Here is the abstract of the Batechor and Ramyar (2004) from page 1. Roy Batchelor and Richard Ramyar Cass Business School, City of London September 2006 Abstract There is a widespread belief in financial markets that trends in prices are arrested at support and resistance levels that are to some degree predictable from the past behaviour of the price series. Here we examine whether ratios of the length and duration of successive price trends in the Dow Jones Industrial Average cluster around round fractions or Fibonacci ratios. We identify turning points by heuristics similar to those used in business cycle analysis, and test for clustering using a block bootstrap procedure. A few significant ratios appear, but no more than would be expected by chance given the large number of tests we conduct. Keywords: Technical Analysis, Stock Market, Forecasting, Anchoring, Stationary Bootstrap JEL Classification: C15, C53, G10 Roy Batchelor, HSBC Professor of Banking and Finance, Sir John Cass Business School, City of London, 106 Bunhill Row, London EC1Y 8TZ, United Kingdom. Telephone: +44 207 040 8733, fax +44 207 040 8881 E-mail: r.a.batchelor@city.ac.uk Richard Ramyar, PhD Researcher (2002-2006), Sir John Cass Business School, currently of Ramyar Integrated Consulting. Telephone: +44 207 870 3185 E-mail: richard@richardramyar.com The conclusion begins on page 31. This is the conclusion: It is of course possible that our results are an artefact of the parameters of our testing procedure. We have experimented with shorter (10 day) and longer (40 day) average block lengths in our bootstrap, as against the base case of 20 days. We have also conducted tests using narrower (.01) and broader (0.05) bands around the hypothesized ratio values as against the base case value for Ã¥ of .025. None of these sensitivity tests undermine our basic, negative, result. Our conclusion must be that there is no significant difference between the frequencies with which price and time ratios occur in cycles in the Dow Jones Industrial Average, and frequencies which we would expect to occur at random in such a time series. In our introduction, we noted that empirical evidence from academic studies suggests that not all of technical analysis can be dismissed prima facie. The evidence from this paper suggests that the idea that round fractions and Fibonacci ratios occur in the Dow can be dismissed. On page 2 of this study is a reference to another study by Park and Irwin (2004). It is mentioned in the introduction to the study. See this text below: 1. INTRODUCTION This paper tests a popular but previously untested proposition about the behaviour of the stock market. The proposition is that when the market changes direction after a period of trending prices, the magnitude and duration of the next trend is not random, but depends on the magnitude and duration of the previous trend. Specifically we are interested in whether the ratios of successive trends cluster around Fibonacci ratios or âround numbersâ. The idea that price trends may be arrested at predictable support and resistance levels is one of many tools used by technical analysts. Technical analysis â the prediction of turning points in financial markets by chart-based methods - has long been popular among practitioners, but viewed with suspicion by academics. Burton Malkiel, in his classic book writes, among many similarly cutting remarks - âTechnical strategies are usually amusing, often comforting, but of no real valueâ (Malkiel, 1996, p161). The root of the problem is the failure of technical analysts to specify their trading rules and report trading results in a scientifically acceptable way. Too often, rules are so vague or complex as to make replication impossible. Too often popular texts contain dramatic examples of successful predictions of turning points, with no count of misses or false alarms. Recently, however, academics have begun to look systematically at some of the more easily replicable technical trading rules. Park and Irwin (2004) provide a comprehensive review of these studies. Of 92 studies published in the period 1988-2004, 58 reported positive excess profits from a technical rule, 10 yielded mixed results, and 24 reported losses. Even allowing for a bias towards publishing positive results, and the possibility that not all studies 3 properly accounted for transactions costs and risk, this does suggest that not all of technical analysis can be dismissed prima facie. to be continued......
