This blog focuses on the 3 pillars of Technical Analysis and lays the foundation for the so called Study of charts.
I.Price discounts everything
The statement “price discount everything” forms the cornerstone of of technical analysis. The chartists believe that the prices of the market reflect all the possible causes such as fundamental, political, psychological etc. Therefore the study of prices and volume is all that is required.
The shift in demand and supply causes the price to change. If demand exceeds supply, prices will rise and vice versa. These actions are the basis of all fundamental and economic forecasting. Saying it in another way, if the prices rise fundamental must be bullish and if the prices fall fundamental must be bearish.
As a rule, the chartists do not concern themselves with knowing the reason why markets rise or fall. Everything that affects market reflects in the prices; therefore only the prices need to be studied.
II. Prices move in a trend
It is important to understand and accept the concept that the markets move in a trend until there is a significant sign of reversal. The whole purpose of charting the prices of a market is to identify the trend in the early stages of its formation. One can also say it is similar to Newton’s first law of motion “a trend in motion is more likely to continue than to reverse”.
III. History repeats itself
Most of the technical analysts believe that the study of market action has a lot to do with the study of human psychology. Chart patterns for example, have been identified and characterized over the past hundred years to reflect certain pictures. These pictures appear on the price charts and reveal bullish or bearish psychology of the market. Since these patterns have worked well in the past it is assumed to work well in the future as well. In other words we can say that the future is just the repetition of the past.
(Source: Technical analysis for the financial markets by John.j.Murphy)