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  • Essay / Theory of Technical Analysis - 717

    From the beginning of civilization, the question of ideal valuation has been a subject of great concern and controversy. The present study aims to investigate the technical approach to stock valuation in major stock markets across the world, including emerging and developed markets. The increase in the number of analysts and the considerable improvement in analysis techniques are phenomena familiar to any stock market investor. As a growing number of professionals seek new ways to improve investment performance, it is no surprise that in recent years an ever-increasing number of analysts have turned to technical analysis . Just ten years ago, the average portfolio manager, if he knew anything about technical analysis, considered it a kind of black magic. Today, almost all professionals are at least familiar with the terminology, and many make this analysis a major part of their decision-making process. Two factors lead us to conclude that major improvements in this art are on the horizon. The first factor is the growing number of professionals who devote their time and effort to analyzing stock prices. The second is high computing power. Steps taken in this direction so far have not been very helpful. Much academic effort has been devoted to the mathematical analysis of stock prices over the past decade, some of which is described by Nicholas Molodovsky in his excellent article in the renowned journal JSTOR. Much of this effort is aimed at proving that stock prices are essentially a random phenomenon and that attempts to forecast from them are almost useless. The analyst profession, ...... middle of paper ...... trends could be used to determine whether the major trend was up or down. Thus, according to the Dow Theory, each new peak in the averages would be noted. If, after a peak, the averages reacted, moved back to a point below the old peak, and then made a new bottom below the previous reaction floor, this would be evidence that an uptrend has ended and that a downward trend has started. There are other complications, of course, including the fact that both industrial and railway averages are used and it is necessary to confirm one with the other. But the above is just a basic summary of the theory. Due to the different use of this theory by different practitioners, it is difficult to design an effective record of one's performance over a period of time. Most users would agree, however, that its ability to evoke major market turning points, e.g. 1929, has been extremely good...