INTRODUCTION AND
RATIONALE TO THE
TECHNICAL APPROACH
METHOD AND GOALS OF THIS BOOK
The goal of this book is, like my CNBC.com technical analysis columns
that came before it, to present technical analysis tools and insights that
can help you make more informed, and more profitable decisions relating
to trading and investing. I utilize the U.S. stock market for all examples. I
also discuss some indicators and aspects that are particular to the stock
market.
A major related purpose of the information and stories I present is that
a process is begun whereby you start to look at markets in a different way,
to see beyond the usual way that market information is presented to you or
understood by you. I emphasize again my hope that you will be able to
profit from this information. A major consideration is to discuss and
demonstrate what I consider to be the more useful tools and methods from
technical analysis—for example, demonstrating how to locate stocks that
offer the best hope of gain at the right time, at lowest risk, and with an effective
exit strategy. There are less used technical tools and analysis techniques
that could be described but that might be marginal for most people,
in terms of improving trading and investment decisions.
A second orientation I have is to discuss some of the pitfalls to improved
trading and investing decisions, such as your attitude toward the
market—is it gambling or is it profitable investing or trading that you can
master? How much time will you invest in it and how much perseverance
will you maintain? I find that a person’s emotional temperament, work
habits, discipline, and ability to see ahead (foresight) are as, or sometimes
more, important as mastery of some of the more complex areas of technical
analysis. Time spent and perseverance in understanding the most basic
use of charts and technical indicators are more important to most market
participants than exhaustive study of every aspect of this field. And there is
a great tendency among people to think that complex ideas and techniques
must be the way to approach the markets, which after all, are complex
mechanisms. This is wrong, as simple is better in my experience, and I am
not the only one saying this—many top advisors and money managers base
their decisions on a relatively simple set of criteria.
USE OF EXAMPLES
Chart Examples
I use stock and stock averages exclusively for all examples in this book
relating to demonstrating technical patterns and indicators. While I also
have a background in the futures, fixed income, and foreign exchange
markets, I will not provide chart examples from these markets, or discuss
aspects of these markets that are unique to them—for example, describing
open interest and how to use it in futures or the ways of
constructing a continuous contract price series from the various futures
contract–months. I do discuss some custom indicators and methods of
analysis that are unique to the stock market, as I believe I have something
unique to say about these things. However, again I want to emphasize
that all general technical analysis principles, which comprise most
of this book, are applicable to all markets.
All Markets
The popularity of technical analysis owes much to its initial widespread
use in the commodities markets, especially in the 1970s, when these markets
were very active, drawing in many individual futures traders. Technical
analysis is very popular in the biggest single market in the world—the
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