Definition
Technical analysis is the study of market action primarily through the use of charts and for the purpose of forecasting future price trends.
Note:
MARKET ACTION = PRICE + VOLUME
1. Market action discounts everything
It is only PRICE + VOLUME that reflects true supply and demand!
Unless this is fully accepted, nothing that follows can make any sense. It is the corner stone of Technical Analysis.
Charts do not cause up and down swings in the price of a share, they simply reflect the reaction of a massively varied body of investors, speculators and traders, to the fundamentals. The chartist knows that there are reasons for price movements, but he does not believe that knowing those reasons is necessary for the charting process.
2. Prices move in trends
Accept that they do, as the whole purpose of charting price action is to indentify the peaks and troughs in a trend for optimum timing of exit and entry into a share!
3. History repeats itself
The only way we can assume anything about the future, is by looking at the past. So, based on the assumption that human nature basically does not change and that it is human sentiment that is reflected in market action, we look at the chart history of a share to extrapolate to the future.
Criticisms
1. Self fullfilling prophecy
Waves of buying and selling are created by signals generated whthin the charts.
Chart reading is subjective.
These two critisisms are always lumped together, but really, (ii) entirely negates (i)!
2. The past has nothing to do with the future
All forecasting must be based on the past. There just is no future information available!
3. The "Random Walk" theory
This theory states that prices fluctuate randomly about their intrinsic value, therefore a "buy and hold" strategy is the only one worth considering! Trends do not exist and all market action is arbitrary.