When it comes down to someone’s trading / investing strategy, it will in general come down to either a fundamental / economic analysis approach or a technical analysis approach. With fundamental / economic analysis I mean a trader / investor analysing a company using its financial data (to invest in stocks), or maybe general market conditions for the stock market / commodities / interest rates, bonds, forex, politics to come to a decision as to in what products (of which there are many)to invest / trade. I don’t want to write much more about fundamental / economic analysis but I hope that you at least get the idea, and I actually want to get to the part of technical analysis of which this post is actually about.
Let me start off my explanation on technical analysis with an excerpt from a great book for technical traders “Technical Analysis of Stock Trends” which was written Robert D. Edwards and John Magee:
“Technical Analysis is the science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in “the averages” and then deducing from that pictured history the probable future trend.”
Here is another excerpt from the same book as mentioned above:
“The market price reflects not only the differing value opinions of many orthodox security appraisers but also all the hopes and fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers, as well as their needs and their resources – in total, factors which defy analysis and for which no statistics are obtainable, but which are nevertheless all synthesized, weighed and finally expressed in the one precise figure at which a buyer and a seller get together and make a deal (through their agents, their respective stock brokers). This is the only figure that counts”
And let’s finish with this excerpt from another great book on technical analysis named “Technical Analysis of the Financial markets” written by John J. Murphy:
“Technical analysis is the study of market action through the use of charts, for the purpose of forecasting future price trends.”
The above excerpts say enough but I will try to explain it in my own words and from my perspective words. Technical analysis is about the reading of charts / market action in trading / investing. When talking about market action I mean price and volume (also open interest) which all of us have access to in this day and age. As an aside, I won’t be talking too much about volume and open interest here as I trade mostly spot forex and don’t pay attention to it.
Now, from the price there are different ways in which to interpret the chart. It can be made up of candlestick charts or bar charts (there are more types) of which in my opinion the candles are the most popular, or I like them the most. Also from price different chart patterns form like head and shoulders, double top / bottoms, triangles and rectangles to mention just a few. Then different indicators can be derived from price like moving averages and oscillators for example. All this is used in one way or another by technical traders to develop an edge in the market with the hope of extracting profits from their trading endeavours.
To put it another way is that price represents the behaviour of all participants in a market and this behaviour forms different chart patterns through price that can give a trader a means to possibly profit from the market.
In pure technical analysis it is believed that the market discounts everything which basically means that only price counts (which means that fundamentals, news, etc are all already included in the the price). Prices also tend to move in trends (market trending up / down). Also in pure technical analysis there is a premise that history repeats itself in which the chart patterns discussed is an example.
I can’t go into detail of all the patterns that were mentioned in this post but hope to discuss them in more detail in future posts but what I want you to understand is that there are mainly two schools of thought when it comes to trading, fundamental / economic and technical analysis. Please do understand that there are many more subcategories and mixes of the two ideas discussed and many ways on how they can and are used, but it is just too much to get into here. What I would like you to take away from this post is that there are different ways to trade / invest and that you should do your research. Also, that Imy trading approach is technical and that is what my writing will be on.
Regards,
Trading SOS SOS