Information on Modern Technical Analysis
- The Dow Theory is one of the primary, and arguably the oldest, formal theories of technical analysis still in use. Principles of the theory have been derived from Wall Street Journal editorials written by Charles H. Dow.
The theory expresses the concept of "the three trends"--primary trends, secondary trends, and minor trends. Additionally, it provides the notion of averages, based on Dow's suggestion that, "averages discount everything except 'acts of God.' " It is from this theory that major technical indexes, such as the popular Dow Jones Industrial Average (DJIA), are based upon today. - With the digital revolution and the increasing power of computers, new forms of traditional technical analysis have evolved since the early 1990s. Many are based on the technical strategy of "swing-trading," or "swing-charting."
While swing-trading is not new, the rules-based systems that describe the strategy are easily programmed into computers. As a result, many swing-trading indicators are commonly available through stock analysis software, both online and off. Examples include Keltner's trend indexing (or channels), Donchian charting, a variety of "n-day" rules, and Fibonacci-based chart analysis. - Trend systems are based on the idea of calculating trends, typically by crafting well-defined technical signals for entry and exit into a position. Legendary among trend-based traders, but very secretive, are the highly successful and original "turtle traders" who used a trending system that has never been fully, or publicly, revealed. Technical analysis based on "trending" signals remain popular today.
- Fuzzy logic and neural networks are mainstays of modern computer artificial intelligence (AI). They are used for pattern recognition, among other tasks, and can excel at even complex duties such as facial recognition. For this reason, they have been adapted for use in technical analysis of the stock market at a growing rate.
Despite the ability of a computer AI to rapidly locate patterns, a technical analysis still requires rules for pattern matching described programmatically. For this reason, the success of a computer AI in stock-market analysis is only as good as the technical analysis system and programming it operates under. - Ultimately, technical analysis is about pattern recognition. More specifically, it is about recognizing profitable trading patterns in a timely manner. Computers have had a tremendous impact because of the breadth of data they can analyze to locate desired patterns, in addition to their speed. Using computers and computerized trading, technical traders can refine the time scope of their analysis down to hours or minutes, rather than the more traditional week or month.