This updated edition of Technical Analysis from A to Z combines a detailed explanation of what technical analysis is and how it works with overviews, interpretations, calculations, and examples of over technical indicators—and how they perform under actual market conditions. Enhanced with more details to make it easier to use and understand, this book reflects the latest research findings and advances. Good quick reference on technical analysis. Contains a broad description of the technique. Also provides calculation methodology for the easier methods though not for the advanced techniques such as Polarised Fractal Efficiency, or the Random Walk Model.
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Not only is the field too massive, covering every thing from Federal Reserve reports to Fibonacci Arcs, but it is also evolving so quickly that Related Link: anything written today becomes incomplete but not obsolete Traders Library Investment Bookstore tomorrow. Armed with the above knowledge and well aware of the myriad of technical analysis books that are already available, I feel there is a genuine need for a concise book on technical analysis that serves the needs of both the novice and veteran investor.
That is what I have strived to create. The first half of this book is for the newcomer. It is an introduction to technical analysis that presents basic concepts and terminology. The second half is a reference that is designed for anyone using technical analysis. It contains concise explanations of numerous technical analysis tools in a reference format.
When my father began using technical analysis thirty years ago, many people considered technical analysis just another 's adventure into the occult. Today, technical analysis is accepted as a viable analytical approach by most universities and brokerage firms.
Rarely are large investments made without reviewing the technical climate. Yet even with its acceptance, the number of people who actually perform technical analysis remains relatively small. This book would not be possible without the help of thousands Formula Primer of analysts who have studied the markets and shared their User Groups results.
To those from whom I have compiled this information, thank you. Educational Products Training Partners There are two people who have helped so much that I want to mention them by name. Without John Slauson's editorial and research assistance, this book would not have been published until the next century; And Denise, my wife, who has been an Related Link: active participant in my work for more than a dozen years. This includes stocks, bonds, Formula Primer commodities, futures, indices, mutual funds, options, etc.
While User Groups I may imply a specific investment product for example, I may say "shares" which implies an equity these investment Educational Products concepts will work with any publicly traded financial instrument Training Partners in which an open market exists. Similarly, I intermix the terms "investing" and "trading. In either case, the basic Traders Library Investment Bookstore concepts and techniques presented in this book are equally adept.
Bibliography About the Author Investors share a common desire--they want to learn more. If you'd like to receive a list of additional learning material Formula Primer technical analysis books, software, and videos , please call User Groups my office at It presents the basic concepts and Line Studies terminology in a concise manner.
If you are familiar with Periodicity technical analysis, you will probably find the Reference the The Time Element Conclusion appropriate starting point. What will prices be tomorrow, next week, Moving Averages Indicators or next year? Wouldn't investing be easy if we knew the Market Indicators answers to these seemingly simple questions?
Alas, if you are Line Studies reading this book in the hope that technical analysis has the Periodicity answers to these questions, I'm afraid I have to disappoint you The Time Element early--it doesn't. Bibliography About the Author Some history Formula Primer The term "technical analysis" is a complicated sounding name User Groups for a very basic approach to investing.
Simply put, technical Educational Products analysis is the study of prices, with charts being the primary tool. Training Partners The roots of modern-day technical analysis stem from the Dow Theory, developed around by Charles Dow. Charles Dow's contribution to modern-day technical analysis cannot be understated.
His focus on the basics of security price movement gave rise to a completely new method of analyzing the markets. It is the price at which one person agrees to buy and another agrees to sell.
The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it.
These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations.
As we all know firsthand, humans are not easily quantifiable nor predictable. This fact alone will keep any mechanical trading system from working consistently. Because humans are involved, I am sure that much of the world's investment decisions are based on irrelevant criteria.
Our relationships with our family, our neighbors, our employer, the traffic, our income, and our previous success and failures, all influence our confidence, expectations, and decisions. Security prices are determined by money managers and home managers, students and strikers, doctors and dog catchers, lawyers and landscapers, and the wealthy and the wanting.
