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If financial markets are efficient why does technical analysis still exist?

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Introduction

If financial markets are efficient why does technical analysis still exist? Introduction The implication of EMH for investment management The underlying assumption behind Technical analysis How do technicians view the market? Any example Critically illustrate whether market efficiency and technical analysis can be mutually exclusive or not Introduction In the project : I will explain If financial markets are efficient why does technical still exist .In the first part I will explained what is Efficiency Market Hypothesis ,introduce three form of EMH and the implication of EMH for investment management. The second part is about Technical analysis in this part I will introduce TA and find out the assumption of TA .The third part I will use two technical indicator apply to 1 year HSI. To find out technical analysis weather can make profit from market. If investor can use Technical Analysis to make profit from market that means market efficiency and technical analysis no mutually exclusive I will explain further in this part. Introduction of EMH The efficient markets hypothesis (EMH), point out that current stock prices fully reflect available information about the value of the firm, therefore investor can not earn excess profits by using this information. There have three versions of the Efficient Market Hypothesis: the weak, semi strong, and strong forms of the hypothesis. These versions differ by their notions of what is meant by the term 'all available information.' ...read more.

Middle

Therefore the best portfolio strategic is passive management such as create an index fund, which is a fund designed to following the benchmark index of stock. Technical analysis Technical analysis attempts to use recurring and predictable patterns in stock prices to generate superior investment performance. Technicians believe that whatever the fundamental reason for change in stock price, if the stock price responds slowly enough, the analyst will be able to identify a trend that can be use during the adjustments period. The key to successful technical analysis is slow response of stock prices to fundamental supply and demand factors. Technical analysts study records or charts of past stock prices, hoping to find patterns they can use to make profit. Technicians do not deny the value of fundamental information, but believe that prices only gradually close in on intrinsic value. As fundamentals shift, astute traders can exploit the adjustment to a new equilibrium. Much of technical analysis seeks to uncover trends in market prices. This is in effect a search for momentum. Momentum can be absolute, in which case one searches for upward price trends, or relative, in which case the analyst looks to invest in one sector over another. Relative strength statistics are designed to uncover these perceived opportunity Technical analysis also uses volume data and sentiment indicators. These are broadly consistent with several behavioral models of investor activity. ...read more.

Conclusion

Take 14 days for estimate the stock prices movement. RSI is between 0 to 100 .If lower than 30 is oversold and higher than 70 is overbought. For example the stock price is go up very fast then the index also go up very fast to 70or above. If the index is up to 70 above that means the stock is overbought then the price may be drop down at soon. If you buy a stock at that time you are very dangerous. Conversely, the stock is oversold. The stock prices may be rebound soon. You should buy stock at this moment. This chart I apply Bollinger Bands to 1 year HSI .We can see that when HSI .If the price is touching the top of Bollinger Bands. The price will drop and if the price is touching the lowest of Bollinger Bands that means the stock price is too low .The price will rebound .Which mean that in Hong Kong market we can use this technical indicator to actively management the portfolio such as sell at top of Bollinger Bands and buy at lowest of Bollinger Bands. This chart I apply Relative Strength Index to 1 year HSI According the chart we can see that when HIS is overbought then the price may be drop down at soon. Conversely, the HSI is oversold. The stock prices may be rebound soon. Therefore we can buy at oversold and sell at overbought to earn the money. Reference http://www.e-m-h.org/ClJM.pdf http://www.investopedia.com/articles/02/101502.asp#axzz1aGBksBeO http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp#axzz1aGBksBeO http://www.aastocks.com/tc/stock/DetailChart.aspx?Symbol=110000 http://economics.stanford.edu/files/Theses/Theses_2002/Wong.pdf ...read more.

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