Another Look at the Effectiveness of Technical Analysis

Technical analysis is the study of past price patterns to identify market trends and predict future prices. Technical analysts believe that the collective actions of all participants in the market, including buyers and sellers, producers and consumers, investors and speculators, etc., ultimately determine market prices. Therefore, technical analysis focuses on identifying these price patterns and using them to make trading decisions.

There are many different techniques that technical analysts use to identify market trends and predict future prices. Some of the most common techniques include trend analysis, support and resistance levels, moving averages, and technical indicators.

Technical analysis is often criticized for being too subjective. We have discussed the effectiveness of technical analysis previously. Reference [1] provided another review of published papers on the effectiveness of technical analysis. It pointed out,

The final conclusion of the thesis is that technical analysis has its place in analysing financial markets. It might not be universally profitable in all financial environments or with all asset classes, but there is a significant amount of evidence that when used in a correct way and in correct trading environment, technical analysis certainly is able to be used successfully.

When it comes to profitability it is highly probable, that if the user of the technical analysis is a finance professional, has sufficient amount of experience, or has the ability to use the right indicators and methods in a right context, considerable profits can be generated. However, more research on this subject is still needed in order to find out more about what technical analysis is capable of.

In short, according to the paper, technical analysis can be useful, depending on how and by whom it is used.

Let us know what you think in the comments below or in the forum.

References

[1] Kalle Vessari, Is technical analysis a successful tool for trade decision?, 2022, HAME University of Applied Sciences

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