The Profitability of Technical Analysis: A Review
AgMAS Project Research Report No. 2004-04
106 PagesPosted: 15 Oct 2004
Chungbuk National University
Scott H. Irwin
University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics
Date Written: October 2004
The purpose of this report is to review the evidence on the profitability of technical analysis. The empirical literature is categorized into two groups, "early" and "modern" studies, according to the characteristics of testing procedures. Early studies indicated that technical trading strategies were profitable in foreign exchange markets and futures markets, but not in stock markets before the 1980s. Modern studies indicated that technical trading strategies consistently generated economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 92 modern studies, 58 studies found positive results regarding technical trading strategies, while 24 studies obtained negative results. Ten studies indicated mixed results. Despite the positive evidence on the profitability of technical trading strategies, it appears that most empirical studies are subject to various problems in their testing procedures, e.g., data snooping, ex post selection of trading rules or search technologies, and difficulties in estimation of risk and transaction costs. Future research must address these deficiencies in testing in order to provide conclusive evidence on the profitability of technical trading strategies.
Keywords: technical analysis, market efficiency, trading systems, speculative markets
JEL Classification: G13, G14, G15
Suggested Citation:Suggested Citation
Park, Cheol-Ho and Irwin, Scott H., The Profitability of Technical Analysis: A Review (October 2004). AgMAS Project Research Report No. 2004-04. Available at SSRN: https://ssrn.com/abstract=603481 or http://dx.doi.org/10.2139/ssrn.603481
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Several studies have been published in the last 55 years exploring technical analysis. However, there is a lack of research that consolidates the available knowledge concerning technical analysis. The main goal of this paper is, by classifying and coding published papers, to summarize and systematize the significant research that has contributed to the development of the field. Our paper contributes to the existing literature on technical analysis by presenting an overview of characteristics of the literature and potential knowledge gaps in this area, focusing on the analysis of stocks. The paper also discusses suggestions for future research in technical analysis.
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