1st Principle – Market discounts everything.
Everything
including news, facts, data, emotions, and expectations. Everyone
(including the fundamental analyst) ponders over each piece of
information to make only one decision: to buy or to sell. This single
decision affects price and volume.
And price is really what
everyone is interested in. The price tells us if we are in the green or
red. As market prices fluctuate, your net asset value fluctuates. This,
is how important the market is. Hence, price and volume is all we need. This simplicity is what I like about technical analysis.
2nd Principle – Market has inertia.
If
the market is rising, it will more likely continue to rise. If the
market is falling, it will more likely continue to fall. If the market
is not going anywhere, it will more likely continue to stay within a
range. This is very important to traders as our edge lies in staying
with the inertia.
Hence, in technical analysis, we have this
saying: “the trend is your friend”. Now, close your eyes and pick a
random point on a chart. Repeat it 100 times. How many times have you
picked the exact turning point of a trend? Any answer more than zero is
impressive. This shows how important it is to stay with the trend.
3rd Principle – Market moves in waves.
The
market does have an unknown target price determined by fundamentals (or
rather what we expect of it). As information changes constantly, the
market has a moving target. However, it does not move in a straight line
directly to the price target.
This is because traders operating
in different time frames have different needs. As a result, demand may
exceed supply in this moment, and supply may overcome demand in the
next. This causes prices to move in ebbs and flows. In using technical
analysis, this is a crucial principle as we use these ebbs and flows to time our entries and exit in line with the inertia.
Written by
Galen Woods
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