Introduction

In Finance, Technical Analysis Is An Analysis Methodology For Forecasting The Direction

Of Prices Through The Study Of Past Market Data, Primarily Price And Volume.Behavioral
Economics And Quantitative Analysis Use Many Of The Same Tools Of Technical
Analysis, Which, Being An Aspect Of Active Management, Stands In Contradiction To Much
Of Modern Portfolio Theory. The Efficacy Of Both Technical And Fundamental Analysis Is
Disputed By The Efficient-Market Hypothesis, Which States That Stock Market Prices Are
Essentially Unpredictable.

Technical Analysis Is A Method Of Evaluating Securities By Analyzing The Statistics

Generated By Market Activity, Such As Past Prices And Volume. Technical Analysts Do Not
Attempt To Measure A Securitys Intrinsic Value, But Instead Use Charts And Other Tools To
Identify Patterns That Can Suggest Future Activity.

Despite All The Exotic Tools It Includes, Technical Analysis Really Just Studies Supply And
Demand In A Market In An Attempt To Determine What Direction, Or Trend, Will Continue
In The Future. It Attempts To Understand The Emotions In The Market By Studying The
Market Itself, As Opposed To Its Components. If You Understand The Benefits And
Limitations Of Technical Analysis, It Can Give You A New Set Of Tools Or Skills That Will
Enable You To Be A Better Trader Or Investor.

As Weve Already Mentioned In Previous Chapters, Technical Analysis And Fundamental

Analysis Are The Two Main Schools Of Thought In The Financial Markets. Technical Analysis
Looks At The Price Movement Of A Security And Uses This Data To Predict Its Future Price
Movements. Fundamental Analysis, On The Other Hand, Looks At Economic Data, Known As
Fundamentals.

Technical Analysis Can Be Used On Any Security With Historical Trading Data. This
Includes Forex, Stocks, Futures And Commodities, Fixed-Income Securities, Etc. In This Part
Of The Tutorial, Well Emphasize Analyzing Forex In Our Examples, But Keep In Mind That
These Concepts Can Be Applied To Any Type Of Instrument. In Fact, Technical Analysis Is
More Frequently Associated With Commodities And Forex.
Technical Analysis Is A Trading Discipline Employed To Evaluate Investments And Identify
Trading Opportunities By Analyzing Statistical Trends Gathered From Trading Activity, Such
As Price Movement And Volume. Unlike Fundamental Analysts, Who Attempt To Evaluate A
Security's Intrinsic Value, Technical Analysts Focus On Patterns Of Price Movements, Trading
Signals And Various Other Analytical Charting Tools To Evaluate A Security's Strength Or
Weakness.

Technical Analysis Can Be Used On Any Security With Historical Trading Data. This Includes
Stocks, Futures, Commodities, Fixed-Income, Currencies, And Other Securities. In This
Tutorial, We’ll Usually Analyze Stocks In Our Examples, But Keep In Mind That These
Concepts Can Be Applied To Any Type Of Security. In Fact, Technical Analysis Is Far More
Prevalent In Commodities And Forex Markets Where Traders Focus On Short-Term Price
Movements.
 The Underlying Assumptions Of Technical Analysis
There Are Two Primary Methods Used To Analyze Securities And Make Investment
Decisions: Fundamental Analysis And Technical Analysis. Fundamental Analysis Involves
Analyzing A Company’s Financial Statements To Determine The Fair Value Of The Business,
While Technical Analysis Assumes That A Security’s Price Already Reflects All Publicly-
Available Information And Instead Focuses On The Statistical Analysis Of Price Movements.
Technical Analysis Attempts To Understand The Market Sentiment Behind Price Trends By
Looking For Patterns And Trends Rather Than Analyzing A Security’s Fundamental
Attributes.

Charles Dow Released A Series Of Editorials Discussing Technical Analysis Theory. His
Writings Included Two Basic Assumptions That Have Continued To Form The Framework For
Technical Analysis Trading.

1. Markets Are Efficient With Values Representing Factors That Influence A Security’s
Price, But
2. Market Price Movements Are Not Purely Random But Move In Identifiable Patterns
And Trends That Tend To Repeat Over Time

The Efficient Market Hypothesis (Emh) Essentially Means The Market Price Of A Security At
Any Given Point In Time Accurately Reflects All Available Information, And Therefore
Represents The True Fair Value Of The Security. This Assumption Is Based On The Idea That
The Market Price Reflects The Sum Total Knowledge Of All Market Participants. While This
Assumption Is Generally Believed To Be True, It Can Be Affected By News Or
Announcements About A Security That May Have Varied Short-Term Or Long-Term
Influence On A Security’s Price.Technical Analysis Only Works If Markets Are Weakly
Efficient.

