Technical Analysis

This refers to the process of NOT looking at the so-called 'fundamentals' of the economy.

Instead this approach looks at the patterns and trading histories in order to work out what will happen and the best strategy to use.

Essentially there are two axioms or givens within a system of technical analysis that must be accepted if the method is to have any chance of working and, indeed, is to be worth using at all.

These are as follows.

Firstly, that markets have trends, as if not then technical analysis is useless.

And secondly that they stay in place until they are broken, this may sound like it is obvious but it does not necessarily follow.

These are a bit like Newton's laws of motion with regard something always moving in a straight line at a certain velocity unless another force acts on it. Here a trend will always be followed until it is broken.

The models around this theory are very interesting and why it works has a lot to do with the logic of crowds of people and how they behave, which broadly says that a set of people experiencing condition set A will react the same as another in the same situation.

And as such technical analysis looks at patterns of market behaviour which will repeat, and therefore expects similar reactions each time. Of interest is their capacity for being self-fulfilling!

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