Chapter 1: Introduction to Technical Analysis
- Technical analysis is the study of prices in freely traded markets with the intent of making profitable trading or investing decisions.
- Technical Analysis is rooted in basis economic theory:
- Stock prices are determined solely by interaction of supply and demand
- Stock prices tend to move in trends
- Shifts in demand and supply cause reversals in trend
- Shifts in demand and supply can be detected in charts
- Chart patterns tend to repeat themselves
- Technical analysts study the action of the market itself rather than the goods in which the market deals.
- Psychological factors affect markets in an almost indecipherable way: greed, fear, cognitive bias, misinformation, expectations, and other factors.
- Technical analyst disregards all of these factors
- Technical analyst studies how the marketplace is accepting the multitude of various information
- Technical analyst looks for secrets in the market action that have predictive potential
- Technical analysis is used in two major ways:
- predictive
- market letter writers
- technical market gurus in the financial news
- well-known people
- like publicity, which helps market their services
- reactive
- use technical analysis (TA) to react to particular market conditions to make own decisions
- watch market and react when particular technical condition is met such as watching for moving average crossover
- not well-known people; publicity may distract them from their work
- the focus of this book is reactive, not predictive
- predictive
Follow Me Here: