The term technical analysis means many things to different people, but to my way of thinking it simply means basing your trading decisions off of information contained in the price changes of the asset itself. This casts a broad net, covering a wide range of disciplines and tools from traditional chart patterns to modern statistical analysis. One of my goals in writing this blog is to share a bit of my journey as a trader, including some of the challenges I have faced as I adapt my trading style to an ever shorter timeframe. Along the way I will share some of the tools I have found useful, and hopefully even invite some discussion and dialogue via the comments on this blog. Today, I want to lay some groundwork by looking at the roots and history of technical analysis.<\/p>\n
I believe there are serious flaws in the way most of us (including myself) start learning technical analysis. Usually a set of patterns is presented to the student, with the idea that once you have learned to recognize these patterns, all you have to do is go find them in the market and then figure out where you want to spend your earnings. As Bella points on day one to every trader who walks through the door at SMB, the world does not work like that. There is a lot more to successful, consistent trading than simply recognizing a set of patterns. However, I believe that even the way patterns are usually codified and presented is very wrong headed.<\/p>\n
Very few people realize that there are two radically different schools of traditional technical analysis, and both spring from the writings of two men in the 1920\u2019s and 1930\u2019s. Richard Schabacker was a successful trader, investment advisor, and author whose approach was based on classifying many variations of patterns. His books include variation after variation on continuation patterns, trend change patterns, consolidation patterns, etc. After studying thousands of these patterns and then seeing them in action, the student is supposed to be able to gain some intuition about the future direction of prices. Interestingly, he was also the uncle of Robert Edwards, of Edwards and Magee fame. (If you don\u2019t know, these two write what is considered to be the Bible of technical analysis: Technical Analysis of Stock Trends<\/em> (1948).)<\/p>\n Richard Wyckoff was another author whose approach was completely different. He focused on trying to understand why the market was doing what it was doing. The \u201cwhy\u201d was much more important than the \u201chow\u201d\u2014the concept was more important than any specific pattern\u2014the thing itself more important than the form of the thing. Rather than equip the student with a large set of potential patterns, he believed it was important to understand how the motivation of buyers and sellers showed itself in the patterns of price and volume. To my thinking, this is a much more valuable approach, but it seems like 90% of the books, websites, and courses today focus on patterns like \u201ccup and handle\u201d, \u201chead and shoulders\u201d, and \u201ctwo dogs making a puppy.\u201d (I did not make that last one up!)\u00a0 One possible reason for this is that everyone reads Technical Analysis of Stock Trends, which itself springs from the Schabacker school of thought, but it\u2019s also much easier to teach specific patterns than to teach real understanding of supply and demand. Without that understanding, any approach to trading is ultimately doomed to fail.<\/p>\n","protected":false},"excerpt":{"rendered":" A look at the roots of modern technical analysis.<\/p>\n","protected":false},"author":388,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[943,1,15],"tags":[507,939,465,941,942,940,726],"class_list":["post-4781","post","type-post","status-publish","format-standard","hentry","category-adam-grimess-blogs","category-general-comments-2","category-trading_theory","tag-a","tag-analysis","tag-and","tag-background","tag-history","tag-little","tag-technical","no-post-thumbnail"],"yoast_head":"\n