The Philosophy of Technical Analysis
1. Market Discounts Everything
The cornerstone of TA is that anything that can
possibly affect the price, is reflected in the price.
This action is the basis of all economic and fundamental forecasting.
It follows then that if everything that affects market price is ultimately reflected
in market price, then the study of that market price is all that is necessary.
By studying price charts and a host of supporting
technical indicators, the chartist in effect lets the
market tell him or her which way it is most likely to go.
The chartist does not necessarily try to outsmart or outguess the market.
All of the technical tools discussed later on are
simply techniques used to aid the chartist in the process of studying market action.
The chartist knows there are reasons why markets
go up or down.
He or she just doesn’t believe that knowing what
those reasons are is necessary in the forecasting process.
2. Price Moves in Trends
The concept of trend is absolutely essential to the technical approach.
The whole purpose of charting the price action of a market is to identify
trends in early stages of their development for the purpose of trading in the
direction of those trends.
In fact, most of the techniques used in this approach are trend-following in nature,
meaning that their intent is to identify and
follow existing trends.
– Prices move in trends, a trend in motion is more likely to continue than to reverse.
– A trend in motion will continue in the same direction until it reverses.
– Issac Newton’s first law of motion is empirical evidence of this.
This is another one of those technical claims that seems almost circular.
The entire trend-following approach is predicated on riding an
existing trend until it shows signs of reversing.
3. History Repeats
Chart patterns, for example, which have been identified and categorised
over the past one hundred years, reflect certain pictures that appear
on price charts.
They are based on the study of human psychology,
which tends not to change.
Another way of saying this last premise is;
History repeats itself
The key to understanding the future lies in a study of the past
What are your thoughts?