Technical Analysis: Philosophy of Market Action

This is my series on Technical analysis, since I am new to Publishox I will post them here in order, but I have the first 7 parts posted to youtube, starting with this one Below is the written transcript. Enjoy.

This module is on the philosophy behind technical analysis. So lets start by defining technical analysis,

“Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends” John Murphy  (he wrote a great book called Technical Analysis of the Financial Markets which I highly suggest reading)

Market action being the following things, Price and volume, (and open interest if you are trading futures or options.)

The following concept may seem like a basic economic principal but it is take for granted a lot, and not really paid attention to much. the price and volume or market action, reflects shifts in supply and demand. I.E falling prices represent drops in demand, or increases in supply compared to a stagnant demand, and vice versa.

In technical analysis, Market action is king, all the tools of technical analysis are designed to aid the Technician in analyzing market action. It doesn’t matter what is causing the change, just which direction the change is going as Market action is the only thing needed to forecast.

This concept is one of the foundations of the philosophical principals of Technical analysis, do I advocate throwing out fundamental knowledge of markets to just view charts, of course not, but the Market action, or price and volume, is very important. The concept really is premised on that anything that could affect the price, is baked into the price already.

Again, this is a philosophical idea, of course, some philosophies do not work in the real world all the time but the basic concept is very powerful and allows someone to quickly analyze any market and get a feel for what is going on.

The argument could be made that this recent pandemic has caused a crash in the stock market, that is a fundamental issue, but others would argue prices were over inflated and far above trend. thus the new lower prices were already baked into the future data, you just had to look far back enough, and far forward enough to forecast the lower prices. In all reality this market crash is based on many things, the pandemic was just the needle that pricked the bubble.

All this aside, I believe technical analysis combined with fundamental analysis is the true tool

Of course hindsight is 2020, In the next module we will discuss the concept of prices moving in trends, and the philosophical implications of it.



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