A new piece of academic literature argues that if you are an individual investor trading options on the basis of technical analysis, you have made some very poor decisions. The researchers studied Dutch discount brokerage clients for the period 2000-2006. The key take-away:
That translates to a cost of about 8.5% a year for normal traders, and about 20% a year for high rollers.
We had also linked to studies in the past that looked at specific signals. For example, Adam Grimes ran Fibonacci ratios through the grinder. His conclusion: mathematically it does not make sense for traders to use Fibonacci retracements when trading.
When you put these two studies together, it leaves us with an interesting question: why bother with technical analysis when a) it doesn’t work in the aggregate, and b) one of the most popular charts, Fibonacci ratios, have no statistical basis in fact?
In a recent interview with Josh Brown, technician Greg Harmon had this to say:
In my mind, looking at a chart is a bit like getting a “hall-ticket” pooja done at the Ganesha temple before the exams. You know you have studied hard and done your home-work, but if not-pissing off the Gods costs just Rs.100, you might as well get that done too.
- And the chart says: oh dear God no
- Four Questions for Trader Greg Harmon
- Testing Fibonaccis (1/2)
- Fibonacci Conclusions (2/2)
- New Paper Says That Chart-Obsessed Technical Analysis Traders Are Fantastic At Losing Money (businessinsider.com)
- Nifty Gap Analysis (stockviz.biz)
- Will the real arbitrageur please stand up? (stockviz.biz)
- Overcoming the 5 common mistakes that investors make (stockviz.biz)