This is the review of the first chapter of John J. Murphy’s Technical Analysis of the Financial Markets.
Philosophy of Technical Analysis
Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.
It is based on the rationale that:
- Market action discounts everything. Anything that can possible affect the price – fundamentally, politically, psychologically, or otherwise – is actually reflected in the price.
- Prices move in trends. The purpose of charting price action is to identify and follow trends. Once a trend is setup, it is more likely to continue than to reverse.
- History repeats itself. Much of technical analysis is based on the study of human psychology, which tends not to change. The key to understanding the future lies in a study of the past.
Market price tends to lead the known fundamentals. Fundamental analysis is more of an explanation of why the price action occurred while technical analysis tries to predict that price action.
Technical analysis is rooted in statistics. It is a combination if descriptive statistics (graphical representation of data: a candlestick chart, for example) and inductive statistics (generalizations or predictions extrapolated from that data: indicators, for example).
Stay tuned for more!