From Cam Hui, author on one of my must-read blogs Humble Student of the Markets.

In a blog post (Technical analysis as behavioral finance: “Behavioral finance is the school of thought that tries to understand human behavior in the context of what “should” be rational expectations”) Hui links a recent essay he wrote, available here (PDF) in which he reviews the studies and literature examining the efficacy of technical analysis. Hui concludes that ‘Technical analysis = behavioral finance’, that is, TA falls into the realm of modelling human behavior. He says:

  • Technical analysis can work
  • Technical analysis … (is) merely a set of tools, that are best used when you:
  • Understand the investment environment that you are in.
  • Build a model to exploit conditions in the current environment in a systematic and disciplined way.
  • Know the bet that you are making and know the limitations of the model. Most importantly, know when a model is going to fail with a changing investment environment.

Not everyone is going to be convinced, but its a good article to read this weekend. Feedback, as always, welcome.