Technical Analysis Adapts and Thrives by M. Carr and A. Hestla
Professions are built on a body of knowledge and an underlying rationale that explains the reasons behind the knowledge. Technical analysis is a professional undertaking, but little has been written about its foundational principles.
TO begin thinking about the philosophy of technical analysis, first of all, we must consider why traders believe it works. The major textbooks in the field acknowledge that technical analysis rests on three basic precepts:
1 Market action discounts everything.
2 Prices move in trends.
3 History repeats itself.
These core beliefs date back at least into the 1800s and are a part of Dow theory. Some would argue that technical analysis can trace its roots to 18th-century Japan and the use of candlestick charts on rice futures contracts. There may be even earlier instances of technical analysis, but these three precepts lie at the core of any study of charts.
IT'S ALL IN THE CHARTS
Relying on candlestick patterns meant that the trader believed everything he needed to know was in the price chart. This meant that traders were considering the impact of weather on the crop, the possibility of disruptions in supply related to war or epidemics, and any other possible input to supply or demand. Economists quantified this belief into the efficient market hypothesis, and the first precept of technical analysis — “Market action discounts everything” — was recognized as an idea worthy of a Nobel prize.