Advantages of technical analysis:
- Quick and simple
- Do not involve messing with data and accounting problems
- Incorporate psycologyical factors
- Tell when to buy but not why to buy
Challenges to technical analysis:
- Empirical studies support EMH and show that technical analysis rules cannot be used to generate excess returns. EMH believes all available information impounded in the price and new information causes instantaneous price adjustment, technical relationship is not repeating.
- Statistics test of autocorrelations and runs: not move in trends
- If technical trading rules worked, market would self-destruct (call as self fulfilling prohecy)
- If the rule is successful, others will copy and neutralize it at last
- Too subjective, decision variable changes over time.
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