Predictive Power Price Patterns

Synopsis E-book: Predictive Power Price Patterns

The gulf between academicians and practitioners could hardly be wider on the issue of the utility of technical analysis. On the one hand, technical analysts chart stock prices and carefully categorize the patterns, often with colourful terminology, in order to obtain information about future price movements (see for example Pistolese, 1994). Since the objectives of the technical analysts are highly practical, the rationale and fundamental basis behind the patterns are often subordinated, as is the statistical validation of the predictions. The academicians, on the other hand, are very sceptical of any advantage attained by a method that uses information that is so readily available to anyone. Any successful procedure of this type would violate the ef?cient market hypothesis (EMH) which implies that changes in fundamental value augmented by statistical noise would be the only factors in a market that would be con?rmed by statistical testing. Since there is no inside information involved in charting prices, a statistically valid method would violate all forms of EMH.

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