Some issues on the stability of trading based on technical analysis

Jose Alvarez-Ramirez, Guillermo Fernandez-Anaya and Carlos Ibarra-Valdez

Physica A: Statistical Mechanics and its Applications, 2004, vol. 337, issue 3, 609-624

Abstract: Some stability effects of technical trading on financial/commodity markets are analyzed in this paper. Technical trading is characterized by using past price information within a time-delay horizon to forecast future price dynamics. By introducing fundamental and technical excess demand functions, the market dynamics is modeled as a time-delayed differential equation, whose (local) stability is determined by means of root-locus techniques. It is proven that the larger the time-delay horizon, the larger the stability margin. This means that short-run technical trading is more likely to induce market instabilities than large-run technical trading. It is also shown that, as expected, the larger the relative weight of technical trading with respect to fundamental trading, the smaller the stability margin of the market dynamics.

Keywords: Technical trading; Time-delayed differential equations; Stability (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:337:y:2004:i:3:p:609-624

DOI: 10.1016/j.physa.2004.02.008

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