History repeats itself

History Repeats Itself

It is a collection of methodologies used to study past market activity (like price and volume) for present investment/trading decisions.

  • Technical Analysis is super old! Charles dow laid down its foundation in the late 1800s. Initially, some people were very skeptical till the late 1900s and regarded it as a scam. They reasoned that how could random price fluctuation be better than the business fundamentals while trying to make an investment decision. But now? Many hardcore fundamental investors consider it while trying to determine entry points, whereas almost all short term traders use it in some form or other. The modern Technical Analysis is a patchwork of practices that got evolved over the decades.

  • The popularity grew even more after cheap internet and innovation in charting solutions. Now more people are capable of doing what the Technical Analysis prescribed.

  • TA works on broadly two assumptions. First, it considers that the markets are efficient and have fully discounted all the public information in the recent most price. Second, it assumes that history would repeat itself in some form. But why do they think that few price patterns would repeat?

  • Several same types of people (you can consider traders as people) participate in the markets at the same time. Over time they develop repeating behaviors and individual tastes. The underlying human emotions of greed and fear also remain the same. With these cyclic situations, elements of price movement get repeated over time, and history gets repeated.

  • Yes, the markets are very random, such that no trader or fast computer could say with certainty what the next 1 min price would be. But these price movements always have a story beneath the randomness. With TA, we try to decipher this story.

  • Methodologies we call TA today have many branches of thought. They can be divided into two broad sections: A) Price Action B) Indicator based analysis.

In the coming modules we are going to dig a lot more deeper. Stay tuned!