This breadth of market participants guarantees an element of unpredictability and excitement. Fundamental analysis If we were all totally logical and could separate our emotions from our investment decisions, then, fundamental analysis the determination of price based on future earnings, would work magnificently. And since we would all have the same completely logical expectations, prices would only change when quarterly reports or relevant news was released.
Investors would seek "overlooked" fundamental data in an effort to find undervalued securities. The hotly debated "efficient market theory" states that security prices represent everything that is known about the security at a given moment. This theory concludes that it is impossible to forecast prices, since prices already reflect everything that is currently known about the security.
The future can be found in the past If prices are based on investor expectations, then knowing what a security should sell for i. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove. This is done by comparing current price action i. The devout technician might define this process as the fact that history repeats itself while others would suffice to say that we should learn from the past.
The roulette wheel In my experience, only a minority of technicians can consistently and accurately determine future prices. However, even if you are unable to accurately forecast prices, technical analysis can be used to consistently reduce your risks and improve your profits. The best analogy I can find on how technical analysis can improve your investing is a roulette wheel.
I use this analogy with reservation, as gamblers have very little control when compared to investors although considering the actions of many investors, gambling may be a very appropriate analogy. But if he buys a stock when it is in a rising trend, after a minor sell off, and when interest rates are falling, he will have improved his odds of making a profit.
That's not gambling--it's intelligence. Yet many investors buy securities without attempting to control the odds. Contrary to popular belief, you do not need to know what a security's price will be in the future to make money. Your goal should simply be to improve the odds of making profitable trades.
Even if your analysis is as simple as determining the long-, intermediate-, and short-term trends of the security, you will have gained an edge that you would not have without technical analysis. Consider the chart of Merck in Figure 1 where the trend is obviously down and there is no sign of a reversal. Figure 1 Automated trading If we accept the fact that human emotions and expectations play a role in security pricing, we should also admit that our emotions play a role in our decision making.
Many investors try to remove their emotions from their investing by using computers to make decisions for them. The concept of a "HAL," the intelligent computer in the movie , is appealing. Mechanical trading systems can help us remove our emotions from our decisions. Computer testing is also useful to determine what has happened historically under various conditions and to help us optimize our trading techniques.
Yet since we are analyzing a less than logical subject human emotions and expectations , we must be careful that our mechanical systems don't mislead us into thinking that we are analyzing a logical entity.
That is not to say that computers aren't wonderful technical analysis tools--they are indispensable. In my totally biased opinion, technical analysis software has done more to level the playing field for the average investor than any other non- regulatory event.
But as a provider of technical analysis tools, I caution you not to let the software lull you into believing markets are as logical and predictable as the computer you use to analyze them. The fields which define a security's price and Market Indicators volume are explained below. Line Studies Periodicity Open- This is the price of the first trade for the period e. It is the point at which there were more sellers than buyers i.
Training Partners Low- This is the lowest price that the security traded during the period. It is the point at which there were more buyers than sellers i. Traders Library Investment Bookstore Close- This is the last price that the security traded during the period. Due to its availability, the Close is the most often used price for analysis. The relationship between the Open the first price and the Close the last price are considered significant by most technicians.
This relationship is emphasized in candlestick charts. Volume- This is the number of shares or contracts that were traded during the period. The relationship between prices and volume e. Open interest is often used as an indicator. Bid- This is the price a market maker is willing to pay for a security i.
Ask- This is the price a market maker is willing to accept i. These simple fields are used to create literally hundreds of technical tools that study price relationships, trends, patterns, etc. Not all of these price fields are available for all security types, and many quote providers publish only a subset of these.
Table 1 shows the typical fields that are reported for several security types. In this case, a Moving Averages Indicators picture truly is worth a thousand words. Dates are displayed along About the Author the bottom of the chart and prices are displayed on the side s.
Technical Analysis from A to Z
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