Tuesday, September 28, 2010

Technical history

The history of technical analysis is the subject of my latest piece at Research magazine: "Just Technicalities?" Excerpt:
The late Nobel Prize-winning economist Paul Samuelson, key figure in his profession and author of its biggest-selling textbook, wrote scornfully about “gypsy tea-leaf readers, Wall Street soothsayers and chartist technicians.” He referred to technical analysts’ efforts to anticipate financial price moves based on charts of earlier market data as “esoteric,” and he did not mean that in a good way.
Technical analysis flew in the face of the efficient-markets hypothesis, which dominated late-20th-century academic finance, and which Samuelson helped develop. If markets rapidly assimilate information relevant to prices, as the hypothesis holds, then prices would move in a “random walk” based on unexpected events. Such randomness, in this view, would defeat any efforts to extrapolate the future by charting the past. 
The attitude of academic finance theorists toward technical analysis often has been likened to that of astronomers regarding astrology. But whereas astronomy Ph.D.s still show approximately zero interest in horoscopes, technical analysis increasingly has gotten some recognition — as at least worth discussing, if not embracing — from the academic world.
The article is currently located here.

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