Technical Analysis Basics
Technical analysis is the examination of past price
movements to forecast future price movements. Technical
analysts are sometimes referred to as chartists because
they rely almost exclusively on charts for their
analysis.
Technical analysis is applicable to stocks, indices,
commodities, futures or any tradable instrument where
the price is influenced by the forces of supply and
demand. Price refers to any combination of the open,
high, low or close for a given security over a specific
timeframe.
The time frame can be based on intraday
(tick, 5-minute, 15-minute or hourly), daily, weekly or
monthly price data and last a few hours or many years.
In addition, some technical analysts include volume or
open interest figures with their study of price action.
At the turn of the century, the Dow Theory laid the
foundations for what was later to become modern
technical analysis.
Dow Theory was not presented as one
complete amalgamation, but rather pieced together from
the writings of Charles Dow over several years. Of the
many theorems put forth by Dow, three stand out:
-
Price Discounts Everything
- Price Movements are not Totally Random
- What is More Important than Why
Price Discounts Everything:
This theorem is similar to
the strong and semi-strong forms of market efficiency.
Technical analysts believe that the current price fully
reflects all information. Because all information is
already reflected in the price, it represents the fair
value and should form the basis for analysis.
After all,
the market price reflects the sum knowledge of all
participants, including traders, investors, portfolio
managers, buy-side analysts, sell-side analysts, market
strategist, technical analysts, fundamental analysts and
many others.
It would be folly to disagree with the price set by such
an impressive array of people with impeccable
credentials.
Technical analysis utilizes the information
captured by the price to interpret what the market is
saying with the purpose of forming a view on the future.
Prices Movements are not Totally Random: Most
technicians agree that prices trend.
However, most
technicians also acknowledge that there are periods when
prices do not trend. If prices were always random, it
would be extremely difficult to make money using
technical analysis.
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