An alternative test for weak form efficiency based on technical analysis

Abstract

This study proposes a test for weak form efficiency based on the practitioner's approach to technical analysis. Previous studies typically make inferences on weak form efficiency based on the empirical results of testing only one class of technical rules–trend indicators. The practitioner's approach, on the other hand, typically involves the simultaneous use of trend indicators and other confirming indicators because trend indicators do not sufficiently capture the information content in past prices. By combining trend indicators with confirming indicators that are also based on the detection of trends in past prices, it is possible to construct a superior technical trading strategy that captures a more comprehensive aspect of predictability in past prices. Applying the technical trading rules to data on five Asian-Pacific stock markets, the evidence suggests that a test for weak form efficiency based solely on trend indicators is noisy and that the alternative test proposed in this study is significantly more effective in capturing the information content in past prices. An examination of weak form efficiency based on this alternative test suggests that weak form efficiency is determined by factors other than technological progress.

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