Does technical analysis actually work?

Photo Attribution-ShareAlike 4.0 International(CC BY-SA 4.0)

Many traders have claimed to use technical analysis to guide their forecasts and hence make money on the financial markets using this method of analysis, however in this article I will actually argue my case against it. But firstly, what does it actually mean?

Technical analysis essentially entails the use of past price information to predict future price movements. For example, a basic (albeit crude) way to use technical analysis would be to say that if Stock A has currently established a support level of $25 a share over a period of, say, a few months, and today it reaches that level again, but breaks it, dropping to $24.50 a share, then that is a bearish signal on Stock A in the near term future. To me, the first problem with this is that you ONLY use price to inform your trading decisions.

The theory of value investing can give us a valuable lesson to relate to this point – human beings are irrational and hence the market does not always accurately value different companies. For example, during the euphoria associated with the early stages of the dot-com bubble Pets.com shares rose to a high of $14, with the company becoming defunct not even one year later. Such behaviour is indicative of the fact that share price does not always tell the full story of a company’s basic fundamentals, and simply trading on technical indicators is to rely on human emotion rather than solid fundamentals, which is a recipe for potential losses. This illustrates the first deficiency of technical analysis: the fact that the share price of a company is not the sole indicator of its business fundamentals.

However, a counterargument to this point would be that it is indeed possible to use technical and fundamental analysis in tandem to achieve profitable results. While this may be true, it’s interesting to question how much of this profitability is down to the technical analysis itself, and how much is down to just luck. Technical analysis is fraught with ambiguity; different methods of technical analysis have been seen to be contradictory to each other and, moreso, applying different methods of analysis to different financial instruments can possibly yield the same result. There is little room for nuance or financial instrument-specific related analysis actually related to the company or currency pair (for example) itself. This is surmised well in a quote from Warren Buffett, where he says “I realised technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer.” Much of technical analysis is also based on human psychology, which renders it increasingly invalid given the increasing prevalence of algorithm-based trading strategies in the financial markets.

Moreso, arguably for technical analysis to work in analysing different financial instruments an implicit assumption is that traders and investors have perfect information about the underlying instrument being traded. To falsify this, let’s use a case study:

Volkswagen AW

On the 21st of September, 2015, the first trading day after which the Environmental Protection Agency (EPA)’s Notice of Violation to Volkswagen (VW) was made public, the share price of Volkswagen AG fell by 20% on the Frankfurt Stock Exchange. Hence, all forecasts of this share price before the EPA’s announcement based on technical analysis were either completely wrong, or simply correct due to pure chance. While, indeed, fundamental analysis would have also been unable to predict this happening, the 24.7% decline in sales of Volkswagen vehicles in the US in November 2015 from November 2014 at least provides a fundamental indicator of a potential impact on VW’s bottom line, which share price (although it may have done in this case) is not at all guaranteed to do, as there may be other, external influences on the share price that cloud the impact of this scandal.

To conclude, in my opinion technical analysis is a flawed method of analysis of financial market instruments for three main reasons, the first of which is that price does not always reflect all information freely available. In addition to this, the fact that the analysis leaves little room for financial instrument-specific related nuance and also that there may be other information which is not freely available and thus not reflected in, for example, share prices, discredits the notion of technical analysis as a feasible method of analysing the financial markets. Although many traders claim to have successfully traded the financial markets using technical analysis, for the reasons mentioned above I personally do not find technical indicators worth the time compared to fundamental indicators.

Sorry for not writing for so long – public exams really took my time away!

On obstacles to poverty alleviation in India

Step foot (carefully) on the streets of the Delhi megalopolis and you’ll find an explosion of colour and a cacophony of all sorts of weird and wonderful noises. In some ways, it’s the archetypal developing city, with disorganised shops lying around in wide, bending alleyways that look almost as if they’re the fruits of a child’s imagination. In others, however, Delhi has its own unique aura, the quintessential, all-encompassing Indian tinge that has had foreigners from the Mughals to the British flocking like flies to its soil throughout history. Despite this, however, there is an elephant in the room, lying wearily beneath the glitz and glamour of a hugely unequal and somewhat segregated Indian society. You probably already know what it is: poverty. 2012 Indian government projections suggest that 21.9% of the Indian population are below its official poverty limit – to put that into context, it means that almost 1 in 4 Indians are affected by the scourge of poverty. Despite substantial amounts of aid being given to the Asian country to help solve the problem, it’s not even remotely close to going away at all. This is because of deep and wide-ranging problems in the framework of poverty alleviation projects in India, one of which is information failure in the microfinance sector leading to excessively high interest rate loans.

