Technical analysis as the representation of typical cognitive biases Piotr Zielonka Warsaw University SGGW, Rakowiecka 26/30, 02-528 Warsaw, Poland Accepted 13 February 2004 Abstract The present research provides a justification for the popularity of the technical analysis. It finds that financial analysts firmly discriminate between two types of technical signals—those based on typical cognitive biases and ‘‘empty’’ signals that sound like a technical analysis but are without any connotation with psychological inclinations. At the same time that they treat them differently, different analysts rate these items very similarly. These results suggest that the popularity of technical analysis is associated with its relation to the typical cognitive biases of humans. D 2004 Elsevier Inc. All rights reserved. JEL classification: D84; G14 Keywords: Behavioral finance; Psychological biases; Technical analysis 1. Introduction In spite of a long list of publications showing that market movement is random (Alexander, 1961; Cootner, 1964; Malkiel, 1996; Samuelson, 1965) or at least very difficult to predict (Lo & MacKinlay, 1999), considerable effort is devoted to forecasting future stock prices. One of the forecasting tools very popular among practitioners is technical analysis. When the keyword ‘‘technical analysis’’ is put into the Internet seek engine Google, 326,000 URLs are located as opposed to only 49,700 URLs for ‘‘portfolio theory.’’ Technical analysis is the examination of past price movements to forecast future price movements. As previous research shows, it is more an art than an objective analytical tool, 1057-5219/$ - see front matter D 2004 Elsevier Inc. All rights reserved. doi:10.1016/j.irfa.2004.02.007 E-mail addresses: bio@wp.pl, zielonka@delta.sggw.waw.pl (P. Zielonka). International Review of Financial Analysis 13 (2004) 217 – 225