Technical Analysis: Capturing Alpha in Trending Markets

Abstract

Technical analysis is a very common investment tool used by traders to attempt to earn returns great than the market average. This paper will first discuss the background of technical analysis and its implications to the efficient market hypothesis. A simulation is also conducted that back-tests eight commonly used technical trading strategies across a diverse set of seven futures markets to determine if the efficient market hypothesis holds. The results show that ·only the Japanese Yen produces abnormal returns, which is not sufficient evidence to refute the efficient market hypothesis. Finally,, the paper will try to rationalize the results by discussing arbitrage pricing theory, auto-correlations of the futures markets and other topics.