Chapter 2

Tapping into the Wisdom of the Crowd


Bullet Looking at a new model of supply and demand

Bullet Figuring out the crowd

Bullet Reverting to the mean

Bullet 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 trading crowd, 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, price extremes that seem to make no ...

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