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| Value in Time - Better Trading through Effective Volume - Pascal Willain (2008) |
In the eighteenth century, a Japanese rice trader named Munehisa
Homma noticed that it was possible to predict the evolution of prices by
studying certain patterns of past prices. He invented what is now called
candlestick analysis, still one of the most widely used technical analysis
tools. He assumed at that time that current prices represent all known information
about the markets. This hypothesis is still shared by many professional
traders, although we will see how limited it can be.
In the twentieth century, many improvements in technical analysis
appeared as new ideas emerged. These include Fibonacci retracements,
Elliott wave analysis, moving average convergence/divergence (MACD)
lines, and stochastics, to name a few.
In 2001, lightning struck, but it went largely unnoticed. Why? As has
often been the case throughout history, this revolution was the natural result
of a change that had different causes. Everybody noticed the change,
but very few noticed the revolution. It was similar to Louis Pasteur’s discovery
of microbes. That was a revolution, but the real change that made
that revolution possible was the invention of the microscope.
The change that would bring about a revolution to the technical analysis
of stock trading was decimalization. It happened on April 9, 2001, when
traders began to measure stock prices to the penny instead of in sixteenths
of a dollar (or 6.25 cents). The objective was to make the stock price fluctuations
easier for the general public to understand (thereby attracting more
retail investors), as well as to reduce the spread cost. On the contrary, as
we will see later, this change had a large impact on the way institutional
investors play the market. Decimalization killed market visibility
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