Don’t fight the tape! Technical Analysis Momentum and Contrarian Signals as Common Cognitive Biases
Don’t fight the tape! Technical Analysis Momentum and Contrarian Signals as Common Cognitive Biases

Summary/Abstract: Purpose: Stock market participants use technical analysis to seek trends in stock price chartsdespite its doubtful efficiency. We tested whether technical analysis signals represent typical andcommon cognitive biases associated with the continuation or reversal of the trend.Methodology: We compared investors’ opinions about the predictive power of technical analysissignals grouped into five conditions: real technical analysis signals associated with trend continuation (real momentum signals) or trend reversal (real contrarian signals), fake momentum or fakecontrarian signals, and fluctuation signals.Findings: Investors assigned larger predictive power to real and fake signals associated with trendcontinuation than to signals associated with trend reversal. Fake signals, which represented cognitive biases, elicited similar predictions about trend continuation or reversal to real technical analysissignals.Originality: Market players assess momentum signals to have greater predictive power than contrarian signals and neutral signals to have the least predictive power. These results are independentof whether technical analysis signals were well-known to investors or made up by experimenters.The hardwired propensity of our brains to detect patterns combined with the non-natural environment of the stock market creates the illusion of expertise that is not easy to dispe

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