Education - Technical Analysis Chapter - I ( Global Markets)

        Education - Technical Analysis

Technical Analysis – General Information and Principles

Before describing how investors use technical analysis in order to predict future price movement, the general definition and prime principles of technical analysis cannot be omitted.

Technical analysis is the study of price movement on the basis of charts. It is also the study of repetitive price patterns portraying our psyche. The first notes with regard to the subject date back to XVIII century Japan, where a rice trader described that without price analysis no one could become a successful trader. He didn’t know then, that in the future there would be a possibility to actually earn or lose money by predicting what prices could do in the future.

Technical analysis is based around three prime principles:

1. Market action discounts everything

What this means is that to a technical analyst, everything that happens around us from natural disasters to presidential elections, is portrayed in the price itself. Things happening around us obviously do affect the market price, but this can be anticipated or observed on the charts themselves.

2. Prices move in trends

If you take a look at any chart you could realize that prices move in trends, keeping hold of one long term trend. Obviously even a long term trend could change and does on many occasions but most of the time prices remain in the main trend. Larger trends are divided into smaller ones which are also later divided into even smaller ones…etc. From this principle we could reach a significant conclusion which will also be our most important rule. It comes from George Lanes famous words “The trend is your friend”. More about the trend itself will be discussed in later materials but bare in mind that these words should NEVER be forgotten.

3. History likes to repeat itself

Technical analysis as mentioned before is the analysis of repetitive price patterns. How and why are these patterns repetitive? The answer is quite simple but on the other hand very complicated. It is simple due to the fact that these patterns portray our behavior and our psyche, they portray what we do and how we react to different market events. The complicated part is that these patterns are often very precise what shows, that people behave exactly the same way now as they did in the distant past. It is easy to realize, but nearly impossible to explain. It seems like a “Big Brother” is watching over the market and precisely controlling what occurs. If an investor takes hold of the knowledge necessary to understand the repetitiveness of market patterns, then he is on a good way to earning lots of money.

Warm Regards,

Dipak Sharma