Lecture to MBA students about financial markets, with emphasis of the irrationality of investors behaviour.

1.  Money is only a tool. It will take you wherever you
wish, but it will not replace you as the driver.
 Financial History does not repeat itself but it
always rhymes
 Make sure that what you know is true and be
aware of what you do not know
 There is always some one that knows what you do
not know and acts upon it, to your disadvantage
of course.
 The most recent example is the economic crisis
that developed in 2008/9
http://www.youtube.com/watch?v=UC31Oudc5Bg
Prepared by Haim R. Branisteanu
Financial Markets Behavior
Experts and Technical Analysis

2. My personal believes on human behavior related to
financial markets and the so called “market wisdom”
and technological advancement/modernization etc.,
‫י‬ ֵ‫ר‬ ְ‫ב‬ ִּ‫ד‬‫ת‬ֶ‫ל‬ ֶ‫ה‬ֹ‫ק‬‫ִּד‬‫ו‬ ָּ‫ן־ד‬ ֶ‫ב‬,‫ת‬ֶ‫ל‬ ֶ‫ה‬ֹ‫ק‬ ‫ר‬ ַ‫מ‬ ָּ‫א‬ ‫ים‬ ִּ‫ל‬ ָּ‫ב‬ֲ‫ה‬ ‫ל‬ ֵ‫ב‬ֲ‫ה‬ ‫ִּם׃‬ ָּ‫ל‬ ָּ‫ירּוש‬ ִּ‫ב‬ ‫ְך‬ֶ‫ל‬ ֶ‫מ‬,‫ים‬ ִּ‫ל‬ ָּ‫ב‬ֲ‫ה‬ ‫ל‬ ֵ‫ב‬ֲ‫ה‬‫ֹל‬‫כ‬ ַ‫ה‬‫רֹון‬ ְ‫ת‬ִּ‫ה־י‬ ַ‫מ‬ ‫ל׃‬ ֶ‫ב‬ ָּ‫ה‬
‫ם‬ ָּ‫ד‬ ָּ‫א‬ָּ‫ל‬;‫לֹו‬ ָּ‫ֲמ‬‫ע‬‫ָּל־‬‫כ‬ ְ‫ב‬,‫א‬ ָּ‫ב‬ ‫ְדֹור‬‫ו‬ ‫ְך‬ֵ‫ל‬ֹ‫ה‬ ‫דֹור‬ ‫ש׃‬ ֶ‫מ‬ ָּ‫ש‬ ַ‫ה‬ ‫ת‬ ַ‫ח‬ ַ‫ת‬ ‫ֹל‬‫מ‬ֲ‫ע‬ַ‫י‬ ֶ‫ש‬,‫א‬ ָּ‫ּוב‬ ‫ש‬ ֶ‫מ‬ ֶ‫ש‬ ַ‫ה‬ ‫ח‬ ַ‫ָּר‬‫ז‬ְ‫ו‬ ‫ת׃‬ ֶ‫ד‬ ָּ‫מ‬ֹ‫ע‬ ‫ם‬ָּ‫עֹול‬ ְ‫ל‬ ‫ץ‬ ֶ‫ר‬ ָּ‫א‬ ָּ‫ְה‬‫ו‬
‫ש‬ ֶ‫מ‬ ָּ‫ש‬ ַ‫ה‬;‫קֹומֹו‬ ְ‫ל־מ‬ ֶ‫ְא‬‫ו‬,‫ְך‬ֵ‫הֹול‬ ‫ם׃‬ ָּ‫ש‬ ‫הּוא‬ ַ‫ח‬ ֵ‫זֹור‬ ‫ף‬ ֵ‫שֹוא‬‫רֹום‬ ָּ‫ל־ד‬ ֶ‫א‬,‫ב‬ ֵ‫ְסֹוב‬‫ו‬‫פֹון‬ָּ‫ל־צ‬ ֶ‫א‬;ַ‫רּוח‬ ָּ‫ה‬ ‫ְך‬ֵ‫הֹול‬ ‫ב‬ ֵ‫ב‬ֹ‫ס‬ ‫ב‬ ֵ‫סֹוב‬,
‫יו‬ ָּ‫ֹת‬‫ב‬‫י‬ ִּ‫ב‬ ְ‫ל־ס‬ַ‫ְע‬‫ו‬‫׃‬ ַ‫רּוח‬ ָּ‫ה‬ ‫ב‬ ָּ‫ש‬‫ים‬ ִּ‫ל‬ ָּ‫ח‬ְ‫נ‬ ַ‫ָּל־ה‬‫כ‬‫ים‬ִּ‫כ‬ ְ‫ל‬ֹ‫ה‬‫ָּם‬‫י‬ ַ‫ל־ה‬ ֶ‫א‬,‫א‬ֵ‫ל‬ ָּ‫מ‬ ‫ֶנּו‬‫נ‬‫י‬ ֵ‫א‬ ‫ָּם‬‫י‬ ַ‫ְה‬‫ו‬;‫קֹום‬ ְ‫ל־מ‬ ֶ‫א‬,‫ים‬ִּ‫כ‬ ְ‫ל‬ֹ‫ה‬ ‫ים‬ ִּ‫ל‬ ָּ‫ח‬ְ‫נ‬ ַ‫ה‬ ֶ‫ש‬,
