What is Subjective and Objective Analysis?


What is Subjective and Objective Analysis?

Virtually all forms of technical analysis fall under the broad description of pattern recognition. Pattern recognition is the study of recurring formations or patterns. These patterns may be as simple as a gap formation, or as complex as a head and shoulders or Elliott Wave formation. The patterns may be generated from price or volume Information which is directly related to the market, or from data such as astrological or weather information not directly related to the market. A "narrower" view of pattern recognition falls under the extensive study of artificial intelligence, which will be covered In the objective section.

The various types of technical analysis can be separated into the two broad categories of subjective and objective analysis:

  1. Subjective analysis refers to studies that are subject to interpretation and therefore not easily verified using statistical methods. An example of a subjective pattern would be a head and shoulders pattern, because the actual formation is not always mutually agreed upon by all technicians.

  2. Objective analysis refers to studies that can be analyzed, and the results verified, using statistics or other mathematical methods. An example of an objective pattern is a moving average, because there is a specific mathematical definition for a moving average.

Technicians may use both kinds of analysis in arriving at a trading decision. The study of technical analysis will be separated into two different categories for the following reason. Fast and powerful computers now allow the trader to test objective technical studies to see how they perform historically. This allows the trader to decide which studies yield better results with specific markets over certain times. Of course, this does not imply that past performance will be similar to future performance, but the trader now has a reference frame to work from.

Subjective studies are inherently more difficult to analyze in a rigorous manner like objective studies. Although some work on subjective studies is being done in the field of artificial intelligence, there is still a long way to go. This by no means weakens the value of subjective analysis, but simply implies that the studies must be viewed from a different perspective. A technician may use an objective study in a subjective way, and in fact many traders do employ objective studies this way. For example, moving averages are sometimes used in a similar way as trend lines to detect support or resistance points.

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