πŸ’‘πŸŽ“ The Philosophy of Technical Analysis πŸŽ“πŸ’‘

TVC:SPX   S&P 500 Index

To continue awareness our art of Technical Analysis , this idea is an educational post and summary of The Philosophy of Technical Analysis , from Technical Analysis of the Financial Markets, by John J. Murphy, 1999, Page 2-5

The Philosophy of Technical Analysis

1. Market Discounts Everything

The cornerstone of TA is that anything that can
possibly affect the price, is reflected in the price.

- All that is required is a study of price action
- Price action reflects shifts in supply and demand
- If demand exceeds supply, prices rise
- If supply exceeds demand, prices fall

The underlying forces of supply and demand are
the economic fundamentals of a market.

This action is the basis of all economic and fundamental forecasting.

It follows then that if everything that affects market price is ultimately reflected
in market price, then the study of that market price is all that is necessary.

Charts themselves do not cause markets to move,
they simply reflect the bullish or bearish psychology.

By studying price charts and a host of supporting
technical indicators, the chartist in effect lets the
market tell him or her which way it is most likely to go.

The chartist does not necessarily try to outsmart or outguess the market.

All of the technical tools discussed later on are
simply techniques used to aid the chartist in the process of studying market action.

The chartist knows there are reasons why markets
go up or down.

He or she just doesn't believe that knowing what
those reasons are is necessary in the forecasting process.

2. Price Moves in Trends

The concept of trend is absolutely essential to the technical approach.

The whole purpose of charting the price action of a market is to identify
trends in early stages of their development for the purpose of trading in the
direction of those trends.

In fact, most of the techniques used in this approach are trend-following in nature,
meaning that their intent is to identify and
follow existing trends.

- Prices move in trends, a trend in motion is more likely to continue than to reverse.

- A trend in motion will continue in the same direction until it reverses.

- Issac Newton's first law of motion is empirical evidence of this.

This is another one of those technical claims that seems almost circular.

The entire trend-following approach is predicated on riding an
existing trend until it shows signs of reversing.

3. History Repeats

Much of the body of technical analysis and the study of market action
has to do with the study of human psychology.

Chart patterns, for example, which have been identified and categorised
over the past one hundred years, reflect certain pictures that appear
on price charts.

These pictures reveal the bullish or bearish psychology of the market.
Since these patterns have worked well in the past,
it is assumed that they will continue to work well in the future.

They are based on the study of human psychology,
which tends not to change.

Another way of saying this last premise is;

History repeats itself

The key to understanding the future lies in a study of the past

  • What are your thoughts?

Comment: For those interested, a .PDF of the Technical Analysis of the Financial Markets, by John J. Murphy, is available here;
Comment: Having said that, I highly recommend picking up a hard copy - I have one here with me and it is by far the one of the most valuable books you should own a physical copy of..

As John J. Murphy highlights in the opening words of the introduction;

"It has been referred to by many as the "Bible" of technical analysis"
The Macro Economic Cycle is King πŸ‘‘

"Markets reflect all known & unknown information in the Price, Technical Analysis is the mathematical study of Price Action, Price Action reflects Human Behaviour and Human Behaviour repeats"