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Introduction to Technical Analysis

Here's is where we start to have some fun.a  random  walk  as  he  observed  them.
Regardless of how you want to trade the
markets you need an approach. It might beThe best way to demonstrate this is with a
spinning a bottle, asking your Aunt Jennygame. Let say we are going to make a bet on
what  she  thinks  or  just  gut  feel.the toss of a coin. You start with $100. We
will toss this coin once per day. If it comes
However you do it, even though you may notup heads you win 3% and if it comes up tails
think  so,  you  have  an  approach.you  lose  2.5%.
The majority of traders will eventually useAt the end of the first day you will either
some form of technical analysis (also knownhave $103 or $97.50. At the end of the second
as chart traders, market technicians andday  we  repeat  the  process.
chartists).
The probability of the coin landing heads or
Just before we go down this road of mysticaltails is exactly 50%. This is because
wonder I think it is very important that youregardless of how many times the coin is
hear both side of the argument of whytossed each event is independent. The coin
technical  analysis  works.has no memory of what happened the toss
before. This means that the results will be
For every book that there is on making moneytotally  random.
trading there is probably an opposite book
explaining why it can't be done. Before youKendall's paper implies the same effect in
dismiss the last statement out of hand. Letsthe stock or commodities market. If each day
explore the argument that no matter what youis an independent event then the markets must
do  you  can't  beat  the  market.be random. We shall talk about more
probability's  later.
Random  Walk
Taking this idea slightly farther if the
The random walk theory dictates that amarkets are random then the history of the
security prices changes randomly, with noprice of a stock or commodity has no bearing
predictable patterns. Now that's quite aon the future price. It wouldn't help to look
statement but there are number of veryat charts or data, as each day there would be
respected statisticians who have a verya  50% chance of the market going up or down.
convincing  argument  to  prove  it.
You may be thinking by this stage that this
It all started in London with a man calledtheory is rubbish. I can trade the markets
Maurice Kendall who presented a paper to theand make money! Try this simple test. Have a
Royal Statistical Society in 1953. Thelook at the two charts below. One is a chart
subject of the paper Kendall presented wasof 100 daily closes of the Dow Jones
the  behavior  of stock and commodity prices.Industrial Average and the other is a 100
random  coin  tosses.
Kendall started out looking for predictable
price cycles in stock and commodities prices.Makes you think doesn't it! If each day in
The  problem  was  he  couldn't  find  any.the market were in fact an independent event
then it would be impossible for you to make
Regardless of how he approached it, the pricemoney  from  it  consistently.
of a stock was just as likely to go up or
down on any given day despite what happenedYou see any succession of event's
on the previous day. Which is where we getparticularly independent events can have an
the term Random Walk. Prices seemed to followaberrant run. This is what kills the trader.



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