Introduction to the Art and Science of Technical Analysis
of initiating an entry at the breakout of some price barrier. The first is to initiate an
entry at some arbitrary point just after a breakout. The other is to initiate a trade
based on some fixed rules of entry and exits. See Figure 1.21.
Subjectivity arises not because the rules of engagement are unclear, but rather
because of the number of choices available. Hence, each trader will select the
rules of entry and exit that suit their personality, risk capacity, or familiarity with
a certain mode of engagement. A trader could initiate a trade once price moves
a certain distance away from the breakout, or once the penetration bar closes.
Traders may even choose to enter the market after a certain amount of time has
elapsed from a breakout. Figure 1.21 lists three main types of filters that trad-
ers frequently use to initiate an entry. Price, time, and algorithmic filters will be
discussed in more detail in Chapter 5.
Summarizing, even if the rules for identification, interpretation, and inference
are rigidly codified, the very fact that we have choice renders the entire analy-
sis subjective from the ground up. Hence the argument that technical analysis is
subjective in fact represents a general comment on all forms of analysis. It is not
unique to technical analysis!
Here is a little exercise in subjectivity associated with pattern recognition.
See Figure 1.22. Without looking at Figure 1.23, try to see if you can figure out
the trend changes by drawing simple trendlines. After you have finished, refer
to Figure 1.23 to see if you have drawn the same trendlines as indicated on the
chart.
There will most likely be a difference in the points chosen in drawing the
trendlines. The very fact that you can draw alternate trendlines introduces an ele-
ment of subjectivity in identification, interpretation, and forecasting.fIgure 1.21 Subjectivity in the Rules of Engagement.