‫ֶת׃‬‫כ‬ָּ‫ל‬ָּ‫ל‬ ‫ים‬ ִּ‫ב‬ ָּ‫ש‬ ‫ם‬ ֵ‫ה‬ ‫ם‬ ָּ‫ש‬‫ים‬ ִּ‫ר‬ ָּ‫ב‬ ְ‫ד‬ ַ‫ָּל־ה‬‫כ‬‫ים‬ ִּ‫ֵע‬‫ג‬ְ‫י‬,‫ַל‬‫כ‬‫ֹא־יּו‬‫ל‬‫ר‬ ֵ‫ב‬ ַ‫ד‬ ְ‫ל‬ ‫יש‬ ִּ‫א‬;‫ע‬ ַ‫ב‬ ְ‫ש‬ ִּ‫ֹא־ת‬‫ל‬‫אֹות‬ ְ‫ר‬ ִּ‫ל‬ ‫ִּן‬‫י‬ַ‫ע‬,‫א‬ֵ‫ל‬ ָּ‫מ‬ ִּ‫ֹא־ת‬‫ְל‬‫ו‬‫ֶן‬‫ז‬ֹ‫א‬
‫׃‬ַ‫ֹע‬‫מ‬ ְ‫ש‬ ִּ‫מ‬‫ֶּׁה‬‫י‬ ְ‫ה‬ִּ‫י‬ ֶּׁ‫ש‬ ‫הּוא‬ ‫ָה‬‫י‬ ָ‫ה‬ ֶּׁ‫ה־ש‬ ַ‫מ‬,‫ה‬ ָ‫ש‬ֲ‫ַע‬‫נ‬ ֶּׁ‫ה־ש‬ ַ‫ּומ‬,‫ה‬ ֶּׁ‫ש‬ ָ‫ֵּע‬‫י‬ ֶּׁ‫ש‬ ‫הּוא‬;ָ‫ב‬ ָ‫ד‬ ‫ֵּש‬‫י‬ ‫ש׃‬ ֶּׁ‫מ‬ ָ‫ש‬ ַ‫ה‬ ‫ת‬ ַ‫ח‬ ַ‫ת‬ ‫ש‬ ָ‫ד‬ ָ‫ָל־ח‬‫כ‬ ‫ין‬ ֵּ‫ְא‬‫ו‬‫ר‬
‫ר‬ ַ‫ֹּאמ‬‫י‬ ֶּׁ‫ש‬‫ֶּׁה‬‫ז‬‫ה־‬ ֵּ‫א‬ ְ‫ר‬‫הּוא‬ ‫ש‬ ָ‫ד‬ ָ‫ח‬;‫ים‬ ִּ‫מ‬ ָ‫ל‬ֹּ‫ע‬ ְ‫ל‬ ‫ָה‬‫י‬ ָ‫ה‬ ‫ר‬ ָ‫ב‬ְ‫כ‬,‫ָה‬‫י‬ ָ‫ה‬ ‫ר‬ ֶּׁ‫ש‬ֲ‫א‬‫ֵּנּו‬‫נ‬ָ‫פ‬ ְ‫ל‬ ִּ‫מ‬‫ין‬ ֵּ‫א‬ ‫׃‬‫רֹון‬ְ‫כ‬ ִּ‫ז‬‫ים‬ִּ‫נ‬ֹּ‫אש‬ ִּ‫ר‬ ָ‫ל‬;‫ם‬ַ‫ְג‬‫ו‬
‫ים‬ִּ‫ֹּנ‬‫ר‬ֲ‫ח‬ ַ‫א‬ ָ‫ל‬‫יּו‬ ְ‫ה‬ִּ‫י‬ ֶּׁ‫ש‬,‫ֶּׁה‬‫י‬ ְ‫ִּה‬‫י‬‫ֹּא־‬‫ל‬‫ם‬ ֶּׁ‫ה‬ ָ‫ל‬‫ָרֹון‬‫כ‬ ִּ‫ז‬,‫יּו‬ ְ‫ה‬ִּ‫י‬ ֶּׁ‫ש‬ ‫ם‬ ִּ‫ע‬‫ָה‬‫נ‬ֹּ‫ר‬ֲ‫ח‬ ַ‫א‬ ָ‫ל‬‫׃‬
 The words of Koheleth, the son of David, king in Jerusalem. Vanity of vanities, saith Koheleth;
vanity of vanities, all is vanity. What profit hath man of all his labor wherein he labored under the
sun. One generation passed away, and another generation cometh; and the earth abideth for
ever. The sun also ariseth, and the sun goeth down, and hasteth to his place where he ariseth.
The wind goeth toward the south, and turneth about unto the north; it turneth about continually
in its circuit, and the wind returneth again to its circuits. All the rivers run into the sea, yet the
sea is not full; unto the place whither the rivers go, thither they go again. All things toil to
weariness; man cannot utter it, the eye is not satisfied with seeing, nor the ear filled with
hearing. That which hath been is that which shall be, and that which hath been done is that
which shall be done; and there is nothing new under the sun. Is there a thing whereof it is said:
'See, this is new'?--it hath been already, in the ages which were before us.

