Technical Analysis - Myth or Magic?

Table of Contents

1. INTRODUCTION

2. SHARE ANALYSIS AND ITS PREMISES

2.1 CLASSIFICATION AND DEVELOPMENT

2.2 DOW THEORY IN CORRESPONDENCE WITH TA

2.2.1 The Averages Discount Everything (except ‘Acts of God’)

2.2.2 The Three Trends

2.2.3 The History repeats itself

2.2.4 Criticism of the Dow Theory

2.3 RANDOM WALK THEORY IN CORRESPONDENCE WITH BHS

2.3.1 Criticism of the Efficient Market Hypothesis

2.4 FUNDAMENTAL ANALYSIS

2.5 TECHNICAL ANALYSIS VERSUS FUNDAMENTAL ANALYSIS

3. METHODOLOGY

3.1 TEST CONDITIONS

3.2 TESTED INDICES

4. INSTRUMENTS OF TECHNICAL ANALYSIS

4.1 INDICATORS

4.1.1 Moving Averages

4.1.2 Moving Average Convergence Divergence

4.1.3 Bollinger Bands

4.2 OSCILLATORS

4.2.1 The dilemma of Oscillators

4.2.2 Momentum

4.2.3 Relative Strength Index

4.2.4 Slow Stochastic

4.2.5 Combination of Indicators and Oscillators

4.3 APPROACH TO PERFORMANCE TESTS

5. RESULTS/FINDINGS

5.1 BHS

5.2 EMA

5.3 MACD

5.4 BOLLINGER BANDS

5.5 MOMENTUM

5.6 RSI

5.7 SLOW STOCHASTIC

6. ANALYSIS

6.1 EMA

6.2 MACD

6.3 BOLLINGER BANDS

6.4 MOMENTUM

6.5 RSI

6.6 SLOW STOCHASTIC

7. CONCLUSION

Objectives & Research Themes

This dissertation investigates the efficacy of Technical Analysis (TA) by evaluating whether specific trading tools can consistently outperform a passive Buy-and-Hold Strategy (BHS). The research aims to determine if active, computer-assisted trading systems, which remove emotional bias, can provide superior risk-adjusted returns compared to traditional fundamental investment approaches across diverse international stock indices.

• Comparison of Technical Analysis versus Fundamental Analysis and Buy-and-Hold Strategy.
• Evaluation of market efficiency and the validity of Random Walk Theory.
• Performance backtesting of Indicators (Moving Averages, MACD, Bollinger Bands) and Oscillators (Momentum, RSI, Slow Stochastic).
• Analysis of different stock market dynamics (DAX, S&P 500, NIKKEI 225) over a 21-year period.
• Application of Behavioural Finance theories to explain market fluctuations and investment outcomes.

Excerpt from the Book

Summary of Chapters

1. INTRODUCTION: Outlines the research intent to compare Technical Analysis with the Buy-and-Hold Strategy using various indicators across three global indices.

2. SHARE ANALYSIS AND ITS PREMISES: Reviews the theoretical foundations of market analysis, focusing on Dow Theory, Random Walk Theory, and the core differences between Fundamental and Technical Analysis.

3. METHODOLOGY: Defines the rigorous test parameters, including a 21-year period, capital management rules, and the selection of indices like the DAX, S&P 500, and NIKKEI 225.

4. INSTRUMENTS OF TECHNICAL ANALYSIS: Provides detailed technical explanations of the chosen Indicators and Oscillators and justifies the specific configurations used for the backtesting.

5. RESULTS/FINDINGS: Presents the raw performance data for each trading approach, categorized by index and specific indicator, including nominal and inflation-adjusted results.

6. ANALYSIS: Evaluates the performance outcomes, discussing why certain strategies succeeded or failed in specific market conditions such as Bull, Bear, or Sideways markets.

7. CONCLUSION: Synthesizes findings to address the research question, discusses limitations, and suggests future avenues for research into combining traditional and modern TA.

Keywords

Technical Analysis, Fundamental Analysis, Buy-and-Hold Strategy, Efficient Market Hypothesis, Random Walk Theory, Moving Averages, MACD, Bollinger Bands, Relative Strength Index, Momentum, Slow Stochastic, DAX, S&P 500, NIKKEI 225, Behavioural Finance

Frequently Asked Questions

What is the core purpose of this dissertation?

The research investigates whether Technical Analysis (TA) can generate superior performance compared to a passive Buy-and-Hold Strategy (BHS) by using a systematic approach to market timing.

Which specific indices were tested in this study?

The analysis focused on three globally significant indices: the German DAX, the U.S. Standard & Poor’s 500 (S&P 500), and the Japanese NIKKEI 225.

What is the primary research question being addressed?

The dissertation explores whether active TA is a productive investment approach capable of outperforming the passive BHS while considering various market cycles over a 21-year timeframe.

Which methodology is employed to measure performance?

The study utilizes numerical backtesting through Excel, applying specific Indicators (EMA, MACD, Bollinger Bands) and Oscillators (Momentum, RSI, Slow Stochastic) to historical price data.

What does the main body of the work cover?

The main body examines the theoretical premises of share analysis, details the functionality of technical instruments, presents quantitative results, and performs an in-depth analysis of why certain strategies performed differently across various markets.

What are the key keywords defining this research?

Key terms include Technical Analysis, Fundamental Analysis, Buy-and-Hold Strategy, Efficient Market Hypothesis, various specific trading Indicators and Oscillators, and market correlation.

Did the study find the Efficient Market Hypothesis valid?

The theoretical and practical analysis concludes that the Efficient Market Hypothesis does not adequately explain real-world market behavior, as technical indicators demonstrated the ability to influence investment outcomes.

Why was the DAX chosen as one of the primary indices?

The DAX serves as a key representative of European equity markets, and the study matched its available historical data against the other indices to ensure a fair, "like-with-like" comparison.

What impact do transaction fees have on the performance results?

The study clarifies that while transaction fees were excluded for the TA backtests to simplify the model, their omission likely inflates the reported performance of high-frequency indicators.