O'Reilly logo

Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David R. Aronson

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 7

Theories of Nonrandom Price Motion

At the risk of stating the obvious, if market fluctuations were completely random, TA would be pointless. TA is a justifiable endeavor if and only if price movements are nonrandom to some degree some portion of the time. This chapter offers several theories explaining why episodes of nonrandom price movements ought to occur in financial market prices.

Although the occurrence of nonrandom price motion is necessary to justify TA, this alone is not sufficient to justify any specific TA method. Each method must demonstrate, by objective evidence, its ability to capture some part of the nonrandom price motion. Part Two will evaluate a large number of TA rules with respect to their ability to do just that.

THE IMPORTANCE OF THEORY

Several new theories from the field of behavioral finance explain why price movements are nonrandom to some degree and therefore potentially predictable. Thus, these novel theories take a position that is contrary to the efficient markets hypothesis (EMH), a cornerstone of finance theory for over 40 years. EMH contends that price changes in financial markets are random and, therefore, unpredictable. Therefore, these new theories hold out hope for TA.

The reader may wonder why theoretical support for nonrandomness is even necessary. If a TA method has a profitable back test, isn’t that all that should be needed? It could be asserted that a significantly profitable back test not only establishes that markets are nonrandom, ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required