3. How little we, humans and as a civilization have
changed in our financial behavior within the
deluges of a presumed advanced modern State
 "The budget should be balanced, the Treasury should be refilled, public
debt should be reduced, the arrogance of officialdom should be tempered
and controlled, and the assistance to foreign lands should be curtailed lest
Rome become bankrupt!"
-- Marcus Tullinus Cicero, Roman Senator, Philosopher 63 B.C.
 In a statement Jefferson made, in a letter to John Taylor in 1816. He
wrote, "And I sincerely believe, with you, that banking establishments are
more dangerous than standing armies; and that the principle of spending
money to be paid by posterity, (future generations or years to come)
under the name of funding, is but swindling futurity on a large scale.
 Thomas Jefferson was one of the most visionary and smartest US
presidents to this day

4. Example of mindless behavior of professional
financial market participants
Did the Australian Economic activity dropped 15% in one month?

5. Some basics on human character and the
resulting behavior
 More recent scientific research papers demonstrated that human character are based
on his genomic makeup and education can only enhance or depress, but not alter
those embedded qualities which are hereditary . The human genomic makeup stretch
a long way back to the mammals evolution of which we are part of, and therefore
we carry residual character qualities of our forbearers, like the Neanderthals etc.
 More so all living things establish social networks based on their origins, characters
and way of living, by establishing “flocks of same feathers”. The more sophisticated
or brainier, the living creature is, the more complex and sophisticated the social
order of the established network is. From ants and bees, to grazing animals to
baboons to humans. As a result the complexity of the individual behavior within the
network grows solely to achieve its genomic embedded desired goals or needs
depending on the perceived maximum success within the network.
 The state of mind or psychology or reasoning of smaller groups of human networks
to world events is difficult to predict from afar, or by not being intimate to the inner
relationships within those networks or their influence on other networks and
therefore the complexity of predicting human behavior which results in economic
developments which are impossible to predict. We build economic models on what
we know and think that all living networks are the same or have same goals.

6. Logic observation of your surroundings, understanding
human behavior and it’s needs, is the most important
ingredient for success.
 It is important to remember that there are several basics desires and goals of each
person which is easily identifiable and are in general quite universal. In general terms
human behavior is geared toward his and his family wellbeing, a continuous pursuit
of more riches and safety for his offspring’s, social status, power, fame and
admiration which desires in some cases trumps what is agreed to be “common
wisdom”. ***
 On the other hand and at the same time one should remember that what we call
“talent” or “visionary wisdom” is not acquired or taught in any school only enhanced.
A child must be born with those qualities embedded in his genomic makeup.
 Leonardo da-Vinci, Mozart, Darwin, Steve Jobs where born with unusual qualities
embedded in their genomic make up. They enhanced them not by education but by
observation, logical vision of the world or events in nature or behavior of people
around them. Non of them had formal education in the fields they excelled.
 Others like Bill Gates a Harvard University drop out, had the qualities to understand
and identify what product would be a business success and just stole the concept or
bought it well below it’s intrinsic market value, and then defending the deed by legal
means. Same can be said about Warren Buffet who is a classic financial predator.

