The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals
Summary
Andrew Lo and Jasmina Hasanhodzic wrote this history of technical analysis, tracing attempts to forecast prices from past prices from ancient records through to modern quantitative trading.
The historical material covers Babylonian commodity price records, Japanese rice trading at Osaka and the candlestick methods developed there in the eighteenth century, Dutch and English early market commentary, the American development through Charles Dow, William Hamilton and Robert Rhea, the pattern-based approaches of Richard Schabacker and Ralph Elliott, and the twentieth-century systematisation through Edwards and Magee.
Lo's interest is not antiquarian. His adaptive markets framework holds that behavioural regularities in prices exist and change as participants adapt, and he treats technical analysis as an early and unsystematic attempt to identify such regularities. He argues that the academic dismissal of technical analysis conflated the specific claims, many of which are unfounded, with the general proposition that past prices contain information, which the momentum literature has since supported. He and Hasanhodzic are careful to distinguish testable claims from untestable ones. The book is short, illustrated and aimed at a general readership. It does not evaluate specific technical methods rigorously, which readers hoping for that will find disappointing.
Key takeaways 7
- Attempts to forecast prices from past prices appear in the earliest surviving commercial records and recur across every trading culture.
- Japanese rice traders developed candlestick charting methods in the eighteenth century, independently of Western technical analysis.
- Lo argues that academic dismissal of technical analysis conflated its specific unfounded claims with the general proposition that past prices carry information.
- The momentum literature has established that past returns predict future returns, which is a technical claim validated by academic method.
- Technical methods that work are competed away as participants adopt them, which the adaptive markets framework predicts.
- Most published technical patterns are not stated precisely enough to be tested, which is the field's central methodological failure.
- Dow's original writing was commentary on market conditions rather than the mechanical system later constructed from it.
Who should read it
Investors interested in the history of price forecasting and in the relationship between technical analysis and the academic momentum literature.
About Andrew W. Lo
Charles E. and Susan T. Harris Professor, MIT Sloan School of Management; Director, MIT Laboratory for Financial Engineering; founder of AlphaSimplex Group
The Econometrics of Financial Markets and the variance-ratio work with MacKinlay are primary sources the field builds on, and the Adaptive Markets Hypothesis is a named framework in its own right.
MIT Sloan School of Management, MIT Laboratory for Financial Engineering, AlphaSimplex Group
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