The Basics of Chart Patterns

Price is Everything

by Christopher Smith

Technical analysis is the study of historical price performance in an effort to predict future price performance.  Price is a very important statistic in the world of technical analysis because it is the only accurate measure of investor sentiment -- it is the intersection of supply and demand.

Technical analysis makes the assumption that investor sentiment is at least and possibly a more important determinant of price than fundamental factors like earnings, revenues and profit margins. Given this outlook many draw the conclusion that fundamental and technical analysis are at odds but nothing could be further from the truth.  Technical analysis is the study of price and the factors that determine price.  It would be silly to believe that fundamental analysis does not play a role in shaping investors perception of. value.  The technical analyst believes that all perceptions of value are encapsulated in one statistic, price.   

There are three important principles that govern all technical analysis.  First, price is NOT random, second, price anticipates fundamental change and third, the relationship between price and time is linear.