Stock Trading Technical Analysis

Technical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume.See e.g. Kirkpatrick and Dahlquist Technical Analysis: The Complete Resource for Financial Market Technicians (Financial Times Press, 2006), page 3. In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysts may employ models and trading rules based on price and volume 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 stands in distinction to fundamental analysis. Technical analysis "ignores" the actual nature of the company, market, currency or commodity and is based solely on "the charts," that is to say price and volume information, whereas fundamental analysis does look at the actual facts of the company, market, currency or commodity. For example, any large brokerage, trading group, or financial institution will typically have both a technical analysis and fundamental analysis team.

Technical analysis is widely used among traders and financial professionals, and is very often used by active day traders, market makers, and pit traders. In the 1960s and 1970s it was widely dismissed by academics. In a recent review, Irwin and Park reported that 56 of 95 modern studies found it produces positive results, but noted that many of the positive results were rendered dubious by issues such as data snooping so that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to be pseudoscience. Academics such as Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with the weak form of the efficient market hypothesis.Fama, Eugene (May 1970).

"Efficient Capital Markets: A Review of Theory and Empirical Work," The Journal of Finance, v. 25 (2), pp. 383-417.Griffioen, Technical Analysis in Financial Markets Users hold that even if technical analysis cannot predict the future, it helps to identify trading opportunities."Getting Started in Technical Analysis" 1999 Jack D. Schwager Page 2

In the foreign exchange markets, its use may be more widespread than fundamental analysis.Taylor, Mark P., and Helen Allen (1992). "The Use of Technical Analysis in the Foreign Exchange Market," Journal of International Money and Finance, 11(3), 304?314.Cross, Sam Y. (1998). All About the Foreign Exchange Market in the United States, Federal Reserve Bank of New York chapter 11, pp. 113-115.

While some isolated studies have indicated that technical trading rules might lead to consistent returns in the period prior to 1987,Brock, William, Josef Lakonishok and Blake Lebaron (1992). "Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," The Journal of Finance, 47(5), pp. 1731?1764.Osler, Karen (July 2000). "Support for Resistance: Technical Analysis and Intraday Exchange Rates," FRBNY Economic Policy Review (abstract and paper here).Neely, Christopher J., and Paul A. Weller (2001). "Technical analysis and Central Bank Intervention," Journal of International Money and Finance, 20 (7), 949?70 (abstract and paper here) most academic work has focused on the nature of the anomalous position of the foreign exchange market. It is speculated that this anomaly is due to central bank intervention. Recent research suggests that combining various trading signals into a Combined Signal Approach may be able to increase profitability and reduce dependence on any single rule.Lento, Camillo. 2008. A Combined Signal Approach to Technical Analysis on the S&P 500. Journal of Business & Economics Research, Vol. 6, No. 8, pp. 41 - 51..