Introduction to the Art and Science of Technical Analysis
■ (^) Cannot usually determine what the intrinsic value of an asset is or whether it
is under-or overvalued, but is able to determine precisely when to start partici-
pating, purely from the perspective of price performance
■ (^) Is not concerned with the underlying factors that led to the rise in price; this
is irrelevant for all practical purposes as they believe that price is a reflection
of all information available in the markets and therefore that is all that really
matters
In short, from what we have covered so far, we know that technical analysis:
■ (^) Uses past information
■ (^) Uses charts
■ (^) Identifies past and current price action
■ (^) Forecasts potential future price action based on historical price behavior (es-
pecially the start of a new trend)
technical Data and Information
Technical analysts study market action. Market action itself is mainly comprised
of the study of:
■ (^) Price action
■ (^) Volume action
■ (^) Open interest action
■ (^) Sentiment
■ (^) Market breadth
■ (^) Flow of funds
Of all the data that technical analysts employ, price is the most important, fol-
lowed closely by volume action. Price itself is comprised of an opening, high, low, and
closing price, normally referred to as OHLC data. OHLC data normally refers to the
daily opening, high, low, and closing prices, but it may be used to denote the OHLC
of any bar interval, from 1‐minute bars right up to the monthly and yearly bars.
1.4 Classifying Technical Analysis
Technical analysis may be categorized into four distinct branches, that is, classi-
cal, statistical, sentiment, and behavioral analysis. Regardless of which branch is
employed, all analysis is eventually interpreted via the various behavioral traits,
filters, and biases unique to each analyst. Behavioral traits include both the psy-
chological and emotional elements. See Figure 1.6.
Classical technical analysis involves the use of the conventional bar, chart, and
Japanese candlestick patterns, oscillator and overlay indicators, as well as market
breadth, relative strength, and cycle analysis. Statistical analysis is more quantita-
tive, as opposed to the more qualitative nature of classical technical analysis. It