TITLE : TECHNICAL ANALYSIS EXPLAINED: THE SUCCESSFUL INVESTOR'S GUIDE TO SPOTTING INVESTMENT TRENDS AND TURNING POINTS. 3RD ED.

Preface

There is no reason why anyone cannot make a substantial amount of money in the financial markets, but there are many reasons why most people will not. As with most endeavors in life, the key to success is knowledge and action. This book has been written in an attempt to cast some light on the internal workings of the markets and to help expand the "knowledge" component, leaving the "action" to the patience, discipline, and objectivity of the individual investor.

The mid to late 1980s saw the expansion of investment and trading opportunities to a global scale, in terms of both the cash and the futures markets. This third edition of Technical Analysis Explained has been expanded to keep abreast of these changes and to include some technical innovations that have evolved since the second edition was published.

The material in this edition has been thoroughly reworked and expanded. Considerable attention is still focused on the U.S. equity market, but coverage of international equity markets and commodity and currency markets has been greatly expanded. Technical analysis was as valid in Wall Street in 1850 as it is in Tokyo in 1990 and will be in Moscow in the year 2000. This is true because price action in financial markets is a reflection of human nature, and human nature remains more or less consistent. Where appropriate, the concepts are illustrated with up to date examples.

Three new chapters have been added. Chapter 1, Market Cycle Model, builds the framework for the whole book by explaining the idea of the three main trends-primary, intermediate, and short term and hovv they interact.

The important concept of momentum has been significantly expanded and is now covered in two chapters. Momentum indicators such as the relative strength indicator (RSI), stochastics, and moving average convergence divergence (MACD) have been included because they have become popular with futures traders in recent years.

Another new chapter (Chapter 25, Automated Trading Systems) is presented as a starting point for a more formalized and disciplined approach to technical analysis rather than a shortcut to profits.

The treatments of breadth, moving averages (MAs), sentiment, seasonality, relative strength (RS), and volume have been expanded.

A new appendix (Appendix A, Candle Charts) has been included, in response to the resurgence of interest in this method of plotting price data.

Finally, two "new" concepts are presented. These are the weighted summed rate of exchange (know sure thing," or KST) and seasonal momentum. The word "new" is in quotation marks because these concepts are not revolutionary but represent old ideas that have been reworked and presented in a different and more practical format.

In the past two decades the time horizon of virtually all investors has shrunk considerably. As a result, technical analysis has become very popular for implementing short-term timing strategies. This use may lead to great disappointment: In my experience there is a rough corlelation between the reliability of the technical indicators and the time span being monitored. This is the paramount reason for orienting most of the discussion here toward intermediate and long term trerlds.

To be successful, technical analysis should be regarded as the art of assessing the technical position of a particulal market with the aid of several scientifically resealched indicators. While many of the mechanistic techniques described in this book offer reliable indications of changing market conditions, all suffer from the common characteristic that they can and often do fail to operate satisfactorily. This characteristic presents no problem to the consciously disciplined investor, since a good working knowledge of the principles underlying major movements in financial markets and a balanced view of this overall technical position offer a superior framework within which to operate.

There is, after all, no substitute for independent thought. The action of the technical indicators illustrates the underlying characteristics of any market, and it is up to the analyst to put the pieces of the jigsaw puzzle together and develop a working hypothesis.

The task is by no means easy, as initial success can lead to overconfidence and arrogance. Charles H. Dow, the father of technical analysis, once wrote that "pride of opinion caused the downfall of more men on Wall Street than all the other opinions put together." This is true because markets are essentially a reflection of people in action. Normally such activity develops on a reasonably predictable path. Since people can and do change their minds, price trends in the market can deviate unexpectedly from their anticipated course. To avoid serious trouble, investors must adjust their attitudes as changes in the technical position emerge.

In addition to pecuniary rewards, a study of the market can also reveal much about human nature, both from observation of other people in action and from the aspect of self-development. As investors react to the constant struggle through which the market will undoubtedly put them, they will also learn a little about their own makeup. Washington Irving might well have been referring to this challenge of the technical market when he wrote: "Little minds are taxed and subdued by misfortune but great minds rise above it."

Martin J. Pring