Don’t fight the tape! Technical Analysis Momentum and Contrarian Signals as Common Cognitive Biases

Piotr Zielonka , Wojciech Białaszek , Paweł Biedrzycki , Bartłomiej Dzik

Abstract

Purpose: Stock market participants use technical analysis to seek trends in stock price charts despite its doubtful efficiency. We tested whether technical analysis signals represent typical and common cognitive biases associated with the continuation or reversal of the trend. Methodology: We compared investors’ opinions about the predictive power of technical analysis signals grouped into five conditions: real technical analysis signals associated with trend continuation (real momentum signals) or trend reversal (real contrarian signals), fake momentum or fake contrarian signals, and fluctuation signals. Findings: Investors assigned larger predictive power to real and fake signals associated with trend continuation than to signals associated with trend reversal. Fake signals, which represented cognitive biases, elicited similar predictions about trend continuation or reversal to real technical analysis signals. Originality: Market players assess momentum signals to have greater predictive power than contrarian signals and neutral signals to have the least predictive power. These results are independent of whether technical analysis signals were well-known to investors or made up by experimenters. The hardwired propensity of our brains to detect patterns combined with the non-natural environment of the stock market creates the illusion of expertise that is not easy to dispel.
Author Piotr Zielonka
Piotr Zielonka,,
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, Wojciech Białaszek (Wydział Psychologii w Warszawie)
Wojciech Białaszek,,
- Wydział Psychologii w Warszawie
, Paweł Biedrzycki
Paweł Biedrzycki,,
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, Bartłomiej Dzik
Bartłomiej Dzik,,
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Journal seriesCentral European Management Journal, ISSN 2658-0845, e-ISSN 2658-2430, (0 pkt)
Issue year2020
Vol28
No2
Pages98-110
Publication size in sheets0.6
Keywords in Englishtechnical analysis, pattern recognition, cognitive biases, momentum, contrarian
DOIDOI:10.7206/cemj.2658-0845.24
Languageen angielski
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Don’t fight the tape_skan.pdf 305.13 KB
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Osw_Don’t fight_Bialaszek.pdf 752.83 KB
Score (nominal)5
Score sourcejournalList
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