New Trading Systems and Methods, Fourth Edition

CHAPTER 14

Behavioral Techniques

There are some approaches to trading that are directly dependent on human behavior and cannot be represented by pure mathematical techniques. Short-term systems are more likely to target investor behavior than economic factors because, over a few hours of one day, the influence of macroeconomic policy and long-term trends is very small. The concepts presented in this chapter deal specifically with the interpretation of human reactions, although the interpretations are all systematic. The section “Measuring the News” covers an area that has always been important to a floor trader, yet has been greatly overlooked by technicians; it offers great opportunity for research. “Event Trading” the study of the market's reaction to price shocks, has become increasingly important for both proactive and reactive traders. “Contrary Opinion” takes the form of a poll or consensus of opinions of traders and market publications. It may help answer the question, “What is everyone else doing?”—or at least—“What are they thinking of doing?”

The principal works of Elliott and Gann are included in this chapter with a complete discussion of the Fibonacci series and its ratios. Fibonacci forms a singular part of their techniques, and has been applied to most other forms of charting. The way in which traders respond to market moves and the remarkable similarity that can be found in Nature give serious underlying substance to these methods. Because not all of the assumptions ...