Thursday, 4 August 2016

A Random Walk Down Wall Street - Part Two 2: How the Pros Play the Biggest Game in Town

Chapter 7. Technical analysis and the Random walk theory

1. I personally have never known a successful technician. Technical analysis is anathema to the academic world.

2. Chartists believe momentum exists in the market. The “technical rules” have been tested exhaustively. The results reveal that past movements in stock prices cannot be used reliably to foretell future movements. The stock market has little, if any, memory. While the market does exhibit some momentum from time to time, it does not occur dependably and there is not enough persistence in stock prices to overwhelm the substantial transactions costs involved in undertaking trend-following strategies.

3. For example, technical lore has it that if the price of a stock rose yesterday it is more likely to rise today. It turns out that the correlation of past price movements with present and future price movements is slightly positive but very close to zero.

4. Yes, history does tend to repeat itself in the stock market, but in an infinitely surprising variety of ways that confound any attempts to profit from a knowledge of past price patterns.

5. The market is not a perfect random walk. But any systematic relationships that exist are so small that they are not useful for an investor.

6. Not one has consistently outperformed the placebo of a buy-and-hold strategy. Technical methods cannot be used to make useful investment strategies. This is the fundamental conclusion of the random walk theory.

7. Chartists recommend trades – almost every technical system involves some degree of in-and-out trading. Trading generates commissions, and commissions are the lifeblood of the brokerage business. The technicians do not help produce yachts for the customers, but they do help generate the trading that provides yachts for the brokers.

8. Even if markets were dominated during certain periods by irrational crowd behavior, the stock market might still well be approximated by a random walk.

9. All that can be said is that the small amount of info contained in stock market pricing patterns has not been shown to be sufficient to overcome the transactions costs involved in acting on that info.

10. No technical scheme whatever could work for any length of time. Any regularity in the stock market that can be discovered and acted upon profitably is bound to destroy itself. This is the fundamental reason why I am convinced that no one will be successful in using technical methods to get above-average returns in the stock market.

11. Using technical analysis for market timing is especially dangerously. Because there is a long-term uptrend in the stock market, it can be very risky to be in cash. A study by Seybun found that 95% of the significant market gains over the 30 year period from the mid-1960s through the mid-1990s came on 90 of the roughly 7500 trading days. If you happened to miss those 90 days, just over 1 percent of the total, the generous long-run stock market returns of the period would have been wiped out. The point is that market timers risk missing the infrequent large sprints that are the big contributors to performance.


A Random Walk Down Wall Street - The Get Rich Slowly but Surely Book Burton G. Malkiel
http://people.brandeis.edu/~yanzp/Study%20Notes/A%20Random%20Walk%20down%20Wall%20Street.pdf

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