7. Today’s Experts and experts advice or
predictions compared to Witchcraft
 Differences between Expert prediction and Witchcraft prediction are
there any? Or are they just preaching's to suit the clients aspirations.
 There is a huge difference between them on the following approaches;
 (i) the way they do their public relations and the way they dress,
 (ii) the tools they use for their predictions and how to gain popularity,
 (iii) use of a lot of acronyms or jargon words no one really understands
 (iv) the way their presentations are made to gain client confidence,
 (v) the amount of pay they demand for their prediction …. and more.
 The results and accuracy of today experts or years past witchcraft
prediction are awfully similar as both where or are wrong in most cases
 In summary today experts have a similar value to society as the years
past witchcraft practitioners – nothing can substitute knowledge.

8. How likely are today’s experts wrong?
 The science of of expert predictions is pretty spectacular. Science writer
David Freedman, author of the book “Wrong”, determined that two-thirds
(66%) of studies in major science journals are shown later, to be wrong.
http://www.freedman.com/p/wrong-book.html
 Almost 100% of long-term economic studies are proven to be wrong based
on the grand-daddy of all studies related to experts, made by Philip Tetlock
Professor of Organizational Behavior at the University of California, Berkeley.
 Prof. Philip Tetlock, spent 20 years following 300 elite media and
government experts making 82,000 predictions.
 After 20 years, the predictions did a fraction better than a chimpanzee
throwing darts at a board.
 Tetlock found that the best experts were uncertain, because that kept them
thinking about it. But that expert you rarely see on television. They’re boring.

9. Experts Bias, Blindness and How We Truly
Think – a quote from Daniel Kahneman
 Organizations that take the word of overconfident experts can expect costly
consequences. A Duke University study of chief financial officers showed that those
who were most confident and optimistic about how the Standard & Poor’s index
would perform over the following year were also overconfident and optimistic about
the prospects of their own companies, which went on to take more risks than
others.
 As Nassim Taleb, the author of “The Black Swan,” has argued, inadequate
appreciation of the uncertainty of the environment inevitably leads economic agents
to take risks they should avoid. However, optimism is highly valued; people and
companies reward the providers of misleading information more than they reward
truth tellers. An unbiased appreciation of uncertainty is a cornerstone of
rationality -- but it isn’t what organizations want. Extreme uncertainty is
paralyzing under dangerous circumstances, and the admission that one is merely
guessing is especially unacceptable when the stakes are high. Acting on
pretended knowledge is often the preferred approach.

10. What about the economic expert pundits?
 The economy has always been hard to predict. There’s a famous
quote by a Yale economics professor: “Stocks have reached what
looks like a permanently high plateau” made on Oct. 17, 1929, days
before the Great Crash, same prediction repeated itself in all bubbles.
 As an example William White an ex-management consultant who flew
all over the world, advising top companies and governments and who
helped run the Bank of Canada, and was also a top banker in Europe,
once said; the most important thing for an economic expert is to look
right, dress right and drop a lot of jargon during his meetings.
 No one knows with statistical accuracy how to make a business run
or predict the economy. William White is one guy who really pointed
to the truth and said; – “we pretend economics is a science, but it’s
not. It’s psychological mass behavior. It’s unpredictable”.

11. Don’t Blink! The Hazards of Confidence – From
The NY Times - article by Daniel Kahneman
 Mutual funds are run by highly experienced and hard-working professionals who buy
and sell stocks to achieve the best possible results for their clients. Nevertheless, the
evidence from more than 50 years of research is conclusive: for a large majority of
fund managers, the selection of stocks is more like rolling dice than like playing
poker. At least two out of every three mutual funds underperform the overall market
in any given year.
 More important, the year-to-year correlation among the outcomes of mutual funds is
very small, barely different from zero. The funds that were successful in any given
year were mostly lucky; they had a good roll of the dice. There is general agreement
among researchers that this is true for nearly all stock pickers, whether they know it
or not — and most do not. The subjective experience of traders is that they are
making sensible, educated guesses in a situation of great uncertainty. In highly
efficient markets, however, educated guesses are not more accurate than blind
guesses.
 http://www.nytimes.com/2011/10/23/magazine/dont-blink-the-hazards-of-
confidence.html?pagewanted=3&_r=1&sq=Kahneman&st=cse&scp=1

12. When and where we do need Advisers or
Consultants?
 We need consultants or so called experts for;
 For a second public opinion –(i) in the Court of law – as judges may know the
law but are lousy business people, or (ii) for our shareholders and other interested
parties to justify or protect our action and business interests
 We need consultants in any contact with local or governmental authorities to
smooth the bureaucratic process and advance or defend our interests.
 A good consultant has the right knowledge of the mentality and weaknesses of the
bureaucracy involved if at local level or government agency level
 A consultant dealing with the authorities should know the laws and regulation and
the decision making process within bureaucracy and who and how to approach the
officials to best promote our interests
 Your accountant and your attorney and their staff are also your consultants in
assisting you or your business in the related fields in most aspects of your business
 A good consultant will not always agree with you and will make you rethink a
strategy or product or be of assistance where you just do not have the manpower
to overcome “brainpower bottlenecks “within your organization.

