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I've been reading the book Technical Analysis Explained by Martin J. Pring as a result of a conversation with one of my friends who said he did technical analysis but didn't apply the types of models employed by econometrician when forecasting (i.e ARIMA, VAR ect).

as I progressed through the book, I noticed though the methods were simple and required little knowledge of statistics but they worked very well. They call these methods as a part of trend analysis.

My Question: why are such methods not employed by more frequently by economists/econometricians?


Note: an example of such methods can be seen in the presentation by Martin Pring: Technical Analysis for Short Term Traders

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  • $\begingroup$ The phrase "they worked very well" seems misleading. Could you elaborate what you mean by this? $\endgroup$ – Giskard Jul 20 '18 at 22:06
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why are such methods not employed by more frequently by economists/econometricians?

Because the so-called technical analysis ("TA") is overly simplistic and devoid of mathematical (or at least rational) basis.

The application of algebra, probability, time series, and other tools & disciplines does not guarantee accuracy of forecast, but at least that application provides a more robust framework with which to model financial data than what is achievable through TA. Just to mention one example, TA does not address arbitrage opportunities, which is a useful and consistent approach to pricing financial instruments.

I noticed though the methods were simple and required little knowledge of statistics, they worked very well. They call these methods as a part of trend analysis.

There is a false sense of accuracy surrounding TA. Materials that teach or promote TA obviously will present instances where --in hindsight-- the method appears to work. But nothing in TA predicts, models, or at least explains the price trajectory of a financial instrument (let alone its timing).

I think that if/when TA supposedly "works", it is only because of a kind of self-reinforcing feedback: TA "indoctrination" inadvertently prompts TA adepts to reinforce that, say, a price-band (or however it is called) is about to be broken because the price of the stock has touched its limit twice. Thus, TA-based traders react by performing certain transactions expecting to profit from the supposedly imminent direction of the stock.

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  • $\begingroup$ This was my initial reaction to these methods and I dont 100% disagree with you. however what impressed me was the unique explanation of bubbles employed by TAs and Dow Theory. Though it could be as you say just a game of connect the dots with no predictive value. $\endgroup$ – EconJohn Jul 20 '18 at 20:49
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    $\begingroup$ There are connections between technical analysis and more supposedly "complex" econometric models. Andrew Lo has a well known paper on this but the title escapes me at the moment. Note that, moving averages, extremely popular in technical anaylsis, can be approximated by exponential smoothing (ES ) models and ES models have subtle connections with more complex econometric models. I'll try to track down a few papers and send the links. My point is: TA can sometimes be similar to using econometric methods. Also, the "success" of TA is not as clear as some make it out to be. $\endgroup$ – mark leeds Jul 21 '18 at 2:43
  • $\begingroup$ Here is a link to Lo's paper cis.upenn.edu/~mkearns/teaching/cis700/lo.pdf. Here is another paper that makes interesting connections between MA's and return models: papers.ssrn.com/sol3/papers.cfm?abstract_id=2604942 $\endgroup$ – mark leeds Jul 21 '18 at 2:48

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