Federal Reserve Approves Technical Analysis
FEDERAL RESERVE FINALLY
APPROVES
During
August of 1995, the Federal Reserve Bank of New York
published a Staff Report under the title: "Head and
Shoulders: Not Just a Flaky Pattern." The report was
intended to examine the validity of the head and
shoulders pattern in foreign exchange trading. The opening
sentence in the introduction reads:
Technical analysis, the
prediction of price movements based on past price
movements, has been shown to generate statistically
significant profits despite its incompatibility with
most economists' notions of "efficient markets."
(Federal Reserve Bank of New York, c.L. Osler and P.H.
Kevin Chang, Staff Report No.4, August 1995.)
A
more recent report, published in the fall of 1997 by the
Federal Reserve Bank of St. Louis, also addresses the
use of technical analysis and the relative merits of the
Efficient Market Hypothesis. (Technical Analysis of the
Futures Markets was again cited as a primary source of
information on technical analysis.) Under the paragraph
titled, "Rethinking the Efficient Markets Hypothesis,"
the author writes:
The success of
technical trading rules shown in the previous
section is typical of a number of later studies
showing that the simple efficient market hypothesis
fails in important ways to describe how the foreign
exchange market actually functions. While these
results did not surprise market practitioners, they
have helped persuade economists to examine features
of the market... that might explain the
profitability of technical analysis.
Federal Reserve Approves Technical Analysis