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   This is a translation of the former paper published by André Gosselin on the OrientationFinance.com web site on May 30 2005 ( Read the original paper in French here).


   * Paper written by André Gosselin published in the "Disnat" bulletin.

   Technical analysis never had very good press among the economists, and even less among the professors of finance of our universities. The book which, since a quarter of a century, had hurt the most the technical analysis is indisputably the one written by the Princeton University professor, Burton Malkiel, named A Random Walk Down Wall Street.

   For more than 25 years, this best-seller of the financial literature (it is now the 8th edition) has defended with eagerness the idea that it is impossible to beat market over the long term, would it be with the assistance of the fundamental analysis or the technical analysis.

   If the fundamental approach is essential to evaluate properly the securities, Malkiel says, it is not the same with the technical analysis. Not only this approach does not allow the investor to retain interesting gains, but on top of that it does not have any utility for the correct operation of the financial markets. To summary, it is pollution in all respects.

   The price sequence of an index or any security, he says, does not provide sufficient information to beat the market. These prices are under the influence of so many and varied factors that it is impossible to claim that they contain their own logic in itself.

   In 1999, two professors of MIT, Andrew Lo and Craig MacKinlay, have published a book which goes in the opposite direction than Malkiel's. Its title: A Non-Random Walk Down Wall Street. The two researchers of MIT draw up a portrait much more positive and scientist of the technical analysis.

   Their report is clear: it is possible to generate yields higher than the market average when the technical analysis is adequately used, as price trend analysis and chart patterns (head and shoulders formation, triangles, etc...).

   Before the works of Lo and MacKinlay, the scientific study of the technical analysis was facing serious problems. How to check an investment technique which results mainly from art, the personal judgement and the interpretation of stock exchange charts by the analyst? The challenge of the researchers has consisted in finding a methodology able to detect, using optical readers and data-processing software, the patterns and geometrical figures to model them.

   Well, it is now done. It is now possible to test the value of the technical analysis with the same instruments which are used for the recognition of the fingerprints or the identikits. The technical analysis can finally be examined over long periods, no matter how many securities and graphs.

   Thanks to Lo and MacKinlay, it is now known that several tools and rules of the technical analysis make it possible to the investors to generate what is called, in financial language, over performing yields, higher than the average.

   Does that mean that the technical analysts obtain better results that the other types of investors? I don't think so. It takes a lot of discipline and rigour to get benefits from the technical analysis. And that is what the majority of those who are attracted by this investment approach are really short of.

A Random Walk Down Wall Street

Burton G. Malkiel

Special Price
US$ 14.35
in our bookstore

A Non-random Walk Down Wall Street

Andrew W. Lo and A. Craig MacKinlay

Special Price
US$ 37.95
in our bookstore

   André Gosselin

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