It is an analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume.
The efficacy of both technical and fundamental analysis is disputed by the efficient-market hypothesis, which states that stock market prices are essentially unpredictable.
The principles of technical analysis are derived from hundreds of years of financial market data. Some aspects of technical analysis began to appear in Amsterdam-based merchant Joseph de la Vega's accounts of the Dutch financial markets in the 17th century.
In Asia, technical analysis is said to be a method developed by Homma Munehisa during the early 18th century which evolved into the use of candlestick techniques, and is today a technical analysis charting tool.
In the 1920s and 1930s, Richard W. Schabacker published several books which continued the work of Charles Dow and William Peter Hamilton in their books Stock Market Theory and Practice and Technical Market Analysis.
In 1948, Robert D. Edwards and John Magee published Technical Analysis of Stock Trends which is widely considered to be one of the seminal works of the discipline. It is exclusively concerned with trend analysis and chart patterns and remains in use to the present.
Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, business cycles, stock market cycles or, classically, through recognition of chart patterns.
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Characteristics
- Market action discounts everything
- Prices move in trends
- History tends to repeat itself
Trends of Market
Uptrend: If the direction of the market is upward, the market is said to be in an uptrend.
Downtrend: If the direction of the market is downward, the market is said to be in downtrend.
Sideways: A sideways trend is the horizontal price movement that occurs when the forces of supply and demand are nearly equal. This typically occurs during a period of consolidation before the price continues a prior trend or reverses into a new trend.
Six basic tenets of Dow theory
- The market has three movements
- Market trends have three phases
- The stock market discounts all news
- Stock market averages must confirm each other
- Trends are confirmed by volume
- Trends exist until definitive signals prove that they have ended
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