Technical Analysis for Stock Market

The origin of technical analysis could be traced back to the 17^th century in a book named Confusion de Confusiones [1688]: Portions Descriptive of the Amsterdam Stock Exchange, written by Joseph de la Vega.  In 18^th century, a Japanese rice trader, Homma Munehisa, invented the famous “CandleStick Charting” tool to help himself in rice trading business.  Charles Henry Dow, the co-founder of Dow Jones & Company, developed the Dow Theory in late 19^th century, which later became the fundamentals of modern technical analysis.

In contrast to fundamental analysis, which studies the stock market using info from financial statements and economic indicators, technical analysis focuses on historical price pattern to predict the future price movements.

Although professional traders and casual investors claim that they are generating positive returns in stock market using technical analysis, academic studies show no significant advantage of technical analysis in a mature stock market (Read more here).  However, another academic study shows that in emerging markets, technical analysis is able to generate positive returns for investors (Read more here).

Looking back in history, popular technical charting tools were invented during the time where the respective markets were still in a development stage.  As such, technical analysis may be useful for stock markets in emerging economies.  As the market becomes more efficient, the advantage of technical analysis tends to diminish.

However, recent developments in artificial intelligence (AI) make technical analysis a useful tool for mature market.   The definition of efficient market is “all relevant information is available to all market participants at the same time”.  With AI, it could capture the short time-frame where the market is “inefficient” (the time of information arrival for different market participants).  Thus, the condition for using technical analysis has been met.

In short, technical analysis is useful in emerging markets where the markets are not efficient.  Whereas in an efficient market, technical analysis still could be useful if it is AI assisted.