Primarily in Indian rural communities, a large problem with regards to supplying loans to low-income  households is that loans are advertised at lower interest rates than they are in reality. Given the relative lack of education in these areas, exploitative moneylenders can easily demand money unlawfully from families, citing a higher interest rate than the borrowing family had initially thought. Hence, this asymmetric information between lenders and borrowers, combined with the high operational costs of face-to-face lending to these communities in the first place, results in interest rates that frequently reach levels above 50%. To combat this, it’s logical that the government could introduce subsidies for microfinance institutions to reduce overall costs, thereby resulting in the pushing down of interest rates through the competition of the free market mechanism (the sheer numbers of microfinance institutions involved makes this method viable for application). Furthermore, the Indian government could make efforts to introduce a database of sorts for each rural community, spearheaded by a government-appointed official, detailing each microfinance institution and the details of the loans that they are providing to people in these communities, decreasing the potential for exploitation of borrowers. Given that corruption is such a prevalent problem within almost every Indian institution that exists, deterrents such as substantial jail sentences should be given to anyone exploiting the system, along with many avenues for which people to complain about unjustly high interest rates without fear. Obviously, this wouldn’t solve the problem entirely, but it would go a long way to decrease interest rates and therefore provide a more sustainable alternative revenue stream for families starting businesses on the back of this loan.

Moreover, while children going to school and sitting in classes matters, the end goal of all of this is for them to have an education, gaining transferable skills which they can take to work, boosting the standard of living for themselves, their families, and the wider community. In India, however, while the number of children going to school has been increasing, the number of people getting an education is a greatly different story. In 2009, India ranked 73rd out of 74 countries sampled with regards to the extent of the children’s knowledge regarding various subject matters, indicating that although children are going to school, they are actually not learning very much at all. This is in part because teachers believe that they can get away with not working as hard as possible to educate their students, due to no system of rewards or punishments being in place to provide either positive or negative incentives to teach. Therefore, what I propose is as follows: establish a more rigorous, practical system of testing for Indian children by an independent organisation to each class in schools, with positive incentives in the form of bonuses being paid to teachers whose class performs significantly well. Due to negative incentives promoting negativity and eventual apathy in the school environment, it would be unnecessary to include them with the same frequency as positive incentives, however if a teacher’s class has been doing badly for a sustained period of time, they should take a compulsory training class and be forced to accept a decrease in wages, or leave the school entirely. To make the whole system fair, classes should be allocated based on a test conducted to determine each student’s aptitude when they enter the school, making sure that the aptitude levels of each class are relatively similar. Whilst there is no suggestion here regarding how to make more children go to school, this is because it is already happening in India on a large scale, and so therefore we now must focus on how to maximise learning from going to school itself, in order to pull more and more families out of poverty.

Infrastructure has developed hugely in India since the pro-market reforms of 1991; nowadays in India, people have more opportunities than ever before due to more alternative routes to success. However, despite this, the lack of aspiration shown by some of the poorest people in India has continued on from previous years; they feel that high profile, white collar jobs that can pull their family out of poverty are out of their reach. This is because if the poor’s attempts to find a source of income do not work out, the loss that they could have faced both in time and monetary value could cripple them further than they already have been. While there is no silver bullet to fix this problem, the only way in which it could be somewhat ameliorated is through exposing the poor in these communities to people who have succeeded in the past. There is the potential that the effects of supplying information through media to these communities could have little to no effect, as the potential consequences of failing are so crippling. Hence, it is important to focus on other reforms so that people are more and more exposed to others who have succeeded, and the idea is that the allure of success would eventually drive some people to take risks, catapulting them out of the poverty trap. The most difficult thing about this process is the start; once we have a start, there will be a virtuous cycle, hence the burning need to focus on other ways in which to overcome the Indian obstacles to growth.

