Is Technical Analysis a Waste of Time?

There are some investors who believe they can profit by finding patterns in historical stock prices or trading volume. These investors are attempting to profit from technical analysis. Kevin Grogan, my colleague at Buckingham Asset Management, reviewed some evidence on these strategies and found that these investors could probably find a more productive use for their time.

A recent study by finance professors at Massey University in New Zealand examined more than 5,000 technical trading rules to see if they added value. The authors found "no evidence that the profits to the technical trading rules we consider are greater than those that might be expected due to random data variation."

The major contributions of this paper are:

• The paper looks at more than 5,000 trading rules in 49 developed and emerging markets. Most other studies look at far fewer trading strategies and markets.
• The paper uses statistical methods to adjust for data snooping bias.
• The paper looks at both developed and emerging markets to determine whether technical trading rules add more value in less developed (or efficient) markets. The authors found that technical analysis may work better in emerging markets than developed markets, but it was "not a strong result."

• The study "Market Efficiency and the Returns to Technical Analysis" found that profits from technical trading rules don't exceed reasonable estimates of transaction costs in the U.S. market.
• The study "A Note on the Weak Form Efficiency of Capital Markets" applied technical trading rules to the U.K. market. They found the rules profitable, but again, the profits weren't large enough to overcome transaction costs.