New Trading Systems and Methods, Fourth Edition

CHAPTER 1

Introduction

Let's start by redefining the term “technical analysis.” Technical analysis is the systematic evaluation of price, volume, breadth, and open interest, for the purpose of price forecasting. A systematic approach may simply use a bar chart and a ruler, or it may use all the computer power available. Technical analysis may include any quantitative analysis as well as all forms of pattern recognition. Its objective is to decide, in advance, where prices will go over some time period, whether 1 hour or 5 years. Technical analysis must have clear rules.

Technical analysis is no longer just the study of chart patterns or the identification of trends. It encompasses intramarket analysis, complex indicators, mean reversion, and the evaluation of test results. It can use a simple moving average or a neural network to forecast price moves. This book serves as a reference guide for all of these techniques, puts them in some order, and explains the functional similarities and differences for the purpose of trading.

THE EXPANDING ROLE OF TECHNICAL ANALYSIS

Quantitative methods for evaluating price movement and making trading decisions have become a dominant part of market analysis. Those who do not use methods such as overbought and oversold indicators are most likely to watch them along the bottom of their screen. The major financial networks are always pointing out price trends and double bottoms, and are quick to say that a price move up or down was done on low ...