Wednesday, 5 September 2018

A study of the market can also reveal much about human nature, both from observing other people in action and from the aspect of self-development.

There is no reason why anyone cannot make a substantial amount of money in the financial markets, but there are many reasons why many people will not.

The key to success is knowledge and action.  

  • Knowledge of the internal working of the markets and of investing is important.  
  • Action is dependent on the patience, discipline and objectivity of the individual investor. 

Today, numerous charting sites have sprung up on the Internet, so virtually anyone now has the ability to practice technical analysis.  As a consequence of the technological revolution, time horizons have been greatly shortened.

  • This may not be a good thing because short-term trends experience more random noise than longer-term ones.  
  • This means that the technical indicators are not as effective.

Nothing has really changed in the last 100 years.  The same true and tried principles in technical analysis are as relevant today as they always were.  There is no doubt whatsoever that this will continue to be so in the future.

  • Thus, technical analysis could be applied in New York in 1850, in Tokyo in 1950 and in Moscow in 2150.  
  • This is true because price action in financial markets is a reflection of human nature, and human nature remains more or less constant.  
  • Technical principles can also be applied to any freely traded entity in any time frame.  
  • A trend reversal signal on a 5-minute bar chart is based on the same indicators as one on a monthly chart; only the significance is different.  Shorter time frames reflect shorter trends and are therefore less significant.   

Since the 1970s, the time horizon of virtually all market participants has shrunk considerably.

  • As a result, technical analysis has become very popular for implementing short-term timing strategies.  
  • This use may lead to great disappointment.

There is a rough correlation between the reliability of the technical indicators and the time span being monitored.

  • Even short-term traders with a 1- to 3-week time horizon need to have some understanding of the direction and maturity of the main or primary trend.  
  • This is because mistakes are usually made by taking on positions that go against the direction of the main trend.  
  • If a whipsaw is going to develop, it will usually arise from a contra-trend signal.

To be successful, technical analysis should be regarded as the art of assessing the technical position of a particular security with the aid of several scientifically researched indicators. 

  • Although many of the mechanistic techniques offer reliable indications of changing market conditions, all suffer from the common characteristic that they can, and often do, fail to operate satisfactorily.  
  • This attribute present no problem to the consciously disciplined investor or trader, since a good working knowledge of the principles underlying major price movements in financial markets and a balanced view of the overall technical position offer a superior framework within which to operate.  

There is no substitute for independent thought.

  • The action of the technical indicators illustrates the underlying characteristics of any market and it is up to the analyst to put the pieces of the jigsaw puzzle together and develop a working hypothesis.
  • The task is by no means easy, as initial success can lead to overconfidence and arrogance.  
"Pride of opinion caused the downfall of more men on Wall Street than all the other opinions put together."  Charles H. Dow, the father of technical analysis.

This is true because markets are essentially a reflection of people in action.

  • Normally, such activity develops on a reasonably predictable path.  
  • Since people can and do change their minds, price trends in the market can deviate unexpectedly from their anticipated course.  
  • To avoid serious trouble, investors, and especially traders, must adjust their attitudes as changes in the technical position emerge.

A study of the market can also reveal much about human nature, both from observing other people in action and from the aspect of self-development.  
  • As investors react to the constant struggle through which the market will undoubtedly put them, they will also learn a little about their own makeup.  

"Little minds are taxed and subdued by misfortune but great minds rise above it."  Washington Irving.

Martin J. Pring
Technical Analysis Explained

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