September 20, 2005

Predict v. Follow

"From John Murphy's book technical analysis is defined as the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. There is the key difference. Predictive vs following. A lot of the "tools" in technical analysis books are centered around prediction v. following. A classic example of this concept would be the idea of a price target off a head and shoulders top. A true market technician would set a price target based on the size of the formation and forecast the most likely next "leg" the market would go to. A true trend follower would never set a price target, they prefer to let a trailing bar stop take them out of the market when prices start to reverse against them or some other similar method. You can use technical analysis "tools" to help you follow the price movement and act more like a follower or you can use technical analysis tools to help you predict, the choice is yours. Another important point is that if someone told you they were a trend follower, that would imply that they are that type of trader. Technical analysis is a wide concept that would need to be refined in order to generate a particular trade system."