Technical analysis

Technical analysis, is the practice, the art of predicting future asset price using the asset’s past prices and trading volume. The practice itself can be divided into chartism and quantitative methods. The former points the practice where technical analysts look and charts and try to discover certain patterns that may indicate certain future price movements. This is for example done using line or candlestick charts. Quantitative methods refer to the use of indicators that calculate future prices using past price or volume data or just simply calculate the likelihood of an asset going up or down. Indicators are for example, moving averages, exponentially weighted moving averages, rsi, bollinger bands etc.

The use of technical analysis should however not be simply blindly followed and risk should always be properly managed. Although in practice the use of technical trading indicators is widespread and very popular, even among professionals, its merits are largely questioned in scientific research. Evidence on the value of technical trading is rather mixed. Some say it has some merits, others do not find any value at all. In any case, the value of technical trading is to a large extent determined by transaction costs. Therefore, these should be carefully monitored when adopting an actively managed investment style.

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