The Logic Behind Technical Analysis

Let me first say that I do not now engage in technical analysis; nor, have I ever engaged in technical analysis. I do not believe doing so would be a productive use of my time.
Having said that, I do not claim technical analysis has no predictive value. In fact, I suspect it does have some predictive value. The Efficient Market Hypothesis is flawed. It is based upon the (unwritten) premise that data determines market prices. As Graham so clearly put it in Security Analysis.

The Efficient Market Hypothesis is not the only argument against technical analysis. There is also empirical evidence that questions the utility of technical analysis. However, empirical evidence alone is not sufficient to prove technical analysis has no predictive power. If most knuckleball pitchers had limited success, the knuckleball might be an inherently ineffective pitch, or there might be a better way to throw it. The same is true of technical analysis.
Technical analysis is logically valid. Not only is it possible that some form of technical analysis might have predictive power; I would argue it necessarily follows from the above assumptions that some form of technical analysis must have predictive power.

So, why don't I use technical analysis? I believe fundamental analysis is a far more powerful too. In fact, I believe fundamental analysis is so much more powerful that one ought not to spend any time on technical analysis that could instead be spent on fundamental analysis. I also believe there is more than enough fundamental analysis to keep an investor occupied; so, he shouldn't devote any time to technical analysis. Personally, I feel I am much better suited to fundamental analysis than I am to technical analysis.

Of course, there is no reason why this argument should hold any weight with you. I also believe there is sufficient empirical evidence to support the idea that fundamental analysis is a far more powerful tool than technical analysis.
Even though I believe there must be some form of technical analysis that does have predictive power, the mental model of investing which I have constructed does not allow for such a form of technical analysis. In other words: logically, there must be an effective form of technical analysis, but practically, I pretend there isn't.

Why? Because I believe that's the most useful model. One should adopt the most useful model not the most honest model. I'm willing to pretend technical analysis does not work, even though I know some form of it must work.
Really, this isn't all that strange. In science, I'm willing to pretend there are random events, even though I know there must not be random events. In math, I'm willing to pretend zero is a number, even though I know it must not be a number. A model with random events is useful. In most circumstances, a refusal to allow for random events would be harmful rather than helpful. The model with random events is simpler and more workable. The situation is much the same with zero. It isn't a number. To include zero as a number, you would have to put aside the principles of arithmetic. So, we don't do that. In school, you were taught that zero is a number, but that there are certain things you must never do with zero. You accepted that, because it was a simple, workable model.

I propose you do much the same in the case of technical analysis. You should recognize the logical validity of technical analysis, but create a mental model of investing in which technical analysis has no utility whatsoever.

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History of Technical Analysis:

History Of Technical Analysts
The Technical Analysis premises were derived from observation of financial markets over a long period of time say hundreds of years. Perhaps the oldest branch of Technical Analysis is the use of candlestick techniques by Japanese traders at least as early as the 18th century, and are yet still very popular today.
Another theory based resting on the collected writings of Dow Jones, the co-founder and editor Charles Dow, inspired the use and progress of Technical Analysis from the end of the 19th century. Modern research considers Dow theory its foundation stone.

For Technical Analysis the technical tools and theories have been developed and enhanced in recent decades, with a raising emphasis on computer-assisted techniques.
Common Beliefs Regarding Technical Analysis

The Technical Analysis is not at all concerned with why a price is moving but rather whether it is moving in a particular direction or in a particular chart pattern. For example, poor earnings, difficult business environment, poor management, or other fundamentals.
The analysts of Technical Analysis believe that profits can be made by the concept of "Trend following." What is tried to pronounce here is that if a particular stock price is steadily rising, that is, trending upward then a technical analyst will look for opportunities to buy this stock.

Until the technical analyst is convinced this up trend has reversed or ended, all else equal, he will maintain to own this security.
Additionally, technical analysts during the Technical Analysis look for various price patterns to form on a price chart and will take positions in anticipation of the expected move following that pattern. The tools of the analysts are believed to assist the technician in determining when trends have formed, ended, and so on till particular patterns are unfolding.

Technical Analysis can be at odds with fundamental analysis. Fundamental analysis maintains that the markets can miswrite a security and, through various methods of fundamental analysis, the "correct" price can be calculated too.
Profits can be made by trading the mispriced security and then waiting for the market to distinguish its "mistake" and reprice the security. In contrast, a technical analyst during the process of Technical Analysis is not interested in a security's "correct" price, but is only in the price movement.

While Technical Analysis is done there are two well-known sayings among technical analysts that are, "The trend is your friend," and "Forget the fundamentals and follow the money." An example of the different views of technical and fundamental analysis follows.
Suppose a stock was trading at 124.25 pence, and that the accord fundamental analysis view of the stock was that it was worth 120.00 pence. If the share price rose to 125.00 pence, then to 126.00 pence, and then to 127.00 pence, a technical analyst during his Technical Analysis would likely be a buyer of this stock in order to profit from the perceived trend.
In contrast, a fundamental analyst would possibly look to sell the stock as it is moving away from what the fundamental analyst believes is the "correct" price

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Financial Technical Analysis

Financial Technical Analysis Using Volume

I wonder if you have realized this...
All the data you get daily from the stock exchange in financial technical analysis charts are nothing more than:
1. Price
2. Volume

That's right. Only the price and the number of transactions are known daily and captured as charts for financial technical analysis. Even though volume is such an important element, very few technical analysis traders make full use of it in helping them with their trade entries and exit. This is because most technical traders simply do not know how to make sense of the daily volume bars in relation to the price action. I present here a simple chart explaining what the price versus volume behavior stand for and hope it helps you in making more sense in your financial technical analysis.

