B(efore) C(hrist): Technical Analysis
When I began studying technical analysis in the eighties, I remember that in several books about the roots of this topic, many authors have suggested that historically, the use of technical analysis began in the rice markets in Japan.
Kirkpatrick and Dahlquist, in their book about Technical Analysis published in 2010[1], hypothesized that technical analysis is considered historically native from Japan, because is there that the first recorded technical rules have been found.
However technical analysis is thought to be a more ancient method of analyzing markets and prices, but its history has been poorly recorded. The authors assume that we do not have recorded evidence of technical analysis being used in ancient times, but it is conceivable that technical analysis, in some form, was used in the distant past in freely traded markets. At this point we might ask ourselves what could be the oldest use ever made of technical analysis and if we have somewhere historical evidence about this.
Also in 2010, Andrew Lo, Professor of Finance and Director of the Laboratory for Financial Engineering at the MIT Sloan School of Management, published an interesting book with his co-author J. Hasanhodzic[2]. In this book, Lo considers Technical analysis as the use of past prices to forecast future ones most generally, and by following this criterion he did research on historical sources to confirm his assumptions.
A first consideration in such direction, can be made by looking at the graph below:
This is a chart of the price of a commodity that I built through a series of data[1], following Lo suggestions about historical sources. The attentive observer will notice that, while the prices on the vertical axis are given on a regular basis, on the x-axis numbers decrease instead of increase: a mistake? Absolutely not, these are years, but before Christ, and for this reason ranked in reverse order. Where have I taken this data? Certainly not from Bloomberg or Reuters. In fact they are still available today and are the prices of dates, one of the six commodities (barley, dates, mustard or cuscuta, cress or cardamon, sesame and wool), whose prices were faithfully recorded by the Babylonians in their astronomical diaries.
We owe this precious information, that can compete with datasets from modern history, to the conscientious work of Babylonian astronomers. Probably from the reign of the Babylonian king Nabonassar (747-743 BC), and at the instigation of this king, Babylonian astronomers started to make a daily record of the starry sky. These astronomers were professional scholars. From a tablet in Yale (YBC 11549) dating to the early Hellenistic period we know that at least 14 of them were fully employed by the temple. Each of them received 180 litres of barley per month[2].
The records, called Astronomical Diaries, were copied on clay tablets in the Babylonian cuneiform script and consisted of daily information on the position of the moon (rise and setting) and the planets in relation to the fixed stars, and from the early fifth century in relation to zodiacal signs. Furthermore, solstices and equinoxes, Sirius phenomena, meteors, comets and flashes and strokes of lightning were recorded. The diaries bring also information on the weather (e.g. "clouds were in the sky; I could not watch"), and the level of the Euphrates river. At the end of a monthly section some historical events were recorded (mainly on campaigns of the king, visits of the king or high officials to Babylon, cultic events, etc.) and the prices of six commodities were given, always in the same order: barley, dates, mustard or cuscuta, cress or cardamon, sesame and wool. Barley and dates constituted the main diet of the Babylonians.
The source used by professor Lo for the Babylonian data, was the book of A. L. Slotsky, The Bourse of Babylon : Market Quotations in the Astronomical Diaries of Babylonia[3].
Lo considers the parallels between Babylonian diaries and the contemporary technical analysis. The fact that the diaries documented the values of the same six commodities throughout centuries is similar to modern practices (choose a small number of items on which to focus the attention and follow the chosen item over a long time period).
Furthermore, to describe the ancient Babylonian custom of recording market quotations, Slotsky writes that they “were charted regularly so that fluctuations during each month of the year could be noted”. For that reason considering the astronomical diaries as a form of chart could be valid. Moreover the Babylonian scribes were aware of the concept of price volatility, indeed when volatility increased. “instead of the regular quotation at the end of each month, there might be quotations for the beginning and the end of the month; the beginning, middle, and the end of the month; range of days; or even daily”.
Just like technical charts, astronomical diaries report “interruptions or suspensions of commodity sales… on explicit dates in designated places”.
Ancient Babylonian not only charted their markets, but also sought to forecast future prices based on the observed ones, just as modern-day technicians do. The method of forecasting was based on astrology, but this is understandable given that astrology was one of the most important elements in the lifestyle of those times. For example, Slotsky notes that the flourishing of dates and mustard/cuscuta crops “was assigned to the astrological region of Pisces when the benefic planets were dim and the malefic planets where bright”.
Lo found a first use of Technical Analysis in Babylonian price records, but also in Greek market sentiment assessment, and Roman seasonality patterns: “our predecessors not only followed market prices but also made conscious attempts to measure supply/demand imbalances in price data and react to them for their profit, often combining their insights with “data” from fundamental nature or astrology”[1].
For more information on the topic I suggest the book of Lo and Hasanhodzic, an interesting contribution brought into the world of technical analysis by authors who curiously are not technical analysts but who come from academic world of quantitative analysis.
*Mario Valentino Guffanti – CFTe – SAMT Vice President – Swiss Italian Chapter
1. A copy of the raw data can be found on the web page of International Institute of Social History of Amsterdam: http://www.iisg.nl/hpw/data.php#babylon
2. R.J. van der Spek, Commodity Prices in Babylon 385 – 61 BC – Vrije Universiteit Amsterdam -http:// www.iisg.nl/hpw/babylon.php
3. L. Slotsky, The Bourse of Babylon : Market Quotations in the Astronomical Diaries of Babylonia – 1997;
4. C. D. Kirkpatrick & J. R. Dahlquist – Technical Analysis – 2 ed. – Chapter 3. History of technical Analysis – Pearson Education – 2011 (1 ed, 2010);
5. A. W. Lo & J. Hasanhodzic – The Evolution of Technical Analysis – Bloomberg Press – 2010;
6. Lo & Hasanhodzic, The Evolution – chapter 1 – Ancient roots.