Hasanhodzic $29.95 USA / $35.95 CAN PRAISE FOR The Evolution of Technical Analysis Lo “A movement is over when the news is out,” so goes Photo: MIT Photo: The Evolution the Wall Street maxim. For thousands of years, tech- ANDREW W. LO is the Harris “Where there is a price, there is a market, then analysis, and ultimately a study of the analyses. You don’t nical analysis—marred with common misconcep- & Harris Group Professor of Finance want to enter this circle without a copy of this book to guide you through the bazaar and fl ash.” at MIT Sloan School of Management tions likening it to gambling or magic and dismissed —Dean LeBaron, founder and former chairman of Batterymarch Financial Management, Inc. and the director of MIT’s Laboratory by many as “voodoo fi nance”—has sought methods FINANCIAL PREDICTION of Technical Analysis for Financial Engineering. He has for spotting trends in what the market’s done and “The urge to fi nd order in the chaos of market prices is as old as civilization itself. This excellent volume published numerous papers in leading academic what it’s going to do. After all, if you don’t learn from traces the development of the tools and insights of technical analysis over the entire span of human history; FINANCIAL PREDICTION FROM BABYLONIAN history, how can you profi t from it? and practitioner journals, and his books include beginning with the commodity price and astronomical charts of Mesopotamia, through the Dow Theory The Econometrics of Financial Markets, A Non- of the early twentieth century—which forecast the Crash of 1929—to the analysis of the high-speed TABLETS TO BLOOMBERG TERMINALS Random Walk Down Wall Street, and Hedge Funds: electronic marketplace of today. The account is particularly refreshing for academics steeped in statistical In The Evolution of Technical Analysis, the director An Analytic Perspective. His awards include the models, as technical analysis relies upon a substantially different analytical language: graphs, trends, and The Evolution of MIT’s Laboratory for Financial Engineering, Alfred P. Sloan Foundation Fellowship, the Paul A. complex structures. An excellent overview of an important topic.” Andrew Lo, and coauthor Jasmina Hasanhodzic Samuelson Award, the Graham and Dodd Award, —William N. Goetzmann, Edwin J. Beinecke Professor of Finance and Management Studies, present an engaging account of the origins and the James R. Vertin Award, and the American Yale School of Management development of this mysterious “black art,” trac- ing its evolution from ancient Babylon to the rise Association of Individual Investors Award. He is also Chairman and Chief Investment Strategist of “This book will fascinate anyone interested in technical analysis. Lo and Hasanhodzic are the fi rst to compile FROM of Wall Street as the world’s fi nancial center. Along this history and they present it with clear, good-humored prose that moves swiftly. And the book has a AlphaSimplex Group, LLC. the way, the practices of Eastern technical analysts larger message. By charting the history of organized trading through the millennia—even Babylon!—it TABLETS BABYLONIAN like Munehisa Homma (“the god of the markets”) points out the timelessness of the human endeavor we presently know as Wall Street.” are compared and contrasted with those of their —Carol Osler, Director, Lemberg Masters Program in International Economics and Finance, Western counterparts, such as Humphrey Neill, of Photo: John Melanson Photo: Brandeis International Business School, Brandeis University JASMINA HASANHODZIC Analysis Technical William Gann, and Charles Dow (“the father of is a research scientist at Alpha- technical analysis”). “This book is an exhaustive study of technical analysis history and development from Babylon to the Simplex Group, LLC, where she present, another classic by Lo and Hasanhodzic. Using multiple sources, the authors provide a persuasive With deep roots in antiquity, technical analysis is develops quantitative investment argument for the origin, rationale, growth, and future of technical analysis. I found the information and logic strategies and benchmarks. She compelling, and I highly recommend this book to anyone interested in the analysis of trading markets.” part art and part science, seeking to divine trends, reversals, cycles, and other predictable patterns in received her PhD from MIT’s Department of —Charles D. Kirkpatrick II, CMT, President, Kirkpatrick & Company, Inc., coauthor of Technical Analysis: Electrical Engineering and Computer Science. Her The Complete Resource for Financial Market Technicians, and Adjunct Professor, Brandeis University TO historical market prices. While the techniques for works on alternative market betas and technical TERMINALS BLOOMBERG capturing such regularities have evolved consider- ably over the centuries, the all-too-human predilec- analysis have appeared in leading publications, The fascinating history of technical analysis and its role in shaping the such as the Journal of Investment Management, behavioral theory of modern fi nancial markets. tion to extrapolate into the future using the past has and she is the coauthor with Andrew Lo of the been a constant driving force throughout history. book The Heretics of Finance. She also serves on The Evolution of Technical Analysis explores the history of technical analysis from ancient Babylon through the Board of Directors of the Market Technicians the Internet Age, and highlights the successes and failures of the pioneers—the famous and the forgot- The authors chronicle the fascinating and un- ten—who played a pivotal role in the evolution of this fascinating craft. Today, thanks to their contribu- Association Educational Foundation. expected path of charting that likely began with tions, technical analysis has evolved from “voodoo fi nance” into a more scientifi c endeavor, emerging as simple superstitions and coincidences, and has de- a respectable discipline that commands the attention of all serious students of fi nancial markets. This Jacket Design: Fleur de Lis Design veloped into widespread practices in many markets sweeping history will surprise skeptics and open the door for more constructive dialogue between techni- cians and proponents of modern fi nance. and instruments, involving sophisticated computa- tional algorithms and visualization techniques. The Evolution of Technical Analysis is the story of how Andrew W. Lo some early technicians failed miserably, how others succeeded beyond their wildest dreams, and what Jasmina Hasanhodzic it means for traders today. FFIRS.indd iv 8/9/10 8:56:43 PM The Evolution of Technical Analysis Financial Prediction from Babylonian Tablets to Bloomberg Terminals Andrew W. Lo and Jasmina Hasanhodzic FFIRS.indd i 8/9/10 8:56:42 PM Copyright © 2010 by Andrew W. Lo and Jasmina Hasanhodzic. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Lo, Andrew W. (Andrew Wen-Chuan) The evolution of technical analysis : fi nancial prediction from Babylonian tablets to Bloomberg terminals / Andrew W. Lo and Jasmina Hasanhodzic. p. cm. Includes bibliographical references and index. ISBN 978-1-57660-349-9 (cloth) 1. Technical analysis (Investment analysis)—History. I. Hasanhodzic, Jasmina, 1979- II. Title. HG4529.L62 2010 332.63'2042—dc22 2010019276 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 FFIRS.indd ii 8/9/10 8:56:43 PM To our mothers FFIRS.indd iii 8/9/10 8:56:43