Financial Technical Analysis Using Volume Defined
Rising Price + Rising Volume = Healthy Bull trend
Rising Price + Declinging volume = Bull trend drying up, hitting ceiling soon
Declining Price + Rising Volume = Healthy Bear Trend
Declining Price + Declining Volume = Bear tredn drying up, bottoming soon.
Declining Price + Sudden Volume surge = Selling Climax, short term support level reached
Price at Peak + Sudden volume surge = Buying Climax, resistance level reached

Financial Technical Analysis of Head & Shoulder Formation Using Volume
The volume pattern for a head and shoulders top formation is very distinctive.
On the left shoulder volume reaches a peak. As prices move up to the head, volume increases,
but this second volume peak should be lower than that of the left shoulder. This higher peak in price,
yet lower peak in volume, is an important signal to the trader that buying interest is far less ardent.
Finally, as prices rally and form the right shoulder, volume further diminishes.
Financial Technical Analysis Using Volume, Conclusion
I hope this simple explanation of what each movement of price versus volume means in financial technical analysis can help you, as a technical analysis trader, attain a higher level of accuracy when reading your charts and therefore a higher level of trading consistency

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ForexGen | The Technical Analysis Approach to Stock Analysis

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There are lots of things that you can get when you utilize stock resource sites like Featured Profiles. You will get different methods for stock analysis. One of which is technical analysis, which for some is a useful tool for stock behavior. The technical analysis uses charts that determine the trending of stock price in a given period. It also shows the level of the high and low movement of the stocks. Although technical analysis is only one tool in stock analysis, investors find it relevant to have technical analysis approach to stock analysis. And this is present at Featured Profiles when they provide traders and investors with the featured company or stock picks. Aside from the technical analysis, the site also provides other approaches that are even more popular and important such as fundamental analysis and quantitative analysis.

On top of the stock analysis methods present on the featured company in the site, you will also see other important details about anything for stock trading. This includes:

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ForexGen | A Basic Technical Analysis Course for Pattern Analysis

What are the reasons why market participants buy and sell securities in the market? Knowing those reasons will help us make better informed decisions about buying and selling securities, and knowing those reasons is a key part of technical analysis in pattern analysis. There are thousands of market participants at any point selling and buying securities for many reasons, motives and from different financial positions and information/ knowledge positions: for instance, a wide spectrum might have a love of return and a concomitant hope of gain, an aggressive optimism, hedging, with stop loss triggers, with price target triggers, using perhaps fundamental analysis, or perhaps utilising technical analysis, basing decisions on broker recommendations, and many more. Trying to figure out why participants are buying and selling can therefore be challenging. Chart patterns thus place buying and selling into perspective by combining supply and demand into a kind of concise picture. As a visual and complete record of trading and prices, chart patterns provide a framework to analyze bulls and bears in stock price movements. Hence, chart patterns and technical analysis can help us determine the true, bigger picture.

What might pattern analysis do? Pattern analysis can be utilised to make short term or long term forecasts about stock prices. Data can be intraday, daily, weekly or monthly, and patterns can be as short as one day or as long as many, many years. Furthermore, for example, gaps and outside reversals may form very quickly in one single trading session, while, broadening tops and dormant bottoms may take months to be established.

Yet it should be said that technical analysis can be science and, then again at other times, art. In addition, pattern recognition is open to interpretation, subject to personal bias. To defend against bias and confirm pattern interpretations, other aspects of technical analysis should be used to verify or refute conclusions. While price patterns may seem similar, no two patterns are alike. False breakouts and exceptions are all part of the game. Hence, careful constant study is required for successful chart analysis. In addition, it is important to know that two basic tenets of technical analysis are that prices trend and that history repeats itself. An uptrend indicates that demand is in control, and a downtrend, that supply is in control. As the balance shifts, a pattern emerges. The majority of patterns fall into two main groups: reversal and continuation. Reversal patterns indicate a change of trend. Continuation patterns indicate a pause in trend, suggesting that the previous direction will resume later. However, just because a pattern forms after a significant advance or decline does not mean necessarily that it is a reversal pattern. Much depends on previous price actions, volume and more as the pattern evolves. This is where technical analysis becomes an art.

To conclude: pattern analysis is the reading of charts, but it’s not that simple. The various motives that motivate and actuate people in the market are part of charts and patterns, and discerning the charts and patterns requires some insight into such behaviour. Yet at the same time, chart analysis and pattern recognition are not science, but art, meaning that good technical analysis is always hard to do accurately. Hence, to give some key important suggestions to budding new technical analysts, the keys to successful chart pattern analysis are dedication, a persistent dedication to learn, focus, by limiting charts, indicators and methods, and consistency, where one should maintain charts regularly and study patterns often.

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