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Technical Analysis and Behavioral Finance

Technical Analysis and Behavioral Finance

Technical analysis is a branch of behavioral finance that studies collective investor psychology or sentiment. In any freely traded market, prices are set by humans or their mechanical proxies, and a price is set when demand and supply are  at equilibrium at any particular time.

Chart patterns represent human trading activity because human conduct is frequently repeated, becoming identifiable and predictable. Technicians rely on recognizing past patterns and trends to predict future asset price patterns. For example, in bubbles, the price of an asset rises irrationally to high levels driven by hope and greed of investors. According to another premise of technical analysis,  a market represents  a combination of  knowledge and attitudes. This is because every market has  a varied collection of players.

Trades determine volume and pricing. Technicians  analyze such technical market data  as price and volume movement to try to figure out what investors are thinking.

Human activity has an impact on the fluctuation of security prices. Even if they have a favorable assessment of  an investment’s fundamentals, an investor may sell a security for a variety of reasons, including the need for capital or margin. These acts cause the prices to fluctuate, generating trends from which technicians can benefit.

Unlike fixed-income and equity securities that have income streams, for asset types that do not yield income or do not have any underlying financial statements (i.e.such as commodities, currencies, and futures),  technical analysis is oftentimes used..

Question

Which of the following is least likely used by technicians to determine trading patterns?

  1. Price.
  2. Volume.
  3. Market players.

Solution 

The correct answer is C.

Technicians do not use market players to determine trading patterns. Technicians use price and volume to determine trading patterns.

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