Technical analysis, or maybe the statistical analysis of past price changes with the objective of forecasting future price changes, is really a hotly debated topic met with skepticism in numerous financial circles. Most traders and investors get caught in amongst three camps: People who believe it’s a science operates, those insisting it’s a self-fulfilling prophecy and those Brokers Station convinced it’s worthless as a tool of prediction.
TUTORIAL: Technical Analysis: Introduction
Today’s technical analysis is far from what existed inside past. The development of neural networks, genetic algorithms and other technologies, has dramatically improved accuracy in predicts and might mark a transfer of Brokers Station Review the industry. In this post, we’ll take a look at some empirical evidence to finally put this query to rest, using a specific focus on the foreign exchange (forex) market. (To know more details on genetic algorithms, read: Using Genetic Algorithms To Forecast Financial Markets.)
Does Technical Analysis Really Work?
Scientific study has been skeptical of technical analysis from the moment Eugene Fama and Marshall Blume found buy-and-hold better to any filtering techniques in “Filter Rules and Stock-Market Trading.” However, research aimed at Brokers Station foreign exchange markets has shown unusually large profits driven by technical analysis, who have challenged the efficient market hypothesis.
In 1995, Blake LeBaron published a study called “Technical Trading Rule Profitability and Foreign Exchange Intervention,” which proposed a possible answer why technical analysis am effective in foreign exchange markets. The report found out that predictability is essentially reduced, otherwise eliminated, when discounting days which the Federal Reserve was actively intervening.
The cause for the potency of technical analysis in foreign exchange markets may, therefore, be how the priorities differ between major players. Unlike unpredictable equity markets, central banks have a solid incentive to prevent currency prices at certain levels, which may make price movements more predictable, especially after they intervene. (To gain some information about technical analysis practitioner, read: The Pioneers Of Technical Analysis.)
Neural Networks and Technical Analysis
With astounding to find obscure patterns in data, neural network models have been growing in popularity. The models can approximate any nonlinear function in an arbitrary quantity accuracy, making them Brokers Station well suited for forecasting in a number of settings. Moreover, modern software has made these networks accessible to even individual traders and investors.