continuation.... Now my comments to your post: By reading the above and a prior response I made to you in the thread Trend following.....Another Nail in the Coffin, it may be possible for you to reflect. Here is the post where I responded to you: 07-11-07 05:06 PM -------------------------------------------------------------------------------- Quote from marketsurfer: mike covel with some interesting words on trend--- can anyone make sense out of this-----admits trend doesn't exist, but then how can it be used?? what am i missing???? http://www.turtletrader.com/mp3/searching-for-trend.mp3 surf -------------------------------------------------------------------------------- The 2 minute expression by Covel is a very poor statement about a topic. There are many many things that he does not know about trends. These things I mention are facts....facts about trends. If you have heard Pring speak, he is in the same boat as Covel. When you sit in a session on trends with Oliver Velez, you will come to see a similar vagueness about trends, particularly in the area he avoids addressing: their beginnings. Prentice Hall representatives, Covel's publisher for his trend compilation, both in the financial department and the editing department, feel that there is still a lot left to be desired as well. Do not expect anyone to make sense of the snippet. Covel is not in a position to admit anything. Do get that straight. Covel is never going to be able to assign utility to trends. Covel cannot do that in any way. You are missing a lot. That is just the way it is in your realm or space. Read the Abstract of Magic Numbers in the DOW, Batchelor and Ramyar, Septembr 2006. The research examines the length and duration of successive trends in the Dow Jones Industrial average. This is research on a subject. The subject to be researched has to exist. It is possible that the subject of their research doesn't exist as you think Covel suggests. For people who make money using trends, they usually, over time become more knowledgeable, skilled and experienced. The mathematical representation of trends is a broad and exacting science. There is almost no more effective, efficient or optimal utilization of any financial representaion of markets than the mathematical representaion of trends. If Covel, Pring, Velez, Batchelor, Ramyar, Steenbarger or you ever got to see the mathematics related to trends it would make absolutely no difference at all. That is just the way it is. John Netto wrote a book that deals with trading to make money. 55 bucks when new. Now a used copy goes for up to 200 bucks. The book has trading information in it from a trader who knows how to trade. There is bullshit out there all over the place. And there are facts and science and coded software that defines things very accurately and correctly and in such a way that money can be extracted to the extent that the market offers. Some people can figure things out. Some people write about things that they have heard of. Some people cannot understand what others have figured out and there is little chance that any understanding can be found by anyone who is trying to understand a person explaining or reading something that the author has just heard about. Covel is missing just about everything on trends. You are worse off; you are missing what Covel is telling you he is missing. All of the above makes a point.. You and Covel precipitated his posting an edited version of the above in his blog. Now you are suggesting that you are informed. You are not. Essentially, Batchelor and Ramyar agree with Park and Irwin. How could they or any academic not agree. As well, Batchelor and Ramyar did a study of a topic (see above) the topic they chose turned out to be senceless for two reasons: lousy topic and no results as an artefact of the parameters of the testing procedure. FYI this is a common result of people who do not know how to conduct studies. In Park and Irwin this shows up as 10 studies that had mixed results; in Aronson it shows up throughout as explained plainly in this thread in a prior post. I do not care that Batchelor and Ramyar and Aronson fit into the insignificant statisitical category. They are not authoritative with respect to thier work because they failed intellectually. What Batchelor did do, however, was recognize that others were cited by Park and Irwin for succeeeding in doing studies. This all escapes your reasoning process and it does not escape mine. Make a note that the OP has been unresponsive to my most recent post to him. Why? Well it may have something to do with the work of Park and Irwin which roundly refutes his assertions. The OP has, ineffect, failed to make his point. I has disproved it from the vantagepoint of studies as a warm up drill. The OP may or may not begin to deal with the heart of the matter. I certainly am not going to offer proofs in other substantive areas if he is unable to do no more than offer opinions, his current vogue.
jack, im surprised that a man of your obvious intellect misunderstands and misreads the attached paper. enough of this pseudo scientific nonsense of yours designed to influence the naive', intellectually lazy and uninformed. what part of this conclusion of the paper don't you understand: <b> A few significant ratios appear, but no more than would be expected by chance given the large number of tests we conduct.</b> <b>even allowing for a bias towards publishing positive results, and the possibility that not all studies 3 properly accounted for transactions costs and risk, this does suggest that not all of technical analysis can be dismissed prima facie.</b> these conclusions are nebulous at best. so please jack, stop misleading. Is that all the TA community has?? regards, surf
this is unfounded speculation, since you obviously have no clue why I did this. Regarding why not responding, I don't hang around all day on ET waiting to answer posts.
No. it doesn't. Unless ANYONE can show evidence to that effect. This is a constantly repeated, but unfounded belief.
rcanfiel I respect your position as I agree to an extend on some of your comments but as you don't believe in T A perhaps you can tell us as to how we should deal with the market in general Would be good to hear the complete side of your story not only trying to prove TA doesn't work No offense intended by the way Thanks in advance
Folks, the impirical evidence is that plenty of individuals and institutions over the years have made money (some times a lot of money) using nothing but TA. Therefore TA can work. However this doesn't mean it will work for you or that you can optimize a given indicator on a given security and expect to have a money making machine. Yes, most results from TA are no better than random, (even a random walk can produce a positive slope over time). Maybe those people who make money by using TA are manifestations of survivorship bias. However, can anyone give reference that fundamental analysis alone is any better than random and doesn't produce survivorship bias? I think not. All you can say then is that TA can work, not that it does work.
If someone discovered a way to profitably forecast moves in finance markets using technical analysis, they probably would not be publishing a study on it. In that regard, studies regarding the validity of TA are greatly biased.
as a note of clarification--- this is all in good fun for me and learning experience. if TA works for you, great! i have no issues with that in the least---however, the evidence is greatly weighted toward TA being subjective, non testable, and an art form at best. when individuals use anecdotal evidence, etc as 'proof' is what needs to be addresed--not someone's success or lack thereof in using any trading method. different topics. hope this makes sense. regards, surf