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The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals

ISBN: 978-1-57660-349-9
212 pages
September 2010
The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals (1576603490) cover image


A comprehensive history of the evolution of technical analysis from ancient times to the Internet age

Whether driven by mass psychology, fear or greed of investors, the forces of supply and demand, or a combination, technical analysis has flourished for thousands of years on the outskirts of the financial establishment. In The Evolution of Technical Analysis: Financial Prediction from Babylonian Tablets to Bloomberg Terminals, MIT's Andrew W. Lo details how the charting of past stock prices for the purpose of identifying trends, patterns, strength, and cycles within market data has allowed traders to make informed investment decisions based in logic, rather than on luck. The book

  • Reveals the origins of technical analysis
  • Compares and contrasts the Eastern practices of China and Japan to Western methods
  • Details the contributions of pioneers such as Charles Dow, Munehisa Homma, Humphrey B. Neill, and William D. Gann

The Evolution of Technical Analysis explores the fascinating history of technical analysis, tracing where technical analysts failed, how they succeeded, and what it all means for today's traders and investors.

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Table of Contents


Chapter 1 Ancient Roots.

The Beginnings.

Ancient Babylon.

Ancient Greece.

Ancient Rome.

Negative Attitudes toward Traders.

Chapter 2 The Middle Ages and the Renaissance.

Western Europe.

Technical Analysis.

Societal Attitudes.

Chapter 3 Asia.



Chapter 4 The New World.

Wall Street.

Societal Attitudes.

Chapter 5 A New Age for Technical Analysis.

Dow Theory.

Relative Strength.

Market Cycles and Waves.

Chart Patterns.

Volume of Trading.

Market Breadth.

Nontechnical Analysis.

Chapter 6 Technical Analysis Today.





Wall Street’s Reinterpretation of Technical Analysis.

Chapter 7 A Brief History of Randomness and Efficient Markets.

Prices As Objects of Study.

The Emergence of Efficient Markets.

What Is Random?

Chapter 8 Academic Approaches to Technical Analysis.

Theoretical Underpinnings.

Empirical Evaluation.

Adaptive Markets and Technical Analysis.




About the Authors.


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Author Information

ANDREW W. LO is the Harris & Harris Group Professor of Finance at MIT Sloan School of Management and the director of MIT’s Laboratory for Financial Engineering. He has published numerous papers in leading academic and practitioner journals, and his books include The Econometrics of Financial Markets, A Non-Random Walk Down Wall Street, and Hedge Funds: An Analytic Perspective. His awards include the Alfred P. Sloan Foundation Fellowship, the Paul A. Samuelson Award, the Graham and Dodd Award, the James R. Vertin Award, and the American Association of Individual Investors Award. He is also Chairman and Chief Investment Strategist of AlphaSimplex Group, LLC.

Jasmina Hasanhodzic is a research scientist at Alpha-Simplex Group, LLC, where she develops quantitative investment strategies and benchmarks. She received her PhD from MIT’s Department of Electrical Engineering and Computer Science. Her works on alternative market betas and technical analysis have appeared in leading publications, such as the Journal of Investment Management, and she is the coauthor with Andrew Lo of the book The Heretics of Finance. She also serves on the Board of Directors of the Market Technicians Association Educational Foundation.

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Press Release

September 23, 2010
The Evolution of Technical Analysis

Technical analysis, which seeks to divine trends, reversals, cycles, and other predictable patterns for the purpose of forecasting prices, has been marred by common misconceptions likening it to gambling or magic and dismissed by many as “voodoo finance.” In THE EVOLUTION OF TECHNICAL ANALYSIS (Wiley; September 2010; $29.95; 978-1-57660-349-9; Hardcover), Andrew Lo, the director of MIT’s Laboratory for Financial Engineering, and coauthor Jasmina Hasanhodzic examine the origins and development of this mysterious “black art.”

The authors trace its evolution from the ancient world to the rise of Wall Street, presenting such fascinating information as:

  • Ancient Babylonians would methodically record, often intraday, the prices of various commodities, but they would also assign those same commodities to the astrological regions of Pisces and Taurus, depending on whether they were bullish or bearish.
  • The prevalence of market speculation in Ancient Greece led to the development of methods for using past prices and timely news to forecast future prices. Adaptive Athenian traders would change their strategies rapidly according to price fluctuations and news, such as immediately redirecting their ships upon hearing that grain prices have changed.
  • In addition to logical lists of weights, measures, and exchange rates, medieval merchant manuals might also contain lengthy astrological appendixes which advised their readers to buy, sell, or begin anything new when they are in the region of Virgo.
  • Christopher Kurz, a 16th century Antwerp trader, claimed to be able to forecast prices on commodities up to 20 days in advance using his technical trading system based on back-tested astrological signals.
  • Also in the 16th century, Chinese merchant manuals taught their readers to predict changes in the price and availability of goods based, in part, on market cyclicality, and the Munehisa Homma developed the Japanese version of technical analysis based on candle charts, which remains popular worldwide to this day. 

After exploring the roots of technical analysis in the Ancient World and the Middle Ages and its development in later centuries, the book examines Charles Dow’s work, which became the basis for modern technical analysis. In the late 19th century, it was the American rather than European markets that drove progress and innovation in the financial world, including the stocks ticker, the telegraph, and the telephone. It was during this period that Charles Dow started publishing his Dow Jones Industrial Average—the average price of a dozen most active stocks on the New York Stock Exchange—as an objective barometer of the stock market and the economy.

Dow argued that stock speculation is far removed from gambling, for it is based on the perception of a stock’s value and of the underlying market movements. “The market is not like a balloon plunging hither and thither in the wind,” Dow used to say. Rather, “It represents a serious, well-considered effort on the part of far-sighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future.”

The principles on which the now intricate field of technical analysis is built have remained unchanged since the time of Charles Dow and his immediate successors during the first half of the 20th century. According to those principles, markets move in trends, some major, such as bull and bear markets, lasting for years, other minor, often over in a day, but all deemed persistent in their own timeframe.

However, the techniques have become increasing sophisticated. Andrew Lo and Jasmina Hasanhodzic review the tools technicians use to recognize market developments and discuss how the changes on Wall Street in the second half of the 20th century have led technicians to reinterpret their craft. They also explore the academic approaches to randomness and how their proponents may be marginalizing the followers of technical analysis.

The authors conclude that while technical analysis has languished for too long in the murky waters of part art and part science, it is finally starting to develop a more rigorous approach. “Although the fortress walls separating technicians from the adherents of modern finance still stand tall, they are not insurmountable, and we hope that the recognition of the thousands-of-years-long legacy of financial markets will awaken the skeptics and open the door for the dialogue between the two communities to begin.”

From ancient roots in Babylonian price records, Greek market sentiment indicators, and Roman seasonality patterns to Dow theory and present day technical analysis, THE EVOLUTION OF TECHNICAL ANALYSIS demonstrates how, despite the distance created by continents and millennia, the market wisdom of Charles Dow is astonishingly similar to that of his predecessors. Such similarities reveal technical analysis as a truly universal phenomenon and highlight how deeply ingrained it is in human psychology to ride and reinforce the trends, and reason in technical terms.

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