The Emotional Analyst

I have always mused about newspaper commentary of financial markets, particulary jargon such as "asset x has crossed the psychologically important y point barrier". Here is a transscript of an Q&A session with a techinal analyst. - Expert Q&A Session Transcripts. In the introduction he lays out his assumptions on the drivers of price movements in the market.

"Technical analysis is the study of emotion. Every participant in the market is reacting to the current level of price. This is true for governments who are reacting to vote winning/losing policies, investment managers, discretionary traders, bank traders, corporate treasurers, option traders and just about anyone involved. [...] The basic assumption of TA is that in a market that demonstrates mass psychology people will react in similar ways to certain events. What's more these reactions tend to come in sequences. Thus by recognizing the current part of the sequence it is possible to forecast the next likely move."

He goes on to describe the quantitative tools of the technical analyst.

"There are many tools ranging from simplistic indicators such as moving averages through to complex techniques such as Elliott Wave, Gann and even astrology. Which ones are best? Well, in my view that depends on what type of person you are. Some are not comfortable or do not have the patience to practice some of the more complex/esoteric methods. Some people are not interested in forecasting but look to react. As a trader you need to understand which one of these you are and by trial and error you will find methods that suit your personality and style of trading."

Now we know.