Leaning on Objective Based Technical Analysis
In today`s modern age the use of technical analysis has infiltrated even the most guarded fundamental fortresses. The market is driven by fundamentals. It is also driven by consumer confidence, supply and demand, geopolitical factors and expectations of price movement. There is no timely indication that the value of a company has changed, that supply has increased, that the world has resolved its differences, or that expectations have changed. Financial markets are fast moving, continually oscillating, reflections of the processes of transformation and change. They cannot be defined by static concepts and linear relationships. The practical value of economics is therefore limited to providing background forecasts against which to judge the current trends in markets. Recently we have had the disturbing realization that the data used to make fundamental decisions may not be reliable.
Technical Analysis when used to determine the long-term direction of prices, attempts to objectively evaluate these complex fundamentals. The primary advantages of a technical approach are that it is objective, completely self-contained with accuracy of data being certain. It is the systematic evaluation of price, volume, breadth and open interest for the purpose of price forecasting. It is no longer restricted to study of chart patterns or the identification of trends. It encompasses intra-market analysis, complex indicators, mean reversion and the evaluation of test results.
Technical Analysis divides into two broad categories: Subjective and Objective.
“Subjective Based Technical Analysis” comprises analysis methods and patterns that are not precisely defined and are untestable owing to lack of cognitive content. The assertion that they are effective are exempt from empirical challenge and underscore the need for a rigorous and objective approach to knowledge acquisition, to combat the human tendency, to form and maintain strong beliefs in the absence of solid evidence. Beliefs that cannot be tested must be accepted on faith, anecdotal evidence or authoritarian pronouncement. Financial market behaviour is complex and uncertain and we opine that subjective and informal analysis will produce illusory knowledge.
In the process of investing we lean heavily on “Objective Based Technical Analysis” which in our opinion dramatically improves risk profiling of the asset class primarily by identifying price anomalies consequently leading to pro-active risk mitigation. By implementing objective based strategies in Technical Analysis we are able to utilize advanced forms of statistical inference to determine if a profitable back test is indicative of an effective method. Technical Analysis when objectively interpreted offers profound knowledge to market action. We appreciate the inherent complexity and micro-inefficiencies of the financial markets and our predictive modelling has an uncompromising approach to analytical rigor, critical thought, recognizing and eliminating wrong ideas. We do not resort to nebulous forecasts or issue pseudo-declarative statements which are essentially meaningless claims or empty propositions. Our objective interpretation of technical analysis is riveted in providing a body of knowledge about market behaviour that is as good as it can be had given the limits of evidence gathering and the powers of inference. The methods employed are well defined repeatable procedures that issue unambiguous signals.
As indicated in the sketch above, knowledge can be defined as “Justified True Beliefs”. As such a declarative statement to qualify for knowledge, must qualify for ”belief” by virtue of its cognitive content, which in turn must be “true” and “justified” based on sound inferences from solid evidences.