Sunday, May 04, 2008

Technical analysis

Technical analysis is a financial markets technique that claims the ability to forecast the future direction of security prices through the study of past market data, primarily price and volume. In its purest form, technical analysis considers only the actual price behavior of the market or instrument, on the assumption that price reflects all relevant factors before an investor becomes aware of them through other channels. Technical analysts may employ models and trading rules based, for example, on price transformations, such as the Relative Strength Index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns.

Technical analysis is widely used among traders and financial professionals, but is considered by many to be pseudoscience or "voodoo finance;" it receives little or no direct support from academic sources and is considered akin to "astrology." Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the generally-accepted efficient market hypothesis. Economist Burton Malkiel argues, "Technical analysis is an anathema to the academic world." He further argues that under the weak form of the efficient market hypothesis, " cannot predict future stock prices from past stock prices."

No comments: