Quantitative Hedge Funds: Discretionary, Systematic, AI, ESG and Quantamental by Richard D Bateson

Author:Richard D Bateson
Language: eng
Format: epub
Publisher: World Scientific Publishing Europe Ltd.
Published: 2023-06-15T00:00:00+00:00

4.4.8 Technical analysis

Technical analysis or the study of market patterns has been around for a very long time and has a huge literature and following amongst both discretionary and systematic traders. It includes many theories and indicators, for example Bollinger bands, RSI, pendants etc. Interestingly, when rigorous science and backtesting is applied to these indicators, virtually all of them fail and consequently most are not used by mainstream hedge funds. I have a well-known and much used technical analysis book on my desk. Once, a couple of my former colleagues were assigned the job of testing as many of the strategies and theories contained within its around 1000 pages. Surprisingly over 95% of the technical strategies detailed failed miserably. Those that did were fairly simple and involved the concepts of support, resistance, ranges and breakouts.

One cannot automatically dismiss technical analysis and rule it out as hokum and bad science. There is a clearly academically established 52-week rule in equities. Often one observes that markets like to reach round numbers. For example, it is curious why the equity market in 2007 hit the same value it did in the dot-com peak of 2000. One of my first jobs in finance was as a junior USD swaps trader and my successful boss was fervent believer in technical analysis. Technical analysis is rooted in human behaviour and markets are complex systems based on this behaviour. The scientific process of systematic trading is reliant on statistics and it may be that the ephemeral effect of technical patterns eludes the scientific methodology. If there are too few observations, we can never formulate a proper theory.

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