The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

the hAnDbook of teChnICAl AnAlysIs

The third premise above is obvious when using oscillators such as stochastics, RSI,

and MACD. A reading of 100 percent on the stochastics is extremely and explicitly

bullish but it is also regarded as a potentially or implicitly bearish condition since it is

at a level where price may generally be regarded as being overextended or exhausted.

There is an underlying expectation or assumption that a reversion to the means would

eventually take place (note that this may not always be true, for example, in the case

of cumulative type indicators). A breakout above a rising channel is also explicitly

bullish but it is also regarded as implicitly bearish since it also represents a state of

overextension or exhaustion in price, with respect to the rising channel formation.

The fourth premise is specifically about the effects of the self‐fulfilling

prophecy. It is easy to understand why a largely concerted wave of buying or

selling at various points on a price chart may cause a significant reaction in price.

This concerted wave of buying or selling will generally be more pronounced if

these points are significantly clear and obvious to most market participants using

technical analysis. Hence we generally notice a larger than average penetration

bar during trendline breakouts, especially if the trendline is significantly clear and

obvious to most traders. This also implies that should an indicator be essentially

faulty or illogical in its design, if enough participants risk actual capital based on

its signals, it would begin to exhibit a greater level of reliability.

the efficacy of technical analysis at various timeframes

Technical analysis generally works more efficiently at timeframes where there are

fewer forms of analyses available. For example, on higher timeframes like the dai-

ly, weekly, monthly, or yearly charts, fundamental analysis plays a very important

role in helping to forecast potential market action. But at very low timeframes like

the one‐minute charts, fundamental analysis may not be as useful, especially if the

stopsize is very small. In essence, the smaller the stopsize, the more important will

be the role of applying technical analysis when trying to forecast very short term

movements in price. This is the main reason why technical analysis is generally

more reliable at lower timeframes.

1.8 Market Participants

Market participants comprise the average investors and traders, financial institu-

tions, commercial and central banks, hedgers, arbitrageurs, brokers, hedge funds,

mutual and pension funds, and so on. Here are the eight main categories of mar-

ket participants:

1. Retail


2. Institutional


3. Speculator


4. Supply Side


5. Demand Side


6. Professional


7. Investor


8. Novice