Technical Analysis effective? Refer to a recent formal study:
Head and Shoulders Above the Rest? Performance of Institutional Portfolio Managers Using Technical Analysis
- David M. Smith: State University of New York at Albany - School of Business
- Christophe Faugère: Kedge Business School Bordeaux
- Ying Wang: State University of New York at Albany - School of Business
January 17, 2013
This study takes a novel approach to testing the efficacy of technical analysis. Rather than testing specific trading rules as is typically done in the literature, we rely on institutional portfolio managers’ statements about whether and how intensely they use technical analysis, irrespective of the form in which they implement it. In our sample of more than 10,000 portfolios, about one third of actively managed equity and balanced funds use technical analysis. We compare the investment performance of funds that use technical analysis versus those that do not using five metrics. Mean and median (3- and 4-factor) alpha values are generally slightly higher for a cross-section of funds using technical analysis, but performance volatility is also higher. Benchmark-adjusted returns are also higher, particularly when market prices are declining. The most remarkable finding is that portfolios with greater reliance on technical analysis have elevated skewness and kurtosis levels relative to portfolios that do not use technical analysis. Funds using technical analysis appear to have provided a meaningful advantage to their investors, albeit in an unexpected way.
Go to this link to download the paper at the Social Science Research Network: