The purpose of this paper is to estimate the effectiveness of technical trading strategies and examine the extent to which trading profitability using technical analysis indicators explains the ‘risk premium’ or ‘risk compensation’ for investing in equity markets as against assets that are relatively risk-free using multiple regression analysis. The technical indicators selected for the analysis are Bollinger bands (volatility indicator), moving average (trend indicator), Relative Strength Index (momentum indicator), and Elliot wave theory (mass psychology indicator). The paper finds evidence for risk premium being explained by technical indicators. The technical trading strategy based on trend, momentum, volatility indicators, including the Elliot wave theory has the ability to explain the excess return of a stock. The findings have important implications for traders and practitioners. A positive relationship implies that technical indicators can be explored while evaluating strategies for investment. So, it suggests that traders, retail investors and fund managers, while evaluating portfolios, can rely on technical indicators-based trading strategies other than fundamental analysis.

Technical analysis persuades numerous investors into believing that they could outsmart the market. Smidt (1965) studied its importance among amateur traders in US commodity futures market and found that more than 50% of the survey respondents use technical analysis. Gehrig and Menkhoff (2006) found that technical analysis is seen as the ‘workhorse’ among foreign exchange traders. Even if there is adequate evidence that technical analysis is usually used in speculative markets, the financial literature on the profitability of technical analysis is quite dispersed. This dispersion originates from the inconsistency of profits in technical trading systems. Hence, academicians distrust technical analysis. Malkiel (1973), a strong proponent of the efficient market hypothesis, states:

Obviously, I am biased against the chartist. This is not only a personal predilection, but a professional one as well. Technical analysis is anathema to the academic world. We love to pick on it. Our bullying tactics are prompted by two considerations: (1) the method is patently false; and (2) it’s easy to pick on. And while it may seem a bit unfair to pick on such a sorry target, just remember: it is your money we are trying to save.

Applied Economics Journal, Technical Analysis, Stock Trading, Technical Trading Tools, Average Trading Rule, Moving Average (MA) , Risk Premium, Indian Equity Market, Regression Analysis`.