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Stationarity and Technical Analysis

In: High-Frequency Trading and Probability Theory

Author

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  • Zhaodong Wang
  • Weian Zheng

Abstract

There are basically two methods to analyze the asset price: (i) fundamental analysis and (ii) technical analysis. Fundamental analysts examine earnings, dividends, new products, potential of the industry and the like. Technical analysts use charts to identify price patterns and market trends in financial markets and attempt to exploit those patterns. Technicians study technical indicators, momentum, and look for forms such as lines of support, resistance, channels and more obscure formations such as flags, pennants, balance days and cup and handle patterns. Contrasted with fundamental analysis, technical analysis holds that the prices already reflect all such trends before investors are aware of them. Uncovering those trends is what technical indicators are designed to do, imperfect as they may be. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions. Technical analysts do not attempt to measure a security's intrinsic value, but instead use various technical indicators to identify patterns that can suggest future activity…

Suggested Citation

  • Zhaodong Wang & Weian Zheng, 2014. "Stationarity and Technical Analysis," World Scientific Book Chapters, in: High-Frequency Trading and Probability Theory, chapter 6, pages 109-140, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814616522_0006
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