The Second Basic Assumption Underlying Technical Analysis, The Notion That Price Changes
Are Not Random, Leads To The Belief Of Technical Analysts That Market Trends, Both Short-
Term And Long-Term, Can Be Identified, Enabling Market Traders To Profit From Investing
Based On Trend Analysis.
Today, Technical Analysis Is Based On Three Main Assumptions:

1: The Market Discounts Everything

Many Experts Criticize Technical Analysis Because It Only Considers Price Movements And
Ignores Fundamental Factors. Technical Analysts Believe That Everything From A Company’s
Fundamentals To Broad Market Factors To Market Psychology Are Already Priced Into The
Stock. This Removes The Need To Consider The Factors Separately Before Making An
Investment Decision. The Only Thing Remaining Is The Analysis Of Price Movements, Which
Technical Analysts View As The Product Of Supply And Demand For A Particular Stock In The
Market.

2: Price Moves In Trends

Technical Analysts Believe That Prices Move In Short-, Medium-, And Long-Term Trend. In
Other Words, A Stock Price Is More Likely To Continue A Past Trend Than Move Erratically.
Most Technical Trading Strategies Are Based On This Assumption.

3: History Tends To Repeat Itself

Technical Analysts Believe That History Tends To Repeat Itself. The Repetitive Nature Of
Price Movements Is Often Attributed To Market Psychology, Which Tends To Be Very
Predictable Based On Emotions Like Fear Or Excitement. Technical Analysis Uses Chart
Patterns ToAnalyze These Emotions And Subsequent Market Movements To Understand
Trends. While Many Form Of Technical Analysis Have Been Used For More Than 100 Years,
They Are Still Believed To Be Relevant Because They Illustrate Patterns In Price Movements
That Often Repeat Themselves.
 HISTORY OF TECHNICAL ANALYSIS OF MARKET

The Principles Of Technical Analysis Are Derived From Hundreds Of Years Of Financial
Market Data. Some Aspects Of Technical Analysis Began To Appear In Amsterdam-Based
Merchant Joseph De La Vega's Accounts Of The Dutch Financial Markets In The 17th
Century. In Asia, Technical Analysis Is Said To Be A Method Developed By Homma
Munehisa During The Early 18th Century Which Evolved Into The Use Of Candlestick
Techniques, And Is Today A Technical Analysis Charting Tool. In The 1920s And 1930s,
Richard W. Schabacker Published Several Books Which Continued The Work Of Charles
Dow And William Peter Hamilton In Their Books Stock Market Theory And
Practice And Technical Market Analysis. In 1948, Robert D. Edwards And John Magee
Published Technical Analysis Of Stock Trends Which Is Widely Considered To Be One Of The
Seminal Works Of The Discipline. It Is Exclusively Concerned With Trend Analysis And Chart
Patterns And Remains In Use To The Present. Early Technical Analysis Was Almost
Exclusively The Analysis Of Charts Because The Processing Power Of Computers Was Not
Available For The Modern Degree Of Statistical Analysis. Charles Dow Reportedly Originated
A Form Of Point And Figure Chart Analysis. With The Emergence Of Behavioural Finance As
A Separate Discipline In Economics, Paul V. Azzopardi Combined Technical Analysis With
Behavioural Finance And Coined The Term "Behavioural Technical Analysis".

Dow Theory Is Based On The Collected

Writings Of Dow Jones Co-Founder And
Editor Charles Dow, And Inspired The Use
And Development Of Modern Technical
Analysis At The End Of The 19th Century.
Other Pioneers Of Analysis Techniques
Include Ralph Nelson Elliott, William
Delbert Gann And Richard Wyckoff Who
Developed Their Respective Techniques
In The Early 20th Century. More
Technical Tools And Theories Have Been
Developed And Enhanced In Recent Decades, With An Increasing Emphasis On Computer-
Assisted Techniques Using Specially Designed Computer Software.
The History Of Technical Analysis Is Very Poorly Recorded, As There Is No Evidence Of It
Being Used. But It Can Be Conceived That This Ancient Method Of Analyzing Markets And
Prices Was Used In The Distant Past In Freely Traded Markets.

Markets In One Form Or Another Have Existed For Centuries. For Instance, We Know That
Notes And Checks Between Traders And Bankers Existed In Babylon By 2000 BC (Braudel,
1981). Currency Exchange, Commodities, And Participations In Mercantile Voyages Were
Traded In Ostia, The Seaport Of Rome, In The Second Century AD (Braudel, 1982). In The
Middle Ages, Wheat, Bean, Oat, And Barley Prices Were Available From 1160 On In Angevin,
England (Farmer, 1956); And A Large Grain Market Existed In Toulouse As Early As 1203
(Braudel, 1982). Publicly Available Evidence Suggests That As Early As The Twelfth Century,
Markets Existed In Most Towns And Cities And Were Linked In A Network Of Arbitrage
(Braudel, 1982).

