Technical Analysis

BEHAVIOURAL FINANCE AND TECHNICAL ANALYSIS

Why « good » behaviour matters….

Contents

• Introduction. Where does Behavioural Finance fit in. • How Behavioural Biases Arise • Common Behavioural Biases • How Technical Analysis can help overcome common Biases

Introduction

• In this presentation I shall argue that markets are broadly efficient and that it is behavioural biases that cause elusive and sometimes fleeting market inefficiencies to arise. I shall argue that we should treat the market as being highly efficient and that assets are generally fairly priced but that at times markets become inefficient and that is what causes opportunities to arise. It is thus a question of being patient and waiting for those inefficiencies to arise and for all the technical and/or fundamental signals to be aligned. I shall try to present what the common behavioural biases are, how they arise and how we can try to identify their effect on us and hopefully minimise their effect on us. Importantly, from my own experience it is not only individual private investors who fall may be misled by these biases but “professional” investors as well. Experts tend to have an overly

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Why Inefficiencies Arise and Types of Inefficiencies

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In his seminal paper, Alpha Hunters and Beta Grazers (2005, Financial Analyst Journal), Martin Leibowitz analyzes the market inefficiencies that may give rise to investment opportunities. Existence of these inefficiencies is what gives rise to the possibility of outperforming the market or generating alpha. Unfortunately, those inefficiencies do not arise frequently. The great investors play a disciplined game, avoiding large miss-hits and waiting for grand opportunities. At that moment, they move into “carpe diem” mode, gather up their strength and courage and take a calculated risk to proactively force a winning trade. Leibowitz distinguishes between (i) “Acute” inefficiencies (which are fleeting and can be quickly arbitraged...