Technical Analysis in Portfolio Management: Performance and Practice

Overview

A 2013 academic study (Smith, Faugère, and Wang) took a novel approach to the decades-old academic-vs-practitioner debate over technical analysis: rather than backtesting specific trading rules (the traditional, flawed approach), it surveyed over 10,000 institutional portfolio managers about their actual TA usage and analyzed their real-world performance outcomes. The finding: TA provides a genuine edge, but not in the way most would expect — through a distinctive return profile (positive skewness, high kurtosis) rather than simply higher average returns.

Key Concepts

• The academic-practitioner divide — academics have long dismissed TA (sometimes compared to “alchemy”) citing the efficient market hypothesis, while surveys show 30-40% of FX traders consider it important for short-term forecasting.
• Why prior research failed — tested strategies were too simplistic to capture real-world TA practice, it's impossible to test every strategy (and practitioners don't reveal their best methods), data-snooping bias made retrofitted strategies look artificially successful, and researchers couldn't “peer into the black box” of what chartists actually do.
• The methodology fix — bypass the black-box problem entirely by surveying managers on actual TA usage and measuring real outcomes, rather than trying to reverse-engineer or simulate their strategies.

Who Uses Technical Analysis

~1/3 of funds use TA, most commonly U.S. equity managers. Usage doesn't vary much by market cap, but only 5.9% of All-Cap funds rate it “very important” — and surprisingly, over 85% of U.S. balanced funds deem it unimportant despite needing asset-allocation timing.

Correlation with other strategies:

High correlation with Momentum suggests TA users focus on trends; low correlation with Fundamental Analysis indicates TA functions as a complementary tool rather than a substitute.

The Performance Advantage

• The skewness & kurtosis edge — the study's most notable finding: TA-managed funds show significantly elevated skewness (higher chance of large positive returns) and kurtosis (more frequent extreme outcomes), suggesting a strategy geared toward capturing major market moves rather than smoothing out returns.
• Down-market advantage — TA users significantly outperformed during declines; managers rating TA “very important” beat non-users by ~19 basis points per month in negative markets, a statistically significant result.
• Volatility without higher failure — despite higher return volatility, TA funds showed survival rates comparable to peers, suggesting the added risk was managed effectively rather than simply tolerated.

Cumulative Performance (1993–2012)

Value of $1 invested (net of benchmark) diverged most sharply during the 2000–2002 dot-com crash and the 2008–2009 financial crisis — TA portfolios' outperformance concentrated specifically in these downturn periods rather than accruing steadily across the whole period.

Conclusion

TA's benefit for institutional portfolios isn't “slightly higher average returns in all conditions” — it's a distinctive return profile (positive skewness, high kurtosis) that provides a real edge, particularly for managing risk during market downturns.

Advantages: superior downturn performance, positive skewness, effective risk management despite higher volatility, complementary role alongside fundamental analysis.

Caveats: findings are based on institutional managers, not individual traders; higher volatility demands stronger risk management; results likely depend on disciplined implementation; past performance doesn't guarantee future results.

Key Takeaways

• The study's real contribution is methodological, not just empirical — surveying actual usage and outcomes sidesteps the "black box" problem that made every prior TA backtest study inconclusive or contested.
• TA's edge concentrates specifically in market downturns and tail outcomes (skewness/kurtosis), not in raw average returns — meaning "does TA outperform?" is the wrong question; "does TA change your portfolio's return distribution shape?" is the one the data actually answers.
• The weak correlation between TA and Fundamental Analysis usage (0.107) supports treating them as complementary tools serving different portfolio functions, not competing philosophies where a manager must choose one.

Related Reading

• Research Paper: Technical Analysis Performance and Practice
• Watch on YouTube
• Full Academic Paper (SSRN)