13. Lessons from the Financial Crisis: - What’s good for few
WS companies and brokers can topple an entire economy
 Innovation drives markets – that is WS firms main mantra. But when
innovation is left unharnessed and spreads too fast, regulation can’t keep up,
and the so called WS “innovation” which is based only on greed implodes.
 During the 2008 financial crisis, loose regulations at the institutional level
combined with lenders’ “innovative” restructuring at the organizational level
led to the de-stabilization of the mortgage market and its practices,
according to research done by Ass. Professor Jo-Ellen Pozner at the
University of California, Berkeley’s Haas School of Business.
 “WS organizations seeking profits from making bad mortgages and then
securitizing them and sell them to unaware investors seemed like a good
idea, (but only) for those making the commissions, but when you aggregate
that behavior to the institutional and/or WS industry level, you get a very
dysfunctional industry,” (Pozner - June 03, 2011)
http://www2.haas.berkeley.edu/Videos/Pozner-Jo-Ellen.aspx

14. The Psychology of Bankers and simple bank
loans or Corporate Debt
 In business any banker is not your friend all he is after is his compensation and
commissions. Therefore before asking for a loan prepare an impressive presentation
of your business, take advantage of the banker greediness after all his job is to make
loans and he is after his commission, and in most cases the banker is not smart
enough to understand your business. (In banking if you want a friend, have dog.)
 Prove to the banker that other banks are interested to give you a loan and make it
clear to him he does not make you any favors. You can verbally “drop names”, but do
not make any false statements or exaggeration in your presentation. In summary, act
as a consultant, give the impression you know much more than the banker.
 There are a variety of loans available if from Banks or Financial institution
they are;
 Corporate loans – Corporate loans are given to corporation with a history of
profitability strong corporate cash-flow and identifiable assets. Criteria is mostly based
on the coverage ratio of the interest and principal payments to free cash-flow.
 The issuance of corporate debt is similar corporate loans. The advantage to the
company is that in the event of default the bank credit lines are mostly unaffected.

15. Other types of non traditional loans
 Asset Based loans – are given to companies that are relatively new and not well
established their products are perishable or do not prove continuous demand or
prone to clients returns. The loan amount is depending on the company partial value
of accounts receivable, finished inventory, machinery and equipment RE etc.,
 Equipment leasing loans are done mostly on equipment that can be easily sold to
another party such as airplanes for example, usually used by a fast growing
company who did not generate enough cash to buy the new equipment and do not
qualify for a loan to buy the assets. It actual is a long term rental agreement of the
asset from a financing company with the financing company holding the ownership.
 Equipment leasing spread financing – of airplanes or rolling stocks (ACF, DELL)
 Sale –Leaseback Loans are used mostly after the asset was fully depreciated and
to generate more cash to the company (it is mostly done in RE transactions).
 For example if a pharmaceutical company has a blockbuster drug who needs FDA
approval and substantial marketing expenses but do not have the means to finance
those expense will enter into a Sale – Leaseback agreement with the lender and
convert into a renter of the asset for a defined period of time at predetermined rate.

16. Bankruptcy related loans
 Bankruptcy remote loans are mostly done in situation that there are regulatory
or tax uncertainty whereby the regulator tax man may put a lien on the asset or
force the company into bankruptcy. If the demands settle to the benefit of the
company the company pays back the loans and receives their assets or in case of
bankruptcy the lender reposes the asset. (Partnership, example Golden Share, ACF)
 Debtor in Possession (DIP) loans are loans that from a legal point of view all
assets are in actuality sold to the lender including intellectual property, and the
company continue to operate under court supervision settles the unsecured debt
and tries to work itself out to profitability and regain control of their corporate
assets. (Photo 47th Street)
 Structured loans and PIK’s – Senior, Mezzanine, Junior Loans is a multilayer loan
used in any of the above type of financings whereby the lower the loan rank the
higher the interest rate is charged. Usually the Junior lender who is similar to equity
investment, receive a pay in kind in addition to the preset interest rate if the
company is very successful – used mostly in leverage buyouts of substantial
amounts of well established companies.

