The Pillars of Technical Analysis
There are four main areas of technical analysis that analysts can objectively measure and use in trading systems. They are as follows:
There are indicators and analyses in each of these areas, and Chapter 23, "Sometimes Being Wrong Is Good", outlines many of the more popular ones. For the purposes of introducing these concepts in this chapter, it will be sufficient to give them a general treatment.
Price is the most important of these areas; we measure profits and losses in price differences between buys and sells. It deservedly gets the most focus by analysts and academics alike, but if all four can be employed together, the odds of making successful decisions can be dramatically increased.
Volume includes such concepts as accumulation and distribution, market breadth, open interest, and trade count. Time includes cycles, seasonality, and relationships between patterns and trends from a duration point of view. Finally, sentiment is a more subjective area that seeks to determine solely if the masses—i.e., the consensus of investors—is tipped too far in one direction. At that point, it pays to consider positioning against the crowd. Such indicators as cocktail party chatter and options premiums play roles here, and there will be more on each aspect later in various places in this book.