In The Eighteenth Century, As The Dutch Empire Declined, The London And Paris Exchanges
Gradually Surpassed The Amsterdam Exchange In Activity And Offerings. In Other Parts Of
The World, Specifically In Japan, Cash-Only Commodity Markets In Rice And Silver Were
Developing, Usually At The Docks Of Major Seacoast Cities. It Is In These Markets That We
First Have Recorded Information Of A Wealthy Trader Who Used Technical Analysis And
Trading Discipline To Amass A Fortune.

Japan Is The First Place In Which Recorded Technical Rules Have Been Found, Many
Historians Have Suggested That Technical Analysis Began In The Rice Markets In Japan.
However, It Seems Inconceivable That Technical Analysis Was Not Used In The More
Sophisticated And Earlier Markets And Exchanges In Medieval Europe. Indeed, Even In
Japan, It Is Thought That Charts Were Introduced First In The Silver Market Around 1870 By
An “English Man” (Shimizu, 1986). Thus, Technical Analysis Has A Poorly Recorded History
But By Inference Is A Very Old Method Of Analyzing Trading Markets And Prices.

Modern Technical Analysis

Although The Practice Of Technical Analysis In Some Forms Likely Dates Back Many
Centuries, Charles Dow (1851-1902) Was The First To Reintroduce And Comment On It In
Recent Times. He Is Considered The Father Of “Modern” Technical Analysis. Dow’s
Introduction Of Stock Indexes To Measure The Performance Of The Stock Market Allowed
For A Major Advance In The Sophistication Of Stock Market Participants.

With The Advent Of Computers, Many Schools Of Technical Analysis Have Arisen And The
Modern Day Technical Analysis Has Changed Completely. Earlier Traders Used To Draw
Charts On Papers And Then Come Out With The Analysis On That Particular Asset. But Now,
It Is Completely Automated Where Data Is Directly Fetched From Exchanges And The Price
Charts Are Drawn On The Technical Analysis Software Armed With End Number Of Tools To
Make An Analysis Out Of It.

Today, Technical Analysis Covers Many Different Time Horizons: (1) Long-Term Investing
And (2) Short-Term Swing And Intraday Trading Being The Most Basic. The Indicators And
Methods Utilized For These Horizons Often Have Their Own Characteristics. In Addition To
Time Horizons, Different Investing Or Trading Instruments Exist. Commodities, For Example,
Have Their Own Technical Information And Peculiarities, As Do Currencies And Financial
Instruments Such As Bonds And Notes. The Subject Of Technical Analysis Is
Complex. Because Knowledge Of All Possibilities Is Impossible, The Individual Must Decide
The Period, Methods, And Instruments Best Suited To His Or Her Personality, Ability,
Knowledge, And Time Available. Although
The Basic Principles Of Technical Analysis
That We Investigate In This Book Are
Common To All Areas Of Markets, Investors
Must Learn By Reading, Studying, And
Experiencing The Peculiarities Of The
Markets In Which They Wish To Profit.

While Entering The Stock Markets One

Should Have The Complete Strategy To Earn
As The Market Is A Competitive Field In Which Your Analysis Is Matched With The Toughest
Minds Of The Industry. Unless You Have Developed The Complete Strategy Of Your Own
One Cannot Say The Good From
 Limitations Of Technical Analysis

The Major Hurdle To The Legitimacy Of Technical Analysis Is The Economic Principle Of
The Efficient Markets Hypothesis. According To The Emh, Market Prices Reflect All Current
And Past Information Already And So There Is No Way To Take Advantage Of Patterns Or
Mispricings To Earn Extra Profits, Or Alpha. Economists And Fundamental Analysts Who
Believe In Efficient Markets Do Not Believe That Any Actionable Information Is Contained In
Historical Price And Volume Data, And Furthermore That History Does Not Repeat Itself;
Rather, Prices Move As A Random Walk.

A Second Criticism Of Technical Analysis Is That It Works In Some Cases But Only Because It
Constitutes A Self-Fulfilling Prophesy. For Example, Many Technical Traders Will Place
A Stop-Loss Order Below The 200-Day Moving Average Of A Certain Company. If A Large
Number Of Traders Have Done So And The Stock Reaches This Price, There Will Be A Large
Number Of Sell Orders, Which Will Push The Stock Down, Confirming The Movement
Traders Anticipated.

Then, Other Traders Will See The Price Decrease And Also Sell Their Positions, Reinforcing
The Strength Of The Trend. This Short-Term Selling Pressure Can Be Considered Self-
Fulfilling, But It Will Have Little Bearing On Where The Asset's Price Will Be Weeks Or
Months From Now. In Sum, If Enough People Use The Same Signals, They Could Cause The
Movement Foretold By The Signal, But Over The Long Run This Sole Group Of Traders
Cannot Drive Price.