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According to Wikipedia, Technical Analysis (TA)

is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.

As I understand it, the idea behind this technique is to search for certain geometrical patterns in the shape of price charts. Combined with threshold values for some performance indices, these patterns are apparently used to predict the future development of market prices.

A search on Amazon shows that virtually hundreds of books have been published on the topic. Also, there is no lack of online courses that claim to teach the principles of TA, ranging from free offers over relatively cheap ones to online certificates that cost a few thousand dollars. Clearly, there is a huge demand for instructions on TA – people are apparently very willing to spend money on this.

However, the effectiveness of this technique doesn't seem to be undisputed. The Wikipedia article has a section that discusses the empirical evidence in favor and against TA. Yet, the discussion appears to be fairly inconclusive:

Whether technical analysis actually works is a matter of controversy. Methods vary greatly, and different technical analysts can sometimes make contradictory predictions from the same data. Many investors claim that they experience positive returns, but academic appraisals often find that it has little predictive power.

If the last statement was true, TA may not be much more than a pseudo-science. At one point, the Wikipedia article quotes economist Burton Malkiel who has apparently compared technical analysis to "astrology". Yet, most of the references given in that section are from the 1990s and 2000s. I'm not sure if they reflect still the current state of research on technical analysis appropriately.

From the little exposure that I had to TA, I can guess where Malkiel's assessment comes from. Here's the conclusion from what I suspect to be a technical analysis of Bitcoin price development:

As a result, BTC could rise to $10,000 over the next few weeks. In the short-term, a price pullback cannot be ruled out.

The analysis is dated June 17, and given that the Bitcoin price has passed the $10,000 mark as of today (June 21), the prediction is technically not wrong. Yet, I can't fail to notice that instead of a few weeks, the predicted mark was reached in a few days, and that the prediction protected itself against falsification by not ruling out a price reduction "in the short-term". To me, this way of predicting future developments sounds a lot like the Barnum statements that are used by astrologists and self-proclaimed psychics: pretend that you provide a very specific description of the personality of an individual, but in fact make it so vage and general that it will apply to virtually anyone.

Of course, I may have come across a particularly bad piece of Technical Analysis – as a lay person, there's no way of telling for me. Nevertheless, prominent economists have suggested that TA does not work, and should perhaps be considered a pseudo-science. If that was true, it would be something even worse if we consider the wide range of books and online-courses: a money-making scheme for authors and online course educators.

Thus, my question: What is the current academic consensus? Does learning Technical Analysis make you capable of predicting accurately the future development of market prices? Or Technical Analysis considered a pseudo-science?

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    How accurately? "Prediction" itself has many forms, some more precise than others. Measuring prediction is the hard part here because few predictions follow a strict protocol. You can't really normalize the data. That said, TA is a recognized phenomenon, meaning TA hopes to utilize typical market force understanding for predictive purposes. Opinions on how much investors should depend on it vs other determinants vary from "not at all" to "entirely". There's no definitive answer to be had here. – fredsbend Jun 25 at 0:25
  • For an interesting theory of prediction, try Superforcasting by Philip Tetlock. This one is especially interesting because it includes updates and changes to predictions as part of the accuracy calculation of predictions. – fredsbend Jun 25 at 0:29
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    @fredsbend (thanks for the book suggestion): There are several good reasons why we routinely discard predictive techniques such as astrology or tarot reading (even though they may be considered "recognized phenomena in their circles). Here are some I can think of: (1) there is no scientific theory that explains why they should work in the first place, (2) they don't produce falsifiable predictions, (3) following their predictions doesn't seem to improve the result above chance level (excluding effects of self-fulfillment). I think criteria such as these could be applied to TA just as well. – Schmuddi Jun 25 at 11:37
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    you stated that TA is an umbrella term for a diverse range of methods. if one of those methods was any good, would that make TA any good? i'd come from another angle: if any of the methods was any good, it would be trivial to implement as an automatic system, generating wealth on an untold scale, and thus removing any incentive of teaching or publishing said method. any currently taught method thus creates less income by itself than by being taught, or it wouldn't be ... – bukwyrm Jun 25 at 14:24
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This is not a complete answer to your questions. A contrast is often made between Fundamental Analysis and Technical Analysis. There are studies comparing the predictive power of the two methods, and although results differ (with TA still having some predictive power), the bottom line is that it is more powerful if the two approached are combined. Two recent papers comparing the two methods, and then testing for their combined use are here and here.

  • In a very noisy system (with lots of random movement) it is easy for some analysts to outperform the market average by pure chance even if they have no skill whatsoever. So it is easy for studies to get positive results by being selective about the analyst and time period they use in the study. But there is little to no evidence that any analyst can sustain performance that beats the market average in the long term (say 5 years or more). And, when transaction costs are counted, even that "little" becomes a clear NO. – matt_black Jul 7 at 12:40

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