Behavioural Technical Analysis

An Introduction to Behavioural Finance and its Role in Technical Analysis

Behavioural Technical Analysis is an accessible introductory guide to how human nature impacts the markets and those who trade in them.

At its core, trading is a decision-making process based on the analysis of data and a judgement on risk and uncertainty. When humans make trading decisions their emotions, physiology and the natural qualities of the brain automatically and subconsciously play a role. Therefore, to better understand the financial markets we need to better understand the behaviour of individual investors within those markets.

Behavioural finance the study of how human sentiment and emotion affects financial decision-making is a means for achieving this better understanding and it is already revolutionising investment and trading. In particular, it is becoming clear that behavioural finance can help evaluate various aspects of technical analysis and this is the unique focus of Behavioural Technical Analysis.

Behavioural Technical Analysis places real human beings at the centre of price patterns and graphs and shows how human sentiment and emotion is what really drives securities markets.

The first part of the book is a practical, concise introduction to behavioural finance and deals with six main areas: dealing with complexity; how humans perceive what is around them; sense of self; aversion to risk; the impact of society and crowds; and gender. An overview is given in each case and for each key concept details are provided about how it can affect the work of technical analysts.

In the second part of the book, I then build on these early chapters by applying the concepts of behavioural finance to three key technical analysis techniques: study of extremes, study of trends, and support and resistance. It is shown how behavioural finance can help illuminate long observed technical price patterns and thus serve as a foundation for profitable investment and trading strategies.

Cover of the India edition by Vision Books, 2012.

The book does not presuppose any knowledge of behavioural finance or psychology, skills in mathematics or detailed trading techniques, but instead provides an outline of the key features of behavioural finance that are relevant to technical analysis and advances a new and exciting way of thinking about trading.

Behavioural Technical Analysis is a lucid and practical read for all those who want to understand what happens when human nature and financial markets collide and, most importantly, how to profit from it.

Harriman House is one of the UKs leading independent publishers of finance, trading and investment books.

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Acknowledgements

Preface

PART ONE BACKGROUND

Chapter One The Behavioural Finance Revolution