In 'Behavioural Technical Analysis', author Paul Azzopardi first explains the field of behavioural finance and then applies some of his findings to technical analysis in an attempt to explain how the two are compatible.
Behavioural finance is essentially the study of how human sentiment and emotions affect financial decision-making, and the subsequent effect of this on financial markets.
The author has done a competent job of explaining the main findings and principles behind the field.
Among the key concepts that are explained is the belief that traders use many irrational techniques when making judgments. For example, they may place too much emphasis on a small amount of recent data. Traders also try to avoid losses, which can lead to all manner of problems, as larger losses often ensue from failing to take a loss quickly.
The first part of the book is concise and easy to read.
The six main areas of behavioural finance are introduced in Part 2. They deal with complexity; how humans perceive what is around them; sense of self; aversion to risk; the impact of society and crowds; and gender. An overview of each area covers its key concepts, followed by details of how each area can affect technical analysis.
Part 3 builds on the concepts introduced in the earlier chapters by applying them to three technical-analysis conditions - the study of extremes, the study of price trends, and the often-used analysis of areas of support and resistance. The author shows how he believes behavioural finance can help understand some commonly used technical price patterns, and how these can be used to build a foundation for trading and investment strategies and decisions.
This easily read book serves as a solid introduction to the world of behavioural finance for those using technical analysis. The author does not over-use jargon and no prior knowledge of behavioural psychology is needed to understand the concepts discussed.
