Estimating the portion of technical analysts in a market

ABSTRACT

This article presents structural estimates of the portion of technical analysts in six markets. I find that the portion of technical analysts in the U.S. equity market has been decreasing since the 1970s. A simple asset pricing model predicts that both risk and return are increasing in the portion of technical analysts. This prediction is confirmed across stock market indexes for six countries.

JEL CLASSIFICATION:

• G12
• C11
• G02

KEYWORDS:

• Technical analysis
• market volatility
• model averaging

Acknowledgements

I thank the editor and referees for insightful comments. I also thank Zach Kowaleski, Phillip Li, Morris Mitler and Marcelo Pinheiro for helpful discussions.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ For the reverse-exponential moving average, I follow Zakamulin (2016) and use $\varphi =.8$.

² These expectations can also be motivated in a continuous-time setting by assuming that technical analysts start with the average price $\overline{p_t}=(1/t){\int }_0^t{p}_{u}du$, and infer that the changes to this average price over time are given by $d\overline{p_t}/dt=(1/t)\left(p_t-\overline{p_t}\right)$. The average price plus the recent change in price equals $\overline{p_t}+(1/t)\left(p_t-\overline{p_t}\right)$. Replacing $\overline{p_t}$ with a moving average leads to the same expression described earlier.

³ These data are available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.