Monday, July 30, 2007

Lesson-4 Criticism against Tech Analysis

Lack of evidence
Some academic studies say technical analysis has little predictive power, but other studies say it may produce excess returns.

Efficient market hypothesis
The efficient market hypothesis (EMH) by Economist Eugene Fama, advocates that if prices quickly reflect all relevant information, no method (including technical analysis) can "beat the market." Developments which influence prices occur randomly and are unknowable in advance.

EMH advocates that while individual market participants do not always act rationally (or have complete information), their aggregate decisions balance each other, resulting in a rational outcome (irrational optimists who buy stock and bid the price higher are countered by irrational pessimists who sell their stock, until the price reaches equilibrium).

Likewise, complete information is reflected in the price because all market participants bring their own individual, but incomplete, knowledge together in the market.


Excerpts,contents Re-edited by me and with contents courtesy-Investopedia and answers.com


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