Trading Systems and Methods, 6th Edition

CHAPTER 1Introduction

It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.

—Charles Darwin

Let's start by defining 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 computing power available. Technical analysis may include any quantitative method as well as all forms of pattern recognition. Its objective is to decide, in advance, based on a set of clear and complete rules, where prices will go over some future period, whether 1 hour, 1 day, or 5 years.

Technical analysis is not just the study of chart patterns or the identification of trends. It includes intermarket analysis, complex indicators, and mean reversion, as well as the testing process 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. It includes portfolio construction and multilevel risk control, which are integral parts of successful 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 ...