ver, that approach would never predict a market shift. Therefore, technical analysts attempt to identify patterns in the behavior of equity securities and the behavior of equity markets that will allow them to compare the activity pattern in a current period to activity patterns in past period to predict future movements in equity stock prices.
Strengths and Weaknesses of Technical Analysts
The principal strength of technical analysts is that they consider the behavior of an equity stock in a broader perspective than the narrow range of date related to the company underlying an equity stock. The broader perspective facilitates the assessment of indirect factors on the behavior of an equity security. The principal weakness of technical analysts is that they rarely consider the characteristics of the underlying companies that hold the potential to behave at variance from a trend even in those instances when a predicted trend materializes.
Assessment of Technical Analysis: The Good and the Bad
Random walk refers to the process of determining whether or not a statistical pattern is present in a particular dynamic activity, or whether movements within the activity are random. The random walk concept, as it is used in common stock portfolio analysis and investment analysis, refers to the application of the runs test to stock market prices and returns. Specifically, the runs test seeks to ascertain the presence in a set of data of a recurring pattern which would enhance the ability to predict future movements in the data set. If such a recurring pattern cannot be found, it is assumed that movements in the data set follow a random walk.
Thus, a good thing about technical analysis is that the approach attempts to reduce the level of uncertainty involved in predicting future behavior by eliminating from consideration those equity securities for which patterns cannot be identified. A bad thing about technical analysis is the ...