Today's technical analysis is a far cry from what existed in the past. The development of neural networks, genetic algorithms and similar technologies, has dramatically improved accuracy in predicts and may mark a shift in the industry. In this article, we'll take a look at some empirical evidence to finally put this question to rest, with a specific focus on the foreign exchange (forex) market. (To know more about genetic algorithms, read: Using Genetic Algorithms To Forecast Financial Markets.)Does Technical Analysis Really Work?
Another study called "Using Recurrent Neural Networks to Forecasting of Forex," provides more empirical evidence that neural networks can provide statistically reliable prediction of foreign exchange rates. The model used in the study reportedly obtained 80% accuracy in prediction, confirming that neural networks can be very effective in making foreign exchange predictions. (To know more about neural networks, check out: Neural Networks: Forecasting Profits.)
Components of an Effective System
There are several key considerations to take into account when developing a technical analysis-based trading system for the foreign exchange markets, according to the aforementioned studies on the topic. Here are a few key points to keep in mind when developing a system:
A Word from the Opposition
The effectiveness of technical analysis-based trading systems is still disputed by many researchers. By using suspect testing data samples or excessively-customized trading systems, these researchers believe that the results from these studies may be misleading. Ultimately, this is difficult to tell without applying the system to new data sets, but traders should be aware of the concerns.
The two key concerns include:
The Bottom Line
Technical analysis may not be proven to work in the equity markets, but there is growing evidence of its efficiency in the forex markets. The success has largely been attributed to the predictability of interventions seen largely in safe-haven currencies by central banks. However, some researchers remain skeptical, given the potential for at least two types of misleading analysis techniques.
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