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WHAT DO WE KNOW ABOUT THE PROFITABILITY OF TECHNICAL ANALYSIS?

WHAT DO WE KNOW ABOUT THE PROFITABILITY OF TECHNICAL ANALYSIS? Abstract The purpose of this paper is to review the evidence on the profitability of technical analysis. The empirical literature is categorized into two groups, ‘early’ and ‘modern’ studies, according to the characteristics of testing procedures. Early studies indicate that technical trading strategies are profitable in foreign exchange markets and futures markets, but not in stock markets. Modern studies indicate that technical trading strategies consistently generate economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 95 modern studies, 56 studies find positive results regarding technical trading strategies, 20 studies obtain negative results, and 19 studies indicate mixed results. Despite the positive evidence on the profitability of technical trading strategies, 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Surveys Wiley

WHAT DO WE KNOW ABOUT THE PROFITABILITY OF TECHNICAL ANALYSIS?

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References (205)

Publisher
Wiley
Copyright
Copyright © 2007 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0950-0804
eISSN
1467-6419
DOI
10.1111/j.1467-6419.2007.00519.x
Publisher site
See Article on Publisher Site

Abstract

Abstract The purpose of this paper is to review the evidence on the profitability of technical analysis. The empirical literature is categorized into two groups, ‘early’ and ‘modern’ studies, according to the characteristics of testing procedures. Early studies indicate that technical trading strategies are profitable in foreign exchange markets and futures markets, but not in stock markets. Modern studies indicate that technical trading strategies consistently generate economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 95 modern studies, 56 studies find positive results regarding technical trading strategies, 20 studies obtain negative results, and 19 studies indicate mixed results. Despite the positive evidence on the profitability of technical trading strategies, 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.

Journal

Journal of Economic SurveysWiley

Published: Sep 1, 2007

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