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Technical Analysis

Technical analysis predicts the future behavior of stocks by examining their past performance.

TECHNICAL ANALYSIS TECHNIQUES

Technical analysis employs different techniques.  One approach is to inspect price chart formations and superimpose diagrams or determine patterns which have shown predictable results in the past. 

Different analysts may see different patterns in the same data, and results depend upon the time period being examined.  For those techniques which have a subjective component, we are unable to verify their success by applying a mechanical rule based process.  This observation, however, does not reflect on the value of these widely used techniques.

INDICATORS USED FOR BACKTESTING

Market Reflex uses indicators which are based on daily trading values.  These values are used with a technical strategy to calculate past profitability and current purchase and sale recommendations.  The inference is that a stock that has yielded a good profit using a certain strategy in the past, will do so in the future.  Indicator parameters are set and the past performance that these indicators would have generated is used to calculate the return on capital utilized.  Because this value takes into account the total duration for which the stock was held, it allows a fair comparison between different stocks, even when the stocks have different strategies.  When all strategies are evaluated, the stocks are ranked by the return on capital utilized. 

A limited number of frequently used and well respected indicators have been provided.  Separate buy and sell criteria are specified for the calculation.  Additional buy and sell criteria have been provided for these indicators beyond the standard criteria, as they have been found to be useful.  The indicators used in Market Reflex have been chosen to each derive distinct information from the data.

OPTIMIZING A STRATEGY

A strategy can be further optimized to provide a better return; however, if this is carried to the extreme, indicator parameters which exactly fit the history can be developed.  Such an exact fit does not reasonably predict future performance, since the return may derive from one or two exactly right purchases or sales.  A valid strategy will show a number of successful trades with a steady progression of primarily increasing balances over time.  This criterion separates 'tweaking' from optimizing.

A buy signal for a stock that has a good return on capital utilized might not be acted on until trade history has been examined.  Recent performance can be given a greater weight in the decision.  Fundamental analysis may also support a buying decision for a new stock, although some technical analysts disregard fundamentals and trade on a purely mechanical basis.  This follows the Dow theory that 'the price discounts everything'.