How technical is technical analysis?
How technical is technical analysis?

Summary/Abstract: This paper discusses the arbitrariness involved by technical trading rules and the impossibility to prove, beyond any doubt, that these rule does not work. Based on the existing literature, we analyze whether technical analysis could be consistent with rational investment behavior and what are the plausible economic arguments for its abnormal profits. We discuss the inference problems that arise when testing the profitability of technical rules and the necessity of out-of-sample tests. Finally, using the moving average rule as one of the most tested technical rule, we identify the layers of subjectivity involved by the use of this rule in practice. The paper contributes to the literature by underlining the difficulty of setting up a standard methodological framework for the evaluation of technical trading rules.

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