I assume the answer is "no" because if you can predict the development of a stock then people would get very rich. However there are so many YouTube channels and web sites where people talk about things like Elliot Waves and other theories.
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$\begingroup$ en.wikipedia.org/wiki/Technical_analysis discusses this. The best criticism is that if future price movements could be profitably predicted from past price movements, somebody would have done it and so current prices would have already moved to prevent this being profitable in future. $\endgroup$– HenryCommented Mar 23, 2021 at 19:02
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1$\begingroup$ Also please, this is not 9gag but science stack, memes are really not appropriate here $\endgroup$– 1muflon1 ♦Commented Mar 23, 2021 at 20:07
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1 Answer
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There are not a lot of studies on this topic. There were studies in the 70s that would tend to disconfirm the idea of technical analysis as it was proposed at the time.
The studies generated random sequences of numbers in a time series and had technical analysts then make decisions believing that the time series were real time series. They didn't detect the substitution. You cannot make systematic profits on a true random series.
Unfortunately, that is a weak falsification. There is no evidence they got the time series correct. It may be the case that equity time series are different and that signals exist that are legitimate.
With that said, there is a bigger problem with actual time series. Block orders are "taken off the tape," which means that block orders are not reported when they happen. The time series is "as reported" rather than "as occurred." Block purchases or sales are reported after the fact at the weighted average price.
It is not unreasonable to believe that the bid and ask do contain information even if the price record does not. Whether it creates a "pattern," is another matter.
I am not convinced by the studies so far in either direction. I do believe, however, that no retail investor should ever try it. There is a giant information asymmetry between retail investors and institutions. I don't believe that any retail investor can overcome the informational differences present in the system.
Indeed, during the tech bubble of the 90s, the State of Georgia did a study of 100% of all Georgia daytraders by looking at their statements. They found that 90% of Georgia day traders lost 100% of their money and only one percent made a significant profit.
Arditti, F.D., McCollough, W.A. (1978), Can Analysts Distinguish Between Real and Randomly Generated Stock Prices? Financial Analysts Journal, 70-74.
Barber, Brad M. and Terrance Odean, 2000, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,” Journal of Finance 55 (No. 2, April), 773-806.
Bartlett, M.S. (1946), On the Theoretical Specification of Sampling properties of Autocorrelated Time Series, Journal of the Royal Statistical Society, Series B, 8, 27-41.
Grandia, V. (2002), The Search for the Golden Rule: A Reality Check of Technical Analysis in the Dutch Stock Market, master thesis, University of Amsterdam.
