Technical Analysis In The Stock Market

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In the course of years of stock market study, two quite distinct schools of thought have arisen, two radically different methods of arriving at the answers to the trader’s problem of what and when. In the street jargon, one of these is commonly referred to as the fundamental analysis or statistical, and the other as the technical. The term technical in its application to the stock market has come to have a special meaning. It refers to the study of the action of the market itself as opposed to the study of goods in which the market deals. Technical analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volumes, and transactions, etc) in a certain stock or in “the averages” and then deducing from that pictured history the probable future trend. According to Park and Irwin (2007) recent studies indicate that technical trading strategies consistently produce economic profits in a range of speculative markets at least until the early 1990s. From a total of 95 recent studies, 56 studies find positive results regarding technical trading strategies, 20 studies obtained negative results, and 19 studies indicate mixed results.
In pioneering work, Smidt (1965b) studies amateur traders in US commodity futures markets and finds that more than half of the respondents use charts exclusively or moderately in order to identify trends. Charts are working tools of the technical analyst, and they have been developed in a multitude of forms and styles to represent graphically almost anything that takes place in the market as well as to plot “index” derived thereform. From a more recent study, Billingsley and Chance (1996) found that about 60% of commodity trading advisors (CTAs) rely heavily or e...

... middle of paper ... quotation already contains in itself all that can be known about the future and in that sense has discounted future contingencies as much as is humanly possible.” There are also negative empirical findings in numerous pioneer and widely cited studies of technical analysis in the stock market, such as Fama and Blume (1966), Jensen and Benington (1970), and Van Horne and Parker (1967, 1968). Sullivan et al (1999, 2003) and Olson (2004) are among recent studies that have shown that technical trading rules do generate positive economic profits before the 1990s, but the profits are declining markedly or are disappearing altogether as time passes and globalization occurs. Such results may be explained by temporary market inefficiencies in periods before the 1990s. According to Park and Irwin, 2007, there are two possible explanations for the temporary inefficiencies
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