17. The emotional state of market participants
or do financial seers or economists need brains?
The emotional state of market participants is best described in article of
Neuro-economics - Do economists need brains? - (The Economist Jul 24th 2008)
http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=11785391
Since the 1980s researchers in this branch of the discipline, (of behavioral
economics) had used insights from psychology to develop more “realistic”
models of individual decision-making, in which people often did things that
were not in their best interests. Neuro-economists have focused on such
issues as people’s reasons for trusting one another, apparently irrational
risk-taking, the relative valuation of short- and long-term costs and benefits,
altruistic or charitable behavior, and addiction.
There is also growing interest in new evidence from neuroscience that
tentatively suggests that two conditions of the brain compete in decision-
making: a cold, objective state and a hot, emotional state in which the
ability to make sensible trade-offs disappears.

18. The justification for Technical Analysis –
the “nonsense” that primates believe in
 In general people, want to be safe and certain, of the events that will
unfold and therefore, they have a hunger for rules because they need
to reduce the complexity of events or the dimension of matters in such
a way, that they can simplify and “get recipes of unfolding events into
their heads”, or better said be able to squeeze them into their
memory. The more random information is, the greater the
dimensionality, and thus the more difficult it is to summarize.
 As such there is the human tendency to ignore the complexity and try
to summarize even more, you are trying to find a “perceived rule” that
anticipates unfolding events at any given time, by ignoring complexity.
 The more you summarize, the more order you put in, the less
randomness. Hence the same condition that makes us simplify, pushes
us to think that the world is less random, than it actually is, and we
believe to have found the “holy grail” of the anticipated events.

19. “Feeling Better” - Technical Analysis does
exactly that - gives you the feeling that
“you know” the outcome – but you do not
 Both the artistic and scientific enterprises are the product of our need to
reduce dimensions and inflict some order on things. Think of the world
around you, try to describe it and you will find yourself tempted to weave a
thread into what you are saying, in a novel, a story, a myth, or a tale, all
have the same function: they spare us from the complexity of the world and
shield us from its randomness. Myths impart order to the disorder of human
behavior and perception and the perceived “chaos of human experience.”
 The very same desire for order, interestingly, applies to scientific pursuits - it
is just that, unlike art, the (stated) purpose of science is to get to the truth,
not to give you a feeling of organization or “make you feel better.”
 Once you identify a repeat pattern you anticipate the same or at least similar
developments of events will develop. Familiar pattern which repeat
themselves randomly are the “bedrock” defining TA that well educated
professionals are betting millions on them – even that it is all “hubris”
 All TA does is giving you the “Feeling Better” and the feeling that “you know”
the outcome of a very complex system that is summarized in a series of
numbers over a period of time, and in the case, of FOREX the exchange rate.

20. What is Technical Analysis
 Technical Analysis is part of behavioral economics which
uses insights from the state of mind of the market
participants to develop more “realistic” models for the
individual decision-making which try in a simplistic form
to predict future pricing of financial instruments based on
a two dimensional graphic information with 4 data points.
 The 4 data points are prices of same financial instrument
over a defined period of time, at open, low, high and
close, and which in many cases is arbitrary (day, hour,
minutes, week etc.), but in some cases also correlated to
some degree to the settlement dates of the said
instruments.

21. What is the purpose of Technical
Analysis
 TA tries to anticipate the psychology of the market
participants and their emotional state of mind in
connection to the financial instrument they trade by
applying simplistic formula and graphic price relation
between various data points of price and accurately
with some “curve fitting” predicts the past!.
 Some aspects of TA take also into account the
transaction volumes which better assists to predict
turning points and price movements or anticipation of
events, only known to few market participants (an
feature used also to identify insider trading).

22. Why Technical Analysis is so
popular
 The popularity of TA is a direct result of the desire of
active market participants to instill some orderly short
term price movements in an environment which by
definition is very random in its behavior due to the very
wide individual participation of buyers and sellers and
their view of the pricing of same financial instrument.
 The mere belief in TA theories, of a big enough crowd of
sellers and buyers, makes TA a self fulfilling discipline in
the short term. On the other hand the complete dismissal
of long term TA is similar to completely adhering to the
decision making process on TA alone over same period of
time. The result – think and observe all the time!

