Why Technical Analysis Works

• Technical analysis works because prices reflect all available

information and because many market participants make
decisions based on emotions.

• Stock market participants include:

• Traders who are leveraged and will sell on a small decline.
• Long-term value investors accumulating positions over time.
• Long-term value investors with positions they believe they can’t sell
because they’ll face taxes.
• Individual investors with an emotional attachment to the company.
• High frequency traders buying and selling to benefit from market moves.
• Investors who believe the stock represents a special situation.
• Random buyers and sellers.

25
To Know What Everyone Knows Is to Know Nothing

https://ssrn.com/abstract=3144223
26
Most Traders Already Know How to Win

• Richard Dennis (Turtle Trader):

“I always say that you could publish my trading rules in the

newspaper and no one would follow them. The key is consistency
and discipline. Almost anybody can make up a list of rules that are
80% as good as what we taught our people. What they couldn’t do is
give them the confidence to stick to those rules even when things
are going bad.”

From Market Wizards by Jack Schwager

27
Turtle Trading Legend

• Successful traders Richard Dennis and William Eckhardt held the

turtle experiment to prove that anyone could be taught to trade.

• By the early 1980s, Dennis had turned an initial stake of less than
$5,000 into more than $100 million.

• Dennis believed anyone could be taught to trade while Eckhardt

countered that Dennis had a special gift that allowed him to profit
from trading.

28
The Experiment
• Dennis would find a group of people to teach his rules to, and then
have them trade his ideas with his money.

• The training would last for two weeks and could be repeated over
and over. He called his students "turtles" after recalling turtle
farms he had visited in Singapore and deciding that he could grow
traders as quickly and efficiently as farm-grown turtles.

• Dennis placed an ad in The Wall Street Journal and thousands

applied. Only 14 traders were accepted.

• No one knows the exact criteria Dennis used, but the process
included a series of true-or-false questions.

29
Example Turtle Test Questions

1. The big money in trading is made when one can get long at lows
after a big downtrend.
2. It is not helpful to watch every quote in the markets one trades.
3. Others' opinions of the market are good to follow.
4. If one has $10,000 to risk, one ought to risk $2,500 on every
trade.
5. On initiation one should know precisely where to liquidate if a
loss occurs.

30