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Seven Pitfalls of Technical Analysis

Author

Listed:
  • Guglielmo Maria Caporale
  • Alex Plastun

Abstract

This paper examines the main drawbacks of technical analysis. Although this is widely used by practitioners, from an academic perspective it can only be seen as a form of “voodoo finance”. In particular, it runs into the following pitfalls: Subjectivity; Doubtful assumptions; Unjustified algorithms; Low profitability; Data snooping; Statistically insignificant results; Unrealistic simplifications. The key conclusion is that it is high time that (self-fulfilling) technical analysis be replaced by more sophisticated time-series forecasting methods and models such as fractional integration, R/S analysis and autoregressive specifications .

Suggested Citation

  • Guglielmo Maria Caporale & Alex Plastun, 2023. "Seven Pitfalls of Technical Analysis," CESifo Working Paper Series 10213, CESifo.
    • Handle: RePEc:ces:ceswps:_10213
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp10213.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    technical analysis; data snooping; financial markets; price forecasting; trading;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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