Is Technical Analysis for Investors Really All Technical? (FT Press Delivers Elements)

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Examples include the moving average , relative strength index , and MACD. There are many techniques in technical analysis. Adherents of different techniques for example, Candlestick analysis -the oldest form of technical analysis developed by a Japanese grain trader-, Harmonics , Dow theory , and Elliott wave theory may ignore the other approaches, yet many traders combine elements from more than one technique.

Some technical analysts use subjective judgment to decide which pattern s a particular instrument reflects at a given time and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation.

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Contrasting with technical analysis is fundamental analysis , the study of economic factors that influence the way investors price financial markets. Technical analysis holds that prices already reflect all the underlying fundamental factors. Uncovering the trends is what technical indicators are designed to do, although neither technical nor fundamental indicators are perfect.

Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions. Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index , moving averages , regressions , inter-market and intra-market price correlations, business cycles , stock market cycles or, classically, through recognition of chart patterns. Technical analysis stands in contrast to the fundamental analysis approach to security and stock analysis.

Multiple encompasses the psychology generally abounding, i. Also in M is the ability to pay as, for instance, a spent-out bull can't make the market go higher and a well-heeled bear won't.

Technical analysis analyzes price, volume, psychology, money flow and other market information, whereas fundamental analysis looks at the facts of the company, market, currency or commodity. Most large brokerage, trading group, or financial institutions will typically have both a technical analysis and fundamental analysis team. In the s and s it was widely dismissed by academics.

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In a recent review, Irwin and Park [13] reported that 56 of 95 modern studies found that it produces positive results but noted that many of the positive results were rendered dubious by issues such as data snooping , so that the evidence in support of technical analysis was inconclusive; it is still considered by many academics to be pseudoscience. While some isolated studies have indicated that technical trading rules might lead to consistent returns in the period prior to , [18] [19] [20] [21] most academic work has focused on the nature of the anomalous position of the foreign exchange market.

A core principle of technical analysis is that a market's price reflects all relevant information impacting that market. A technical analyst therefore looks at the history of a security or commodity's trading pattern rather than external drivers such as economic, fundamental and news events. It is believed that price action tends to repeat itself due to the collective, patterned behavior of investors.

Hence technical analysis focuses on identifiable price trends and conditions. Based on the premise that all relevant information is already reflected by prices, technical analysts believe it is important to understand what investors think of that information, known and perceived. Technical analysts believe that prices trend directionally, i.

The basic definition of a price trend was originally put forward by Dow theory. A technical analyst or trend follower recognizing this trend would look for opportunities to sell this security. AOL consistently moves downward in price.

Each time the stock rose, sellers would enter the market and sell the stock; hence the "zig-zag" movement in the price. The series of "lower highs" and "lower lows" is a tell tale sign of a stock in a down trend.

Each time the stock moved higher, it could not reach the level of its previous relative high price. Note that the sequence of lower lows and lower highs did not begin until August. Then AOL makes a low price that does not pierce the relative low set earlier in the month. Later in the same month, the stock makes a relative high equal to the most recent relative high. In this a technician sees strong indications that the down trend is at least pausing and possibly ending, and would likely stop actively selling the stock at that point. Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them.

To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable and predictable price patterns will develop on a chart. Technical analysis is not limited to charting, but it always considers price trends. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish.

Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment. And because most investors are bullish and invested, one assumes that few buyers remain.

Technical analysis

This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading. Chan have suggested that there is statistical evidence of association relationships between some of the index composite stocks whereas there is no evidence for such a relationship between some index composite others.

They show that the price behavior of these Hang Seng index composite stocks is easier to understand than that of the index. The industry is globally represented by the International Federation of Technical Analysts IFTA , which is a federation of regional and national organizations. Professional technical analysis societies have worked on creating a body of knowledge that describes the field of Technical Analysis. A body of knowledge is central to the field as a way of defining how and why technical analysis may work.

It can then be used by academia, as well as regulatory bodies, in developing proper research and standards for the field. Technical analysis software automates the charting, analysis and reporting functions that support technical analysts in their review and prediction of financial markets e. Since the early s when the first practically usable types emerged, artificial neural networks ANNs have rapidly grown in popularity. They are artificial intelligence adaptive software systems that have been inspired by how biological neural networks work. They are used because they can learn to detect complex patterns in data.

In mathematical terms, they are universal function approximators , [36] [37] meaning that given the right data and configured correctly, they can capture and model any input-output relationships.

Technical analysis - Wikipedia

As ANNs are essentially non-linear statistical models, their accuracy and prediction capabilities can be both mathematically and empirically tested. In various studies, authors have claimed that neural networks used for generating trading signals given various technical and fundamental inputs have significantly outperformed buy-hold strategies as well as traditional linear technical analysis methods when combined with rule-based expert systems. While the advanced mathematical nature of such adaptive systems has kept neural networks for financial analysis mostly within academic research circles, in recent years more user friendly neural network software has made the technology more accessible to traders.

However, large-scale application is problematic because of the problem of matching the correct neural topology to the market being studied.

Systematic trading is most often employed after testing an investment strategy on historic data. This is known as backtesting. Backtesting is most often performed for technical indicators, but can be applied to most investment strategies e. While traditional backtesting was done by hand, this was usually only performed on human-selected stocks, and was thus prone to prior knowledge in stock selection. With the advent of computers, backtesting can be performed on entire exchanges over decades of historic data in very short amounts of time.

The use of computers does have its drawbacks, being limited to algorithms that a computer can perform. Several trading strategies rely on human interpretation, [41] and are unsuitable for computer processing. John Murphy states that the principal sources of information available to technicians are price, volume and open interest. However, many technical analysts reach outside pure technical analysis, combining other market forecast methods with their technical work.

One advocate for this approach is John Bollinger , who coined the term rational analysis in the middle s for the intersection of technical analysis and fundamental analysis. Technical analysis is also often combined with quantitative analysis and economics.

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For example, neural networks may be used to help identify intermarket relationships. Investor and newsletter polls, and magazine cover sentiment indicators, are also used by technical analysts. Whether technical analysis actually works is a matter of controversy. Methods vary greatly, and different technical analysts can sometimes make contradictory predictions from the same data. Here is the link:. There are equity and fixed income ETFs in the portfolio to allow for changing market conditions.

There are five stand-alone strategies that can be used to time the market that have worked well over time. For those of you looking for another way to invest, this book will provide additional options to consider. Either book can be purchased by clicking on the links on the right sidebar which contains the cover of each of the book.

Mebane Faber, the best selling author of The Ivy Portfolio, mentioned on his website www. Here is one review:. If you want to invest using ETFs and you are willing to spend a few minutes every week reviewing the conditions of the market and performing a relative strength ranking for 66 ETFs, this book is for you. I have read several other books on investing using ETFs, but none of them are as practical or cover all the key points like this book does. The book includes specific instructions on how to perform each of these steps using free web sites where you can implement this approach.

He has asset allocation recommendations for 4 types of investors based on your risk tolerance. Search the FT Search. World Show more World links. US Show more US links. Companies Show more Companies links. Markets Show more Markets links. Opinion Show more Opinion links.

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