echnical analysis is the use of past price and volume relationships to forecast T price movements. This type of analysis is especially popular in the futures markets, where high leverage, high liquidity, and low brokerage costs permit quick trading profits (and losses). According to Fama (1970), however, the capital markets are characterized by the weak form of the Efficient Market Hypothesis (EMH), a hypothesis which states that the ex ante expected return from a technical trading system cannot be greater than that from a naive buy-and-hold strategy of equal risk.
Numerous tests of the effectiveness of technical analysis in the futures markets have been undertaken by various distinguished authors, including Smidt (1965), Stevenson and Bear (1970), Leuthold (1972), and Irwin and Uhrig (1984). Most such tests have focused on the profitability of certain mechanical trading strategies, and the evidence is mixed.
However, all such tests are subject to dispute. Research which uncovers a profitable trading system and therefore rejects the weak form of the EMH are subject to the Tomek and Querin (1984) criticism that some trading strategy is always successful ex post, even in a random-walk world. On the other hand, studies which reject the possibility of trading profits are subject to the technician's critique that the traditional tests employed by researchers only reject isolated technical tools, whereas most technicians use a variety of different indicators in a variety of different ways. In fact, much of technical trading is judgmental and cannot be tested mechanically. The only realistic test of the usefulness of technical analysis is to examine the public performance of professional technicians.
Previous studies have been conducted on the general performance of professional futures traders. For example, Houthakker (1957) and Rockwell (1967) have found *The helpful comments of two anonymous reviewers are gratefully acknowledged.