I’ve always been somewhat interested and skeptical at the same time of TA. I’ve never truly applied it to my personal trading but often look at moving averages, MACD, RSI etc., on websites like stockcharts.com and found the historical accuracy to be impressive. I have more recently been intrigued by more advance techniques such as Elliot wave theory, fibonocci numbers, etc. Is anyone familiar with the Elliot Wave theory? What do you think of it? I would be interested in any suggested readings about the topic as well. thanks
The CFA orthodoxy is that the market is semi-strong efficient, meaning that past price behavior is not useful for making future return estimates, but that fundamental analysis is potentially useful for uncovering investment opportunities. You don’t get thrown out of the program for disagreeing with the orthodoxy, but it means that the exams don’t really support the idea of technical analysis or help you learn it. The challenge with technical analysis is that the appropriate description of events seems much clearer in retrospect, when things are “in the middle of the chart” than when you see patterns on the right of the chart. So be careful when you think of how “the historical accuracy is impressive.” At the time of making trading decisions, it might have been much less clear what the technical analysis signal is really signaling. There are a lot of different techniques to technical analysis. I’m not all that familiar with Elliot Wave theory, so can’t comment. I can say that some of the techniques seem kinda bogus to me, but others make some theoretical sense (in the sense that they’re plausible). The good theories are based on some kind of behavioral theory of why patterns or indicators do what they do, and are not simply some kind of “pattern recognition” combined with data mining techniques. If you can’t reduce a technical analysis rule to some kind of behavioral explanation on the part of investors, you should be extra skeptical. Also realize that a big part of technical analysis is risk control through things like stops and money management. That’s a different technique than the usual portfolio optimization methods taught in the CFA program, and a lot of the success of in those TA strategies that are successful depend highly on how you do your position sizing and set your stops. Yet much of technical analysis concentrates on entry signals and exit signals (and often not even much on how to exit). So be aware of that if you start to explore the TA route. Finally, this market is one where sensible technical analysis - to the extent you believe it works at all - is likely to add a lot of value. That’s because fear and greed and uncertainty is driving a lot of the volatility these days, so the psychological and behavioral aspects of investor decisions are having an unusually large impact, compared to fundamentals, which are just very difficult to predict right now.
bchadwick sums it up very well and points out some salient points. I would just make one correction to this line: > The CFA orthodoxy is that the market is semi-strong efficient, meaning that past > price behavior is not useful for making future return estimates, but that > fundamental analysis is potentially useful for uncovering investment opportunities. Semi-strong efficiency says that both technical and fundamental analyses are useless.
Don’t fight the market.
Exactly, that’s what market efficiency is really saying.
Right, Dreary, I did mess up the efficiency forms… weak form efficient says no technical info, but fundamental info is potentially useful. Semi-strong says that no publicly available information is useful, but insider knowledge might be. Strong says something that is almost impossible to believe.