CHAPTER 4 – TECHNICAL ANALYSIS CONTROVERSY Flashcards
What are some advantages of Fundamental Analysis?
Studies show that buy and hold fundamental approach outperforms.
Explanations are logical, availability for concrete information, proven relationships between growth/value and stock prices, provides an excellent understanding of company business/story.
What are some advantages of Technical Analysis?
Easy to analyze, adaptable to all market, can be used to follow many market, can easily see the big picture. Risk management can be clearly defined, it save time, can be precisely defined and tested wih objective signals, analyzes price to forecast price.
What are some disadvantages of Fundamental Analysis?
Info. dissemination can be inaccurate, wrong info (financial data misleading, fraudulent and lagging), diffeerent accounting standards, takes too much time to analyze the data and the price may start to move as you are researching, better timing needed of when to buy, can use a logical way to substantiate (prove) irrational prices.
What are some disadvantages of Technical Analysis?
Oftentimes subjective (personal), must learn concept, can disregard all fundament, has a short term bias, makes you sell a big winner too early. Technical strategies usually underperform buy and hold.
What is the problem between Fundamental and Technical Analysis?
they often conflict which each other and gives you inconsistent buy a and sell signals.
What are criticisms (of one paradigm vs. the other) when it comes to Fundamental Analysis?
RWH (Random walk hypothesis)/EMH (Efficient Market Hypothesis) - prices are not completely random/efficient, prices have “memories” and exhibit serial correlation, evaluation multiples are relative and subjective too!
What are criticisms (of one paradigm vs. the other) when it comes to Technical Analysis?
For short term trading only, is a self fulfilling prophecy, subjective, using past price data to forecast future goes against RWH/EMH, technical analysis is “voodoo”!
What are assumptions of Fundamental Analysis?
Investors are rational, prices follow RW, market are efficient - EMH, returns are normally distributed and arbitrage is possible.
What are assumptions of Technical Analysis?
Investors are irrational (emotions, behavior and sentiment influence security prices), Price discounts everything, prices determined by supply and demand, prices are non-rrandom and inefficient - fat tails/drawdowns, history repeats and rhymes, prices trend, patterns form in trends and patterns are fractal.
What are the principal theoretical arguments against technical analysis?
the Random Walk Hypothesis (RWH) and the Efficient Markets Hypothesis (EMH).
Define the term Drawdowns
the period of successive losses. (losing 2%, 3% and on the third day 6%)
Define the term Market efficiency
is a description of how prices in competitive markets respond to new information.