While growth continues in India at a breakneck pace, the most important thing now for the country is to increase the quality of living of the poorest within society. That can only be done through overcoming inherent obstacles; maybe, just maybe, once we’ve beaten these, growth and prosperity will increase like never before.

What do you think? Please leave a comment below with your thoughts, whether you’ve been attracted or repulsed by my propositions.

Traffic jams: An economic perspective

You know the feeling.

The skies are grey, and fat drops of rain batter your windscreen: it’s almost as if the sky’s crying for you. You’re stuck in a sandwich of motorised vehicles – progress only comes a few inches at a time, slowly but not always surely. You curse as the faint hope you had of speeding ahead is dashed, falling away like droplets from the sky.

But then, after long hours of waiting, it happens. One car edges ahead, then another, then another. Finally, it’s your turn; your car moves forward, breaking the seemingly endless deadlock. It’s emotional catharsis the likes of which you can only experience after hours of frustration. Finally, you’re home, free from the scourge of traffic (until next morning, at least).

When the adrenaline rush wears off, though, you realise that you just wasted precious hours of your life that you’ll never get back. You could have spent that time watching television, playing chess, or even working more if you had to. In addition to the emotional outrage faced by many drivers across the planet, this congestion also has severe economic consequences for car-owning households. According to The Economist, traffic jams cost Los Angeles $23 billion a year, and that isn’t even when we take into account environmental impact. But why exactly do traffic jams happen, and what exactly can we do about them?

Well, part of the blame for traffic jams lies squarely on the shoulders of the people themselves. Public transport in the form of predominantly buses is a “key mode of public transport for those on low incomes”, according to Transport for London. As incomes go up, naturally the proportion of people using public transport in a particular country will decline. Don’t believe me? Hear me out. Public transport is an inferior service, which essentially means that demand for it decreases as consumer incomes go up. This is natural, as cars are inherently more prestigious than buses or trains; they grant you a degree of privacy and exclusivity, and they almost always look better. Therefore, you’d expect that as people become more affluent, more of them will ride in cars and other private forms of transport. Still don’t believe me? Look at the UK. According to the BBC, the number of cars on the streets of Britain rose by almost 600,000 in one year, with the average weekly wages in the United Kingdom also steadily rising. In this case, the correlation implies a heavy degree of causation. What can be done about this? In truth, not much; people’s opinions are not going to radically change. We could, however, simultaneously create more low-skilled jobs in the cleaning sector and clean up our public transport, which appears to be surprisingly dirty. Cleaning up and renovating some of our aged public transport, thereby making it somewhat more prestigious, could go some way to dampening the tradeoff between consumer income and public transport use, although, admittedly, the effect probably won’t be too drastic. It would help though, so why not try it?

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Improving the quality of public transport could diminish the correlation between income and car use. PHOTO CREDITS: Route 79

It’s also important to consider that as of right now, roads are mostly free at the point of use across the world. Therefore, many people see the use of roads as a given: something for which there is no cost. Hence, the number of cars on the road are surging, as the only thing people actually have to pay for is the payments associated with the car itself and fuel. If governments around the world could somehow introduce a system whereby people are charged for the duration of time that they spend on the roads, demand for cars would fall due to increased price leading to a decrease in quantity demanded, as per the demand curve. This is because an increase in the cost of driving means that for more and more people, the marginal utility gained by using a car is offset by its substantial total cost (in layman’s terms, it costs more than it’s worth). Although this would lead to potential job losses in the auto manufacturing industry, it is necessary to carry out to offset both the economic loss of productivity and the severe environmental damage on air quality caused by traffic jams. In short, while painful for one industry, we need to do this for the greater economic and environmental good.

While campaigns encouraging walking, cycling and use of public transport are almost ubiquitous in today’s world, and have no doubt had their effects, more still needs to be done in order for the prevalence of cars on the roads to decrease dramatically. The difficulty of cycling is one factor why for many, the utility gained in terms of exercise and fitness is less than the cost, in terms of their commute becoming drastically longer and also the safety risk that it entails. What I am proposing to solve this is to build more cycle lanes next to roads, thereby increasing their supply. The increased ease by which many can now find an easy way to cycle to the workplace would decrease the costs of cycling, thereby making the utility/cost tradeoff more favourable, hence spurring demand for bicycles with which to cycle to work, potentially helping the cycling industry also. Given that these cycle lanes take up considerably less space than new roads would, they are both a quicker and more effective solution to the problem of traffic congestion (the increased supply of roads would simply spur demand for cars in the same way as demand for bicycles is spurred above).

