What Do Hedge Funds Really Think of Technical Analysis?

The secret of hedge funds. In fact, they rely heavily on charts too.

Walk into any top tier hedge fund and they’ll tell you they don’t care about charts.

But behind the scenes, the smart money is actually attracted to technical price charts.

An important admission

“We don’t use head-and-shoulders or Fibonacci retracements,” admits a longtime quantitative analyst at Renaissance Technologies. “But we absolutely use momentum, volume profiles, and support-resistance levels. That’s just technical analysis with a better suit.”

Hedge funds like Two Sigma and D.E. Shaw have quietly automated hundreds of classic technical charts and indicators that they do use to predict price action. They know, for example, a 100- or 200-day moving average doesn’t work because there’s some universal law for it, but because they know that pension funds or CTAs react to these signals with $2 trillion.

As one Citadel Risk manager put it: “If enough algorithms watch the same line, that line becomes real. Our job is to be two milliseconds faster.”

The truth

Hedge funds may not believe in magic or the alignment of the stars. However, they have a deep respect for human psychology, the reaction of the masses, those well-known patterns over decades, on which technical analysis is ultimately based. We may be talking about a self-fulfilling prophecy, but that’s exactly why it works. Let’s say there’s a crypto with an extremely low RSI, it is likely that many people will buy it, since the technical analysis used by millions will perceive it as a buy signal, and then of course the price will break out from there. As long as traders follow the same pattern, and react to the same technical signals, technical analysis will work.

“I’ll never buy a stock based on a golden cross,” says a portfolio manager at a $10 billion long-short fund. “But I’ll absolutely use RSI to time my entry. Buying an asset because I like it is just gambling, but waiting for a breakout based on an objective mathematic formula? That’s risk management.”