Technical Basics

Technical Basics

Price Discounts Everything

This theorem is similar to the strong and semi-strong forms of market efficiency. Technical analysts believe that the prices fully reflect all information available to the trading public. Because all stock information is already reflected in the price, it represents a 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 illogical 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 Random

Most technicians agree that prices have a tendency to trend. However, most technicians also acknowledge that there are periods when prices are not random, as it would be extremely difficult to make money using technical analysis. Market technicians agree that it is possible to identify a trend, invest or trade based on those movements, and profit as the trend unfolds. However, different analyst strategies could occasionally cause disagreements over whether a market trend exists. In the end, analysts often agree. For example, if we have a descent channel on an hourly chart, it could simply be a minor snag as part of a larger bullish trend. As time progress, analysts will be able to review the data as historical performance, and determine as a group how the market was behaving.

More important than “Why”

“A technical analyst knows the price of everything, but the value of nothing”. Technicians, who also referred to as technical analysts, are only concerned with two things:

  1. Current Prices

  2. Price Movement History

A security price is the product of the supply and demand forces of a company’s stock. The purpose of analysis is to forecast the direction of future prices. By focusing strictly on price, technical analysis has a very direct approach. Fundamentalists are concerned with why the price is what it is. For technicians, the why portion of the equation is too broad and the fundamental reasons given are given little credence. Technicians believe it is best to concentrate on “what”, rather than “why”. Why did the price go up? The answer is simple; there are more buyers than sellers, thereby creating more demand than supply. After all, the value of any asset is only worth what someone is willing to pay for it. Knowing “why” is irrelevant.

Conclusion

The markets move in trends caused by the changing attitudes and expectations of investors with regard to the business cycle. A comprehensive understanding of the historical relationships between certain price averages and market indicators can be used to identify current and future turning points. No single indicator can ever be expected to signal all trend reversals, so it is essential to use a number of different technical instruments.