Is Technical Analysis a Waste of Time?

Last Updated Oct 19, 2009 9:33 AM EDT

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 paper's findings certainly don't cast technical analysis in a great light, especially when you also consider the findings from some other significant studies on technical analysis:
These studies show that looking for patterns and studying historical stock price charts is simply a waste of time. Your time would be much better spent on other endeavors.
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.