Chapter 2

Uncovering the Essence of Market Movement

In This Chapter

arrow Looking at a new model of supply and demand

arrow Figuring out the crowd

arrow Reverting to the mean

arrow Handling crowd extremes

Technical analysis focuses on the price of a security rather than its fundamentals. The collective behavior of buyers and sellers, also known as “the crowd” or “the market,” sets the prices. The market may be rational or irrational, but the market is always “right” in the sense that it sets the price of a security. You and I, as minor members of the market, don't get to set the price, no matter how intelligent our analyses and piercing our judgments.

In this chapter, I suggest one way of looking at the supply-and-demand dynamics of crowd behavior that's consistent with the technical approach — the auction model of supply and demand. Next, an outcome of crowd behavior is the tendency of prices to cluster around the average, even when the average is trending. It's useful to identify clustering, in part to know when to heed the prices that stray from the cluster. Finally, another aspect of crowd behavior ...

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