Applying economics to the problem of traffic congestion may seem unorthodox at first, but I am convinced that inherently, many of the world’s problems are economic. After applying economics to this situation, it’s entirely possible that you may just spend less time stuck on the roads.

Agree? Disagree? Please leave a comment below, whether you’ve been attracted or repulsed by my ideas.

 

Scandinavia is not a socialist triumph

Sorry, socialists; Scandinavian success isn’t your trump card.

While Scandinavia has emerged as one of the world’s leaders in terms of how to run an economy, many advocates of socialism claim that its success is down to large numbers of socialist economic principles. This fanciful perception could not be any more untrue; in fact, the Scandinavian countries extol the virtues of the capitalist economic ideology more than anything else. The fact that even figures such as Senator Bernie Sanders, who claimed that America should look to countries “like Denmark, like Sweden and Norway” for their purported socialist beliefs, believe this woeful and misguided claim, comes as a shocking challenge to the belief that socialism in itself cannot bring about economic prosperity. In theory, this is all well and good: differing ideas are needed to promote healthy, beneficial economic debate which allows countries to further develop. Despite this, when one side of the argument persists with making claims that are inherently flawed and against basic facts and statistics, the debate becomes much less healthy than toxic and useless, and this intuitively benefits no one. Hence, while it could be argued that Scandinavia has some socialist principles that have helped it grow economically, it is completely asinine to brand the whole region with the “socialist” moniker. Frankly, it’s akin to saying that socialism alone works in the first place.

Free market capitalism is perhaps most strongly enforced in the countries which Sanders seems to so idolise. While it is disputed whether laissez-faire economics works in the long term or not, it is a testament to these countries’ resilience and principles that they do not intervene and let large companies go bankrupt if they are not performing or have mismanaged their finances. For example, Sweden allowed Saab, an automobile manufacturer, to go bankrupt, even when there was considerable pressure to bail the company out. Many similar occurrences have taken place with the other Scandinavian nations, affirming the ethos of economic competition that these nations hold so dear. This competition, that is so prevalent in these societies, allows companies to make more and more efforts to innovate and gain a comparative advantage over their rivals, thus increasing the prosperity of these companies, which gives the state more income through taxation with which to fund social services such as healthcare and education. This also results in a reduction in unemployment, again increasing the wellbeing and happiness of the country’s citizens. It stands to reason, therefore, that Denmark is the world’s happiest country. And a large proportion of this has nothing to do with socialism.

The reason why countries such as Sweden have evolved into such developed and financially stable economies is also due to capitalist ethos, and most definitively not socialist ones. In the latter half of the 1800s and the early 1900s, Sweden was floundering financially, with it being very poor and economically destitute (1.3 million Swedes left Sweden for America during this time). The capitalist reforms which were then instituted by the Swedish government spurred economic development and growth, incentivising creativity and encouraging investment into small and medium sized enterprises (SMEs). At this point, the country’s taxes were far lower than the majority of Europe’s, raising serious questions to socialists who propose higher levels of taxation. Therefore, despite the fact that the welfare system in Sweden is amongst the best applications of socialism in the modern world, this is only a small cog in the wheel; and to a large degree, has only been made possible through the wonders of capitalist reform that swept the country. After all, the system could have only been financed through money, money which would have been in high relative scarcity had Sweden continued the way it was going.

Scandinavia has also been made into a pseudo-utopia by some socialists, a place where everything is perfect and nothing has ever gone wrong. However, while the region is a massive success story, it is not as prosperous as some would claim it to be. For example, the United States has a higher economic output per person than Sweden, Denmark and Finland, calling into doubt those who claim that the few socialist policies have resulted in an increase in productivity in the Scandinavian region. Moreover, the Organisation for Economic Co-Operation and Development (OECD) also states that the average Dane has an average household debt equal to 310% of his or her disposable income, again making the claim that Scandinavians are more financially prosperous than others seem highly dubious. According to Credit Suisse’s Global Wealth Report of 2014, the wealthiest 10% of people in Norway, Sweden and Denmark possess between 65 and 69% of the wealth of those countries, displaying staggering levels of wealth inequality. While low inequality is frequently espoused by proponents of the socialist economic system as a virtue of Scandinavia, these figures prove that that is not the case, and that, like much of the Western world, Scandinavia also has serious problems regarding wealth inequality.

