What is Technical Analysis?

What is Technical Analysis?

It refers to the study of the action of the market itself as opposed to the study of the goods in which the market deals. Technical Analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in “the Averages” and then deducing from that pictured history the probable future trend.

John J. Murphy: Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. The term “market action” or “price action” includes the three principal sources of information available to the technician – price, volume and open interest.

Market price tends to lead known fundamentals. Market price acts as a leading indicator of the fundamentals or the conventional wisdom of the moment.

Three Main Premises:

  • Price Discounts Everything
  • Prices Move In Trends
  • History Repeats Itself

Additional premise: Markets are fractal, meaning that patterns (in this case resulting from the psychology of market participants), appear at every scale. This is the reason why using a 200 period moving average or 14 period RSI will produce similar results, regardless of the timeframe they’re used on (i.e. daily vs weekly chart, 5 minute vs 65 minute chart).

One of the largest advantages technicians have is the ability to apply our tools to any liquid asset class, giving us the ability to analyze and invest in thousands of liquid products across the globe. Additionally, as technicians we’re not concerned with the “why”, but rather the “what”, “when” and “how long?”

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