` Gary Investing Blog: Introduction to Technical Analysis


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Friday, June 1, 2012

Introduction to Technical Analysis

If you are new to the study of technical analysis and are reading this page, you must be wondering just what technical analysis is. Many still considers technical analysis ignorant, useless and BS. However, I have met many traders using technical analysis as their primary decision-making technique, especially forex traders.

Already, in the most basic form, technical analysis is the study of past market data, most importantly, price and volume. These information and other indicators derived is used to make trading decisions and identify entry/exit level. 

According to Robert D. Edwards and John Magee in the classic book, Technical analysis of Stock Trends, basic assumptions of technical analysis are:
  • Stock prices are determined solely by the interaction of demand and supply, causing reversal in trends which could ultimately detected in charts
  • Stock prices tend to move in trends
  • Chart patterns (history) tend to repeat themselves
Other common assumptions:
  • Supply and demand are affected by investors' emotions, particularly fear and greed
  • Prices discounts everything (any news, public and private information available)
  • Patterns are fractal
Although certain chart patterns yield to high successful rates, don't forget to control risk. Always use stop orders.

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