The Psychology of Technical Analysis: Ch. 7

PTAWhen an individual buys or sells securities, an emotional commitment is being made.

The battle between the bulls and the bears is what creates a market for securities. Without the presence of this constant state of conflict, there would be no graduated price movements: prices would jump up and down randomly and no one would trade.

When an investor buys/sells securities, he accepts one of the two crowds’ beliefs about the future trend in prices and identifies strongly with other members of the same crowd (there are exceptions to this, however they form a sophisticated niche). An investor is a committed crowd member. Because of this, as a price trend develops, individual trading decisions become increasingly non-rational. Ultimately, extremes in optimism or pessimism occur, creating the conditions for a reversal.

The objectives of technical analysis is to keep a close watch on what other investors are saying and doing and when a vast majority are saying and doing the same thing, do the reverse. The more people who believe in a trend, the fewer people there are left to perpetuate it.

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