We do have our share of problems, I admit. Scandinavia is a great place to live, I admit. What I don’t admit, however, is that they’re perfect or that socialist policies have got them to where they are thus far; it’s, in fact, capitalism that has again, saved the day.

Shrey Srivastava, 15

How did finance lose its way?

In recent years, especially since the advent of the 2008 financial crisis, the worst one of the century, bankers have seen a spectacular nosedive in public approval. Many see them as the orchestrators of this crisis, and although they were not wholly responsible, it is true that banking, and more broadly the finance industry as a whole, has had systemic problems that are not even close to being solved to this day. Tales of plunging share prices and financial woe have been what today’s generation have grown up with; almost everything they have known has been financial negativity. It’s almost redundant to say at this point that a field which was created in order to benefit the public should really not be hoodwinking and failing them in the way which it has. Continue reading “How did finance lose its way?”

Game theory: A gem of microeconomics

Microeconomics has many captivating branches within it, but the newest and most exciting one has to be game theory. In fact, just two years ago in 2014, the Nobel Memorial Prize in Economic Sciences went to the game theorist Jean Tirole. This is indicative of just how far game theory has come in such a short time, since John von Neumann set the building blocks for game theory not even a century ago, in 1944. Nowadays, it is an essential part of microeconomics, which helps one understand how firms operate in a variety of different situations. But what exactly is it? Continue reading “Game theory: A gem of microeconomics”

The resurgence of Keynesian economic theory

In the tumultuous global macroeconomic climate, which we find ourselves in today, people are increasingly looking back in time at the ideas of one revolutionary economist: John Maynard Keynes. The cogitation of the most influential economist of the 20th century has been thrown somewhat under the water in recent decades, in wake of the 1973 oil shock and the recession that shook much of the developing world from then until 1975. However, contemporaneously with the great recession of 2008, Keynesianism has seen a resurgence, often cited by many scholars nowadays in economic debate. Regardless, even given this, the question remains: is Keynesian economic theory still relevant in today’s day and age? Continue reading “The resurgence of Keynesian economic theory”

What caused the demise of Lehman Brothers?

Till date, the biggest bankruptcy ever seen in US history is the crash of Lehman Brothers. The former fourth largest investment bank in the world filed for Chapter 11 Protection with more than $639 billion in assets 7 years ago. Images adorning the hallowed newspaper sheets in the days after its September 15, 2008 collapse were of its dejected employees leaving the company buildings, never to be seen again. However, opinions differ as to what actually caused this gargantuan crash. In truth, it is an amalgamation of many different factors that led to the collapse of the gigantic investment bank. Continue reading “What caused the demise of Lehman Brothers?”

Why Hillary Clinton is the woman America needs for 2016

With the soap opera of the Republican nominations taking over the U.S. political scene, the Democrats have been somewhat overshadowed. The few who are focusing on the Democratic elections have seen a clear frontrunner come through: Hillary Clinton. Despite the astonishing rise of Bernie Sanders, Hillary Clinton still remains the overwhelming favourite to be the Democratic candidate for 2016, and for good reason. Continue reading “Why Hillary Clinton is the woman America needs for 2016”

Lessons learnt from a 15 year old’s voyage into the financial markets

Having traded the financial markets in my holidays, and having made a little over five figures in that time, I feel that not only have I found a gratifying pastime, but also that my knowledge about financial markets has been vastly increased, from many mornings spent watching Bloomberg on a TV screen. The gains have been marvellous, the losses not so much. My general knowledge of global events and their repercussions to the markets has also increased. Above all, however, the most salient thing is that a sound base of knowledge has been built for, hopefully, a lifetime of trading on the financial markets. Many lessons have been learnt from experience, incipiently to ignore the brunt of what the news says. Continue reading “Lessons learnt from a 15 year old’s voyage into the financial markets”