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The Handbook of Commodity Investing by DIETER G. KAISER, ROLAND FÜSS, FRANK J. FABOZZI

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CHAPTER 40

The Profitability of Technical Analysis in Commodity Markets

Cheol-Ho Park, Ph.D.

Economist

Korea Futures Association

Scott H. Irwin, Ph.D.

Laurence J. Norton Professor of Agricultural Marketing

University of Illinois Urbana-Champaign

Technical analysis is a method of forecasting price movements using past prices, volume, and/or open interest. Pring,1 a leading technical analyst, provides a more specific definition:

The technical approach to investment is essentially a reflection of the idea that prices move in trends that are determined by the changing attitudes of investors toward a variety of economic, monetary, political, and psychological forces. The art of technical analysis, for it is an art, is to identify a trend reversal at a relatively early stage and ride on that trend until the weight of the evidence shows or proves that the trend has reversed. (p. 2)

Technical analysis includes a variety of forecasting techniques such as chart analysis, cycle analysis, and computerized technical trading systems. Academic research on technical analysis generally is limited to techniques that can be expressed in mathematical form, namely technical trading systems, although some recent studies attempt to test visual chart patterns using pattern recognition algorithms. A technical trading system consists of a set of trading rules that generate trading signals (long, short, or out of the market) according to various parameter values. Popular technical trading systems include ...

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