An Overview of Technical Analysis as a Trading tool
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Abstract
Our objective in this report is to examine the evidence surrounding technical analysis' profitability. In writing this report, we aim to provide an in-depth assessment of technical trading strategies, both theoretically and empirically. In this article, we examine surveys that have directly explored the experiences and opinions of market participants regarding technical analysis. Approximately 30 to 40 percent of market participants in futures markets and foreign exchange markets believe technical analysis is an important factor in predicting price movement within the next six months, according to a survey. This next section is designed to give an introduction to theoretical models, which includes implications about how technical analysis can be profitable. Technical trading strategies may be profitable because of noise in the market or investors' irrational behaviour, yet conventional efficient market theories, such as the martingale model and random walk models, exclude technical trading profits in speculative markets. The last section surveys empirical studies. By analyzing the testing procedures used in the studies, we categorize "early" and "modern" studies. Of the 58 studies that produced positive results, 24 produced negative results. The remainder produced mixed findings. Despite the fact that several empirical studies have shown that technical trading strategies can be profitable over a long period of time, the majority of test procedures have significant limitations, such as data snooping, the ex-post choice of trading rules or search engines, and the inability to estimate transaction costs and risks. To prove that technical trading strategies are profitable, researchers will need to correct these shortcomings in testing.