Introduction to the Art and Science of Technical Analysis
they expect price to be more non–mean reverting, where demand creates further
demand and supply creates further supply, both driven by a powerful positive‐
feedback cycle. Those that adopt the non–mean reverting approach prefer to em-
ploy technical studies that help pinpoint breakout or trend continuation activity,
which includes chart pattern breakouts, moving average breakouts, Darvas Box
breakouts, and Donchian channel breakouts. They prefer to trade trends rather
than ranging action. They normally short at the breach of support and long at
breach of resistance. Stop entry orders are their preferred mode of entry into the
markets. See Figure 1.7.advantages and Disadvantages of technical analysis
The advantages of applying technical analysis to the markets are:■ (^) It is applicable across all markets, instruments, and timeframes, where price
patterns, oscillators, and overlay indicators are all treated in exactly the same
manner. No new learning is required in order to trade new markets or time-
frames, unlike in fundamental analysis where the analyst must be conversant
with the specifics of each stock or market.
■ (^) There is no need to study the fundamentals of the markets traded or analyzed
in order to apply technical analysis, since technical analysts believe that all
information that impacts or potentially may impact the stock or market is
already reflected in the price on the charts.
■ (^) Technical analysis provides a clear visual representation of the behavior of the
markets, unlike in fundamental analysis where most of the data is in numeri-
cal form.
fIgure 1.7 Mean Reverting versus Non–Mean Reverting Approaches.