Trading Systems and Methods, 6th Edition

CHAPTER 14Behavioral Techniques

I can calculate the motion of heavenly bodies, but not the madness of people.

—Sir Isaac Newton after his loss in the South Sea Bubble

Some approaches to trading are dependent on investor behavior and cannot be represented by pure mathematical techniques. Short-term systems are more likely to target patterns and fast breakouts rather than economic factors because, over a few hours of one day, the influence of ongoing 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 effects of a news announcement, an unusual or periodic event (such as earnings), and the opinion of traders are all important factors in price movement. 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 many 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 upon which these systems are based can be quantified, they can only be substantiated by the performance of the systems themselves. ...