Chapter 4. The Technical Analysis Controversy

Chapter Objectives

After studying this chapter, you should have a good understanding of

• The basic principles of the Random Walk Hypothesis (RWH)

• The historical distribution of stock market returns

• The basic principles of the Efficient Markets Hypothesis (EMH)

• The pragmatic criticisms of technical analysis

• How technical analysts respond to critics

Chapter Summary

Do Markets Follow a Random Walk?

A random walk occurs when future price movement cannot be predicted by observing past price movement. If prices move in a random fashion, then no underlying patterns can exist in stock prices.

Sornette has studied periods in the stock market when successive losses, referred to as drawdowns, have occurred. ...

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