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The Profitability of Technical Analysis: A Review

AgMAS Project Research Report No. 2004-04

106 Pages Posted: 15 Oct 2004  

Cheol-Ho Park

Chungbuk National University

Scott H. Irwin

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Date Written: October 2004

Abstract

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

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

Cheol-Ho Park

Chungbuk National University ( email )

Chungbuk 361-763, Cheongju
Korea, Republic of (South Korea)

Scott H. Irwin (Contact Author)

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
326 Mumford Hall, MC-710
Urbana, IL 61801
United States

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