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Philosophy Of Technical Analysis
Before beginning a study of the actual techniques and tools used in technical analysis.
It is necessary first to define what technical analysis is, discuss the philosophical premises on which it is based, and draw some clear distinctions between technical and fundamental analysis.
And, finally to address a couple of criticisms frequently raised against the technical approach.
The author’s strong belief is that a full appreciation of the technical approach must begin with a clear understanding of what technical analysis claims to be able to do.
Maybe even more importantly, the philosophy or rationale on which it bases those claims.
First, let’s define the subject. 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 includes the three principal sources of information available to the techni
dan-price, volume, and open Interest (Open Interest is used only in futures and options.)
The term “price action, which is often used, seems too narrow because most technicians include volume and open interest as an integral part of their market analysis.
With this distinction made, the terms “price action” and “market action” are used interchangeably throughout the remainder of this discussion.
Philosophy Or Rationale
There are three premises on which the technical approach is based:
- Market action discounts everything.
- Prices move in trends.
- History repeats itself.
Market Action Discounts Everything
The statement “market action discounts everything” forms what is probably the cornerstone of technical analysis.
Unless the full significance of this first premise is fully understood and accepted. nothing else that follows makes much sense.
The technician believes that anything that can possibly affect the price-funda mentally, politically, psychologically, or otherwise is actually reflected in the price of that market.
It follows, therefore, that a study of price action is all that is required. While this claim may seem presumptuous, it is hard to disagree with if one takes the time to consider its true meaning
All the technician is really claiming is that price action should reflect shifts in supply and demand. II demand exceeds supply, prices should rise.
If supply exceeds demand, prices should fall. This action is the basis of all economic and fundamental forecasting.
The technician then turns this statement around to arrive at the conclusion that if prices are rising, for whatever the specific reasons, demand must exceed supply and the fundamentals must be bullish.
| Author | John J. Murphy |
| Language | English |
| No. of Pages | 596 |
| PDF Size | 20.3 MB |
| Category | Stock Market |
| Source/Credits | archive.org |
Technical Analysis Of The Financial Markets PDF Free Download