The Technicians

Technical analysis is one of the least understood methods of investment analysis. Here three stars of the technical field explain their favourite methods and how they turned this numbers game into an industry

By Dale Jackson
Globe Investor Magazine, Feb. 21, 2008
Photographs (Bollinger) courtesy Bollinger Bands; (Nison) courtesy candlecharts.com; (Pring) courtesy Pring; (chart) stockcharts.com

Bollinger Bands owe their name to some quick thinking by the man who created them. As an investment analyst on a U.S. business TV channel in the early 1990s, John Bollinger was explaining his method of gauging market volatility through stock trading bands, which help investors measure price movement. "I had used them for a long time, and they had no name-they were just bands that I used," he says of his new take on an old technique. "The anchor said, 'So, what do you call those?' And I said, 'Uh, gee, Bollinger Bands.'"

It's surprising Bollinger didn't sell his discovery with more pizzazz, given that Hollywood was in his blood at an early age. In 1976, the New York native set off for Tinseltown with a visual-arts degree and dreams of becoming a cinematog-rapher. While Bollinger was passionate about understanding human behaviour, he soon learned that his true calling lay in behavioural finance. Shooting movies may seem like a far cry from technical analysis, but for Bollinger, the switch felt natural. "I'm not sure it was that big a leap," he says. "I was a very technically oriented cameraman in terms of special effects."

So he swapped his film processor for one of the earliest personal computers, earned his certified financial analyst ticket and developed his first trading software application. Unlike most other technical analysts, 57-year-old Bollinger is also a programmer, and he still writes his own code.

In the pencil-powered options trade of the early '80s, Bollinger was a high-tech anomaly. The now-famous bands came into existence when he began questioning long-held assumptions about price movement. "In those days, we be--lieved volatility was a fixed quantity," Bollinger remembers. "I came to realize that volatility was, in fact, itself very volatile." Unlike traditional trading bands, which only track prices, Bollinger Bands adjust to market conditions and give an early warning that volatility levels are about to change. Bollinger's marketing savvy has long since caught up with his technical skills. Today, institutional and retail investors worldwide turn to him-the latter through his various websites, his monthly Capital Growth Letter and his 2001 book Bollinger on Bollinger Bands. At Los Angeles-based Bollinger Capital Management, which he founded in 1998, Bollinger employs a blend of technical and fundamental analysis for more than 50 private clients.

But the strongest proof of his influence is the fact that Bollinger Bands are now part of most trading software. For retail investors, this technology is both a blessing and a curse, Bollinger says. "They may not really understand what the par-ticular sensitivity of that tool is to certain types of market conditions." His advice to novice technicians is to get a feel for Bollinger Bands before making a trade. "Take those ideas and run them in real time without trading them for a year or so, and see if they are robust."

What are Bollinger Bands? They typically consist of two lines charting standard deviations in the price of a stock above and below its moving average-in other words, its price over a set period of time. For the most part, traders use closing prices and a 20-day moving average. But standard deviation keeps tabs on volatility by showing how much a closing price de-parts from the average. Wide and narrow bands indicate high and low volatility, respectively.

Wide bands also signal that a current trend is probably ending, while narrow bands suggest that a new one is likely to begin. Bollinger Bands only indicate a change, not a direction. Once a trader knows a change is on the way, he can in-voke other technical or fundamental indicators to determine if the trend is up or down. "There's nothing to quantify them in terms of, 'Are they right or are they wrong?' because they are simply a tool," says Bollinger. "It's like asking if a hammer is right or wrong."

Martin Pring had his technical epiphany back in 1969, when he was working as a broker in Toronto. After reading the 1940s book Technical Analysis of Stock Trends, his world changed. "I thought, 'This is for me,'" Pring recalls. "The re-search of the company I was working for was really bad, so I used the technical analysis rather than the research."

Pring had immigrated to Canada from the U.K. three years earlier, with an economics degree from the University of Southampton. Pring's new life as a technician took him into institutional sales in Montreal. That job led to a 10-year stint with BCA Re-search, a long-standing investment research firm, where he began his career as an author: His 1979 book, Technical Analysis Explained, has been translated into 10 languages and is standard reading for technical analysts.

Pring founded his own research company in 1981, leaving BCA three years later to publish the InterMarket Review, a monthly newsletter for institutional and individual investors. In 1988, he partnered with Joe Turner, the owner of an Oak-land, California-based investment company, to form Pring Turner Capital. From his home office in Sarasota, Florida, Pring helps manage more than $100 million in assets, applying a mix of technical and fundamental strategies.

Although he's watched the tools of his craft evolve from hand-drawn charts to mass-produced software suites, Pring still thinks technical analysis is more art than science. "Technical-analysis charts basically reflect human emotions, and hu-man emotions repeat, but not exactly in the same way-just like history repeats but not exactly," he explains. "So each situation is going to be different."

Shrugging off criticism that past activity is a poor predictor of future market behaviour, Pring counters that the goal is merely to be right more often than wrong. He defines technical analysis as the process of identifying a price trend rever-sal-up or down-at an early stage, then riding the trend until there's overwhelming evidence the reversal has arrived. "The weight of the evidence is all different indicators-price, momentum, that kind of thing," Pring says. "Everyone is searching for the Holy Grail. The Holy Grail is knowing there is no Holy Grail."

What is Pring's process? Pring uses several technical indicators to determine forward price movement, but his weapon of choice is the bar chart. On a classic bar chart, the bar is a vertical line, with a stock's trading-period high at the top and its trading-period low at the bottom. A horizontal line through the bar shows the closing price, and some charts also include the opening price-for easier tracking of the stock's performance in the previous trading period. The time period in ques-tion can be whatever the trader requires. By plotting a series of bars and examining them for patterns, Pring can establish past trends and identify turning points in the market.

Bar charts contain little detail, and so can display a lot of broad data, which suits Pring's style. He doesn't favour com-puter-based analysis, because it scrunches down trading time frames from monthly to weekly to intraday. Time constriction can sacrifice accuracy, he warns. "The longer the trend, the more price action lends itself to technical analysis, where--as the intraday [data] is due to a lot of randomness."