23. …… continuation
 The popularity of TA grew substantially with the
availability of computing power and wide spread
dissemination of quotes for financial
instruments. During those times a slew of TA
indicators where introduced with each creator
claiming having a better mousetrap to predict
future price levels. Since, every few years some
one else comes up with a new slew of graphical
TA indicator which are in most cases a variant of
the old.

24. Is Technical Analysis useful
 Long term TA has value if taken into account
with fundamentals and can accurately predict
the state of mind of the market participants from
euphoria to deep distrust or outright depression
 Based on the fact that almost always, there are
market participants, that posses non public
knowledge about a financial instrument, if
fundamental information or intention of a
substantial anticipated transaction the
observation of TA discipline can assist in
anticipating short term price movements.

25. ……continuation
 Further more some aspects of TA can provide useful
information of tops and bottoms and exhausting
point in markets which we as human can perceive
the unfolding price action, much better in graphic
form, then by reading plain numerical price series.
 The visual processing of information by humans
seems far better than that of processing plain
streams of numerical data, because visual perception
in humans developed millions of years before
mathematics and there lies the popularity of TA

26. Accuracy of Technical Analysis
 Accuracy and benefits of TA in itself are slightly
better that tossing a coin or throwing darts at a list of
stocks, for a novice user, without a “feel” for the
market, but can be of substantial assistance as a
complimentary tool of fundamental study of the
financial instrument representing the stock or
debenture of a corporation, or commodity or
currencies etc.
 There is growing evidence that the directional
movement of financial instruments are heavily
influenced by the plain emotional state of the major
market participants engaged in the in the
transactions like hopes, desires or manipulation etc.

27. Technical Analysis used by
Financial Institution
 TA is a more simplistic mathematical set of function for processing
market pricing information reflected in visual graphic results, than
the more complex historic and statistical models employed by so
called “Quants”, who are employed by the big institutional
investors, who in essence employ similar information of pricing
volume and price correlation within the financial instruments,
representing a myriad of pricing data or price points across a wide
selection of financial instruments to achieve the holy grail of
relative “risk free” profit generating mechanism.
 This concept is employed in most big financial institution (also
called “black box trading”) and the trades are executed “blindly”
based on mathematical models, scalping temporary price
abnormalities of various financial instruments. The very high
volatility in financial markets is a direct result of unwinding those
trading practices which was first proven on 19th of October 1987

28. Does TA work in maximizing
return for market participants?
 In certain instances and mostly in short term trading strategies it
does, due the random price changes and for the simple reason that
the popularity of the technique is wide spread and market
participants adhere to the pricing points defined by the various
models.
 But noting is for free - even this so called “Secure DELTA” trading
systems generated over $2,3 billions in losses to UBS during the
month of September 2011.
 TA in conjunction with rigorous fundamental analysis can provide
useful information as to the psychology and attitude of the market
participants and correctly point to exuberance, euphoria or
overexcitement and the mirror of the same emotional state of mind
like pessimism or depression.
Prepared by Haim R. Branisteanu

29. Some of the general concepts
 Moving Averages of prices in various forms defining
trends
 Moving Averages of prices trying to capture
emotional state of market participants (RSI,
Stochastic, Bollinger Bands, and various “Oscilators”)
 Geometric formation in the price chart trying to
reflect / indicate the hidden desires of market
participants (Wedges, Triangles, Bases tops, Gaps
etc.).
 Time and Price ranges which try to anticipate the
perception of the market participants of pricy or
cheap pricing of the financial instruments (Gann,
Fibonacci, levels and “fans” ,“arcs”, Speed Lines,
etc.)

30. … continuation
 Outright impulse anticipation of market participant’s
behavior like Elliot Waves
 A combination of the above reflected in a very old
practice from Japan, called “Candle Sticks” which
include many of the above solutions in a pure visual
and color coded interpretation.
 More exotic approaches as a combination of the
above combined with planetary movements or longer
term sunspots cycles of which the moon cycle was
once a quite reliable indicator

31. TA in closed markets equities
 In closed markets like national stock markets the
reading of “market internals” which includes
advancing and declining stocks, new highs new lows,
up and down volume, absolute volume of the market
or of selected indexes produce new indicators. This
information, assist in the definition of new indicators
which are constructed, like market breath, ARMS
index / TRIN, McClellan Oscillator etc. and many
instances, also the above TA criteria are applied. In
many cases the resulting indicators are a new set of
TA awareness indicators (McClellan Summation
Index, resulting in the Hindenburg Omen or
Titanic Syndrome at market tops using new highs
and new lows + the DJIA as an example).

