History, Philosophy, Basic Tenets of Technical Analysis


Technical Analysis is a study of the past price action to predict the future price Trends. This means that the price of a share tells us as to how the share is going to move in the future and any reasons, let it be Fundamental or Technical, that could lead to a rise or a fall in the share prices is reflected in the price of that share. To give a simple example if a company is going to post excellent results, this will be reflected in the share price with a good rise which will be on account of insider buying. Similarly the opposite of this also is true. What we saw above was a fundamental factor responsible for the movement in the share prices. Besides these Fundamental factors there are Technical Factors viz. the Laws of Demand & Supply which also could lead to sharp movements in the share prices. These factors work on Mass Psychology and are closely linked to the Human Mind. Under a given set of circumstances all minds tend to work in the same direction. The theories of Technical Analysis are based on this concept and hence the share price movements can be predicted more often than not based on these theories.

Hence Technical Analysis is a subject which can successfully identify the beginning of a sharp rise or fall in the share prices. However, it is incorrect to say that Technical Analysis can predict or forecast all the moves correctly, as at certain times the markets itself are undecided.

Though Technical Analysis is being practiced in the West as well as some Asian countries like Japan for more than past 100 to 150 years, it has become popular in India only in the last 15 to 20 years.

To sum it up Technical Analysis:

·         A study of price charts along with volumes.

·         Is based on the law of Demand and Supply.

·         Works best in stocks that have a mass following.

·         Depicts the mindset of masses i.e. mass psychology.

The basic difference between Technical Analysis and Fundamental Analysis is that FA tries to find reasons for a stock to move up or down and based on the reasons predicts the price movements whereas TA is not concerned with the reasons and it believes that the way a stock price moves currently tells you where it is heading for in the future.