Technical Analysis

Technical analysis

Kairat T. Mynbaev

Institute of Mathematics, Informatics and Mechanics

Report on the work done in June-August 2012

Introduction

While fundamental analysts examine earnings, dividends, new products, research and the like, technical analysts examine what investors fear or think about those developments and whether or not investors have the wherewithal to back up their opinions. Technical analysis analyzes price, volume and other market information, whereas fundamental analysis looks at the facts of the company, market, currency or commodity. Most large brokerage, trading group, or financial institutions will typically have both a technical analysis and fundamental analysis team.

Technical analysis is a set of intuitive (mostly graphical) tools financial analysts use to study financial time series. It is based on the belief that security prices deviate too much from what is justified by market fundamentals and reflect more the investors’ emotions. The task of a technical analyst is to make conclusions about these emotions. Even though such conclusions have implications for predictions concerning future price movements, the resulting predictions are not quantitative and, unlike the ones obtained with quantitative methods, cannot be used for point or interval estimates that are so dear to statisticians. Technical analysis is useful for at least two reasons: it allows one to put life into otherwise dead charts and it serves as a source of ideas for behavioral finance. Lately, some technical recommendations have been given a more algorithmic form.

This paper consists of three parts. The first is just an overview of general notions and ideas, based mainly on [1, 2]. The second part reviews the most recent papers that translate intuitive and informal notions from technical analysis to the statistical language and test their efficiency. There is also a reference to the Wikipedia site which contains a list of software that implements...