V.6:1 (31-33): Trends and price channels by Heidi Schmidt

V.6:1 (31-33): Trends and price channels by Heidi Schmidt
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Trends and price channels by Heidi Schmidt

For the beginner, it is important to know that technical analysis is based on the belief that current market prices are related to prices that occurred previously. In other words, technical analysis is the opposite of the random walk theory, which states that prices are not related to each other from one day to the next. Thus, the technician analyzes past price (or yield) activity hoping to glean from it the future direction of prices. Technical analysis does not attempt to establish a mathematical model of market activity, such as an econometric model, but rather studies the symmetry of historical market price moves, to formulate price projections.

There is no single tool more important to the technical analyst than the identification of trend. Identification of trend is the heart of market symmetry, for business activity is known to occur in cycles and the correct and timely identification of a change in trend, marking the change in the business cycle, can be very profitable. Price channels are the chartist's tool for using trend to their advantage.

Dow Theory is credited by most technicians as being the "grandaddy" of technical analysis and it is Dow Theory upon which the "bible" of technical analysis is based: Edwards and Magee's Technical Analysis of Stock Trends, first published in 1948. A basic tenet of Dow Theory is that price moves tend to occur in trends. By Dow definition, an up-trend in price, a bull market, is defined by successively higher highs coupled with successively higher lows. A down-trend in price, a bear market, is defined by successively lower highs coupled with successively lower lows.

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