Monday, February 05, 2007

Wasn't the Hoary Old Dow Theory Busted by Researchers Decades and Decades Ago?

Yes it was. It doesn't work. Just like every other publicly-disclosed charting strategy, when subjected to objective research, it fails, or succeeds randomly, same thing. Oh wait. There was one study, involving a trend-following approach, which suggested some mildly exploitable characteristics might exist, before taxes and trading costs. But not after. El Dorado is still not there. BTW, you do understand, that if it worked fifty percent of the time, you could do as well with coin flipping, right? These "charting" approaches can all be considered to be in a busted condition.

Sadly, the big brokerages sometimes still keep a few technical analysis research guys on staff. Technical analysis "systems" can produce frequent trading, and thus commissions. Guess which brokerages are officially on record that an entire body of objective research exists establishing that technical analysis, or "charting" does not work. I do not know of any. I do think that if sizable numbers of people were into trading based on animal entrails analysis, you would see brokerages adding staff with experience in that area and competing for their business.

There is a time and a place in this world for the exercise of faith. Technical analysis has never been shown by objective research to be a suitable object for the fervent faith placed in it by its disciples. Its use can cost you money, time, and lost real opportunities.

There are things that have worked in investing. They are not secret. Work is required to learn and employ them. They take time, and are not splashy. Charting is not one of them. Charts can beautifully explain what has happened, or illustrate a point, but have zero predictive value. Zero. That's not opinion, but the consistent conclusion of a mountain of research papers by many brilliant academics.


Transports hit new high, triggering Dow Theory buy signal - MarketWatch

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