32. ……continuation
 One of the more classic analysis of the above are
other geometrical formation like the very popular
“head and shoulder” formation, “3 peaks and a
dome”, the “Cup and Handle” formation “Turtle” or
“Momentum Speculation”, “The Hindenburg Omen”
the FULL Moon effect, Sunspot cycle or the long term
concept of the “Kondratieff cycle”, which also apply
to population growth and debt levels (which is also
known as Schumpeter-Dent model).
 One empirical measure to remember is that the value
of a “stock market” is correlated to the real GDP +
real inflation of the host country + an innovation
factor of few % points – everything else is noise,
which noise, TA disciples claim to decipher

33. Examples of TA functions & concepts
 Average true range - averaged daily trading range
 Coppock - Edwin Coppock developed the Coppock Indicator with
one sole purpose: to identify the commencement of bull
markets
 Dead cat bounce - the phenomenon whereby a spectacular
decline in the price of a stock is immediately followed by a
moderate and temporary rise before resuming its downward
movement
 Elliott wave principle and the golden ratio to calculate
successive price movements and retracements
 Hikkake Pattern - pattern for identifying reversals and
continuations
http://www.chesler.us/resources/articles/chesler0404.pdf
Momentum - the rate of price change
 Point and figure charts - charts based on price without time

34. Overlays - are generally superimposed
over the main price chart.
 Resistance - an area that brings on increased selling
 Support - an area that brings on increased buying
 Breakout - when a price passes through and stays
above an area of support or resistance
 Trend line - a sloping line of support or resistance
 Channel - a pair of parallel trend lines
 Moving average - lags behind the price action but
filters out short term movements
 Bollinger bands - a range of price volatility
 Pivot point - derived by calculating the numerical
average of a particular currency's or stock's high, low
and closing prices

35. Price-based indicators
These indicators are generally shown below or
above the main price chart
 Accumulation/distribution index—based on the close within the
day's range
 Average Directional Index — a widely used indicator of trend
strength
 Commodity Channel Index - identifies cyclical trends
 MACD - moving average convergence/divergence
 Parabolic SAR - Wilder's trailing stop based on prices tending to
stay within a parabolic curve during a strong trend
 Relative Strength Index (RSI) - oscillator showing price strength
 Rahul Mohindar Oscillator - a trend indentifying indicator
 Stochastic oscillator, close position within recent trading range
 Trix - an oscillator showing the slope of a triple-smoothed
exponential moving average, developed in the 1980s by Jack
Hutson

36. Volume based indicators & Other
graphic Indicators
 Money Flow - the amount of stock traded on days the price
went up
 On-balance volume - the momentum of buying and selling
stocks
 PAC charts - two-dimensional method for charting volume by
price level Wedges and Triangles
 Fibonacci fans arcs and levels and Gann angles
 http://www.analistademercado.com.br/Fibonacci01.pdf
 Elliot Waves –
 Five wave pattern (dominant trend)
 Three wave pattern (corrective trend)
http://en.wikipedia.org/wiki/Elliott_wave_theory

37. Candle Sticks – main patterns
 Candle Sticks – main patterns
 Swirling tops, bottoms
 Dark clouds
 Engulfing candle
 Tree black Crows (bearish) or Tree
white candles (tree Marubozu) (bullish)
 There are other multiple forms of
candlestick chart patterns.

38. Longer Term Economic Cycles
 Longer Term Economic Cycles which can be
called also part of the Technical Analysis are
mentioned below.
 A number of types of business cycles, in the
traditional sense of a fluctuation within a
regular period have been proposed. The main
types of business cycles enumerated by
Joseph Schumpeter, and others in this field,
have been named after their discoverers or
proposers:

39. Long term Economic Cycles
 the Kitchin inventory cycle (3–5 years) — after
Joseph Kitchin,
 the Juglar fixed investment cycle (7–11 years) —
after Clement Juglar,
 the Kuznets infrastructural investment cycle (15–25
years) — after Simon Kuznets, Nobel Laureate,
 the Kondratieff wave or cycle (45–60 years) —
after Nikolai Kondratieff.
 the Forrester cycles (200 years) - after Jay Wright
Forrester.
 the Toffler civilization cycles (1000-2000 years) -
after Alvin Toffler

40.  Even longer cycles are occasionally proposed, often
as multiples of the Kondratieff cycle. Interest in
traditional business cycles was strongest before
World War II. However, interest has waned since the
development of modern macroeconomics, which
generally gives little support to the idea of regular
periodic cycles.
 At present we are in a period where Central Bankers
and the political leadership of most world nations are
trying to fight the Kondratieff Cycle and Debt cycle -