Update: Recent Research Supporting the Value of Technical Analysis

Last week, I wrote a post titled On the Absence of Formal Technical Analysis Education which attracted some attention from the financial blogosphere.  I strongly criticized universities for not broadly and more formally including technical analysis as a part of their curricula and I was surprised and very pleased by the attention because, as I wrote then,

Its absurd that universities still do not formally teach the study of price behavior (technical analysis) and it seems academic finance is way out of touch with real market participants and real risk management.

Thanks Meb Faber who brought this recent working paper to my attention, which supports this view.

Smith, Faugere & Wang’s study titled Head and Shoulders Above the Rest? The Performance of Institutional Portfolio Managers Who Use Technical Analysis takes a methodological approach that potentially allows for greater external validity.

Instead of identifying specific trading rules and then backtesting their predictive capacity using historical price data, the researchers survey institutional portfolio managers for whether they incorporate technical analysis into their investment process and then compare those who do with those who do not.

The study is important to my argument for a few reasons:

1. Effects – The researchers conclude that;

the net effect of technical analysis on the management of institutional equity-related portfolios has been beneficial, although in an unexpected way.

2. The Methodology – There is most often a tension between how well a particular research design reaches a causal conclusion in the lab and how well that conclusion can be generalized into the real world. Traditionally, research focusing on the efficacy of technical analysis has been high on reaching causal conclusions in the lab while sacrificing its ability to generalize those findings into the real world and the much more complex manner in which investors actually incorporate technical analysis.

The present study employs a novel design by surveying institutional investors and is therefore, arguably, more generalizable. It is a welcome shift and might spur more of this type of an approach.

3. Asset Managers Use Technical Analysis – The study finds that 1/3 of U.S. and international/global equity and balanced portfolio investors utilize technical analysis in their investment process. This supports my argument that universities need to teach it if they take seriously the notion of preparing students for their professional future.

The study is great reading for anyone who is interested in this area as it provides an extensive literature review for those who are interested in the history of technical analysis research as well as a detailed description of the novel and potentially more generalizable approach to this research category.

Related Posts:

Academia vs Technical Analysis via The Reformed Broker

Pattern Recognition via Tom Brakke

On Using Technical Analysis via Cullen Roche

Why Does Technical Analysis Make Some People So Angry? via JC Parets

Mutual Funds & TA via Mebane Faber

The Market Technicians Association Educational Foundation

 

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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