This chapter is from the book
This chapter is from the book
This chapter is from the book
The Technical Approach
While fundamental analysis focuses on the investment's intrinsic value, technical analysis is the study of the market through its creators, the investors. Therefore, the focus of technical analysis is the behavior and motivations of investors observed primarily through their own actions. It is imperfect people who determine market prices, not highly perfected valuation models. However, the technician does not deny that the pursuit of value is a primary source of market movement. Yet, the technical perspective deems that market price is formed by the collective opinions of market participants pursuing value. Thus, in the mind of a technician, price is less about company facts and more about investors' feelings and perceptions concerning those facts.
In the exchange markets, prices are determined by what one party is willing to pay and another is willing to accept. Therefore, price is ultimately the end result of a battle between the forces of supply and demand, manifested through the actions and behaviors of investors. Price represents all that is known, feared, and hoped for by the market. It is through the diagnostics of price, volume, and other technical metrics formed by the actions and sentiments of market participants that the technician gauges stock performance.
Technical analysis assumes that market participants are efficient in price formation, thus avoiding any judgments about the intrinsic value of the underlying company. Therefore, the technician is not concerned with what the ideal price should be; rather, he is concerned just with what it is. Consequently, the company or any dataset used to determine the company's value is not the pure technician's direct concern. The technician's objective is to develop an understanding of the behavioral forces producing price (such as supply and demand). The core aspects of the technician include believing that the markets are efficient at discounting even future developments, price moves through trends, investors are both logical and emotional creatures, and past behaviors tend to repeat themselves more so when enough time has elapsed that the behaviors have been forgotten.