• Basic Membership Access to Journal, Shadow Stock portfolio & monthly updates for stock screens
  • A+ Investor Full access to AAII.com, Journal, and a power data suite for investment ideas
  • AAII Platinum Full access to all of AAII's model portfolios and premium services at a significant discount
  • Dividend Investing Newsletter and model portfolio that focuses on dividend growth
  • AAII Growth Investing Find secular growth stocks poised for outperformance regardless of macroeconomic conditions.
  • Retirement Investing Discover trusted strategies for every stage of retirement. Get actionable insights and resources for smart retirement planning.
  • Sentiment Investing A research-driven newsletter with 10+ signals decoding sentiment across retail and institutional behavior.
  • Stock Superstars Report Get stock ideas inspired by the market's leading professionals
  • VMQ Stocks For the value investor looking to harness academic research in an actively managed portfolio
  • Bits and Bips Newsletter delivering insights on linking traditional finance, macro trends and cryptocurrency opportunities to help investors build stronger, more diversified portfolios.
All premium products come with free basic membership.
Explore All Membership Options
Join Now
Dispatches

Study Finds Technical Analysts’ Recommendations Don’t Outperform

A study of Dutch-listed firms and the major Dutch indexes found that technical analysis-based buy and sell recommendations were “largely in line with simple technical trading rules.”

One challenge to academic studies of technical analysis—which uses trends in price movement to determine if an asset or an index is likely to rise or fall—is the lack of allowance for subjective decision making.

This argument describes technical analysis as having an “artistic aspect” to it.

A study of technical analysis–based buy and sell recommendations on Dutch-listed firms and for the major Dutch indexes found that this assertion does not hold up to scrutiny.

Rather, recommendations were found to be “largely in line with simple technical trading rules.”

The study tracked more than 5,000 buy and sell recommendations made between 2004 and December 2010. About half of the recommendations were made by individual technical analysts and half were made by automatic technical analysis services. Eight indicators were checked, including moving averages, moving average crossovers, Bollinger bands, moving average convergence divergence (MACD), relative strength index, rate of change, support and resistance and on-balance volume.

The results were critical of the recommendations. Average abnormal returns were found to be negative over each of the following four five-day periods (day one through five, six through 10, etc.) following recommendations to buy a stock. Average abnormal returns for sell recommendations were barely negative during the first five days, but then turned positive over the following three five-day periods.

Commenting on the findings, the study’s author observed, “In the event of a buy recommendation on stocks, consistent outperformance is virtually non-existent after the day of the recommendation. The same holds for sell recommendations.”

Rather than exhibiting market timing skills, the technical analysts followed merely demonstrated skill in “predicting the past.” Buy recommendations were issued on stocks with positive average returns over the short-term period leading up to the day of the recommendation and sell recommendations were issued on stocks with negative average returns leading up to the recommendation.

Source: “Are Chartists Artists? The Determinants and Profitability of Recommendations Based on Technical Analysis,” Dirk F. Gerritsen, SSRN, February 22, 2016.

Discussion

Tony Hausner from MD posted over 10 years ago:

Andrew Lo published research in the 1990s that showed that technical analysis does make valid predictions. He used multiple regression analyses. Jasmina Hasanhodzic did research a few years ago that confirmed Lo's work.


Lee Wenzel from MN posted over 10 years ago:

The research report is flawed for the same reasons reported. The perspectives of some technical analysts regarding one market were not found to predict the future over a very specific time period. The findings do not generalize. Other analysts using other tools and concepts on other markets over other time periods may or may not have predictive reliability. The lack of finding a relationship doesn't prove that one does not exist. Almost all investment rules and methodologies fail much of the time. That is why investing requires a very skeptical eye.


You need to log in as a registered AAII user before commenting.
Create an account

Log In

Get your free copy of our special report analyzing the tech stocks most likely to outperform the market.
Download the FREE Report Here: