Archive for August, 2012

A Brief Introduction to the Austrian Case for Technical Analysis

August 30th, 2012 No comments

Economists of the Austrian school know that economics is a deductive and qualitative science. This means economic theories build on one another logically rather than being discovered through experiment, and that economics can only indicate whether we can expect more or less of something rather than the exact amount. Investing according to fundamental analysis seems a more natural fit to an Austrian Economist than speculating according to technical analysis, which relies on looking at historical data. But my goal here is to make the Austrian case for technical analysis.

Austrian economists know that the price system coordinates economic activity. If some event causes a good to be in short supply, this causes the price to rise, and so people who consume the good will want to consume less while those who produce the good will want to produce more. Producers and consumers do not necessarily need to know why the price has changed–the simple fact that it has changed is sufficient to coordinate their behaviors. Faced with the complexity of a modern economy where it is impossible to know all the relevant factors, price is vital to coordination.

The same is true of stocks. At any given time, any number of fundamental factors are in play, but the stock is traded at a price, and that price is sufficient to coordinate buying and selling. Furthermore, although technical patterns are often referred to as being “psychological”, time-and-sales data represents not states of mind but rather actual instances of human action. So the task is to explain the past data and react to indicators, and it is from this perspective that I will examine chart patterns.

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August 29th, 2012 1 comment

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