Three prerequisites and four elements of technical analysis

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Technical Analysis 101
Wed, Feb 15, 2023, 1:15 AM ET  ·  5 min read  ·  0 view

First, the market behavior is inclusive and digestible;

Second, prices evolve in a trendy fashion;

Third, history will repeat itself.

What are the four elements? Price, volume, time, and space.


One, Market action embraces and digests all information. What's the meaning of this? That is, we see the fluctuation and fluctuation of the stock price every day. It has reflected all the price factors that affect the stock in this market, including the company's operating conditions, industry, and even political psychology. All factors will be concentrated in the price we see on the market every day. What? If these factors, taken together, were positive for stocks, stock prices would be going up today. If these factors had combined to weigh on the stock, share prices would be down today. Therefore, many pure technical analysts believe that I only need to study the price changes of the board. I do not need to study the news or even some information on the fundamentals. Of course, the fundamental factors that affect the stock price movement are still the fundamentals. Charts, and therefore prices, simply reflect changes in fundamentals. I'll give you an example. It used to be that when you bought stocks, you'd often find that stocks would suddenly soar. There was no advantage if you didn't know why. You didn't know the result during the day. In the evening, you saw the announcement of a major asset injection. This is a great benefit. Therefore, the current stock price surge is justified. However, you do not know that all the benefits and disadvantages of the market will be reflected in the stock price of the day and the decision of investors.

Second, prices evolve in a trending way. Trends are at the core of the technical analysis. Prices fluctuate in either an uptrend, a downtrend, or a sideways move. In short, the price fluctuations are not a mess, are changing according to the trend the way, which is very important for traders. The point of technical analysis is to identify turning points as early as possible, to buy or sell, then continue to rise or fall, you can make a profit, and once established, a trend is not easily changed or terminated. We often say that the market is also the existence of inertia. Once it rises, it is like an object movement. If you want to stop, you need to push with time and external forces. Following the trend has become the mantra of our technical analysts. All you have to do is use the tools of technical analysis to find the trend of the market and then follow its very simple dynamics. What happens if a bear market establishes that you're still buying, mostly technology If it's a bull market, you buy stocks and hold them.


Third, History would repeat itself. Technical analysis says that history repeats itself. In other words, the technical signals given by various graphs or indicator patterns we study are repeated constantly. You only need to execute these signals firmly. The same graph appears again and again, but history repeats itself constantly. If you use the MACD-plus indicator, every time you go above 80 you sell, as was the case, and as will be the case. Why does history repeat itself? This is determined by human nature. As long as human greed and panic remain unchanged, changes in the capital market are always repeating themselves. For example, a price bubble will always go from beginning to collision and then collapse. This has a lot to do with the psychology and behavior of the masses. Mark Twain famously said, History never repeats itself, but the parallels are always striking. I find this phrase highly apt in technical analysis. History is not the same as repetition, but it is very similar. I have discovered a pattern in actual combat and observation over a long period. If you look carefully at every bottom and top of the Chinese stock market, especially two adjacent bottom and top patterns are very unusual examples. But if the interval is longer, then its shape may be more and more different. It's a gradual, graduated process. This time the bottom is similar to the last, but the next time it may not be so similar.


Now let's talk about the four elements of technical analysis. Fundamental analysis We mainly study the operating conditions of companies, and industry policies, but what factors does technical analysis study? Technical analysis focuses on four factors: price, volume, time, and space.


First and foremost, there is the price. Price should be the overriding factor in our study of technical analysis. What's the price? We understand it well, that is, the trading price of a stock, there is the past trading price, the specific trading price of the day, the opening and closing prices, the highest price, and the lowest price. Which of these four prices is the most important? It's the closing price, of course, and the one we've looked at the most is also the closing price. The rise and fall of the stock price itself are what we are most concerned about. If you go through the analysis, you still have to put it into the stock price. Why is the closing price the most important? The price fluctuation every day is the result of the game between long and short in the market. But in the game of every day, it should have a result whether the long side is dominant or the short side is dominant. The final result is reflected by the closing price. An equal to the closing price is a reflection of the day's long and short game. For technical analysis, the closing price is the three-day closing price. Only when the closing price breaks through an important barrier for three consecutive days can we consider it a true breakout. A lot of your technical analysis is based on the closing price.


The second factor is trading volume, which is also understandable. There are past trading volume and current trading volume, and volume is an indicator of market sentiment and momentum. There are many correlations between volume and price. For example, we often say that both volume and price will rise, volume and price will deviate, and the volume will shrink and fall. These are the important mantras or principles of our analysis at ordinary times. To sum up, Rise is the need to increase the volume of falling is not the need to cooperate with the trading volume. The rise of stock prices must be in line with the trading volume, otherwise, it will not last. The decline does not need to cooperate with the trading volume and can shrink the volume. Volume doesn't lie, because it is a reflection of the day's market volume or the amount of money traded, it can't be a fraud.


Also, we often hear a stock market proverb, There's a price after the quantity. The turning point of a stock price is usually the change of trading volume first, and then the change of price. Only the quantitative change in trading volume leads to the qualitative change, and then the price change explains that the change in trading volume should be ahead of the change in stock price.


If the price goes up, but the trading volume does not increase or even decrease, this is what we often call volume-price divergence. Volume-price divergence is the most important technical method to study trading volume. It is also an important signal of the trend turning.


The third time, which can also be called the period, we know that a bull market and a bear market usually have a year or even several years. There are cyclical alternations between bull and bear markets. Sometimes we study the fluctuation of several days, sometimes we study the fluctuation of several months, and even we study the law of price fluctuations for several years or even more than 10 years. The existence of stock price is a cyclical change, which we must recognize because the stock price is a reflection of the economy, the economy itself is cyclical, so this is a natural law. We usually have different periods when looking at the candlestick chart. The candlestick of the period includes a daily chart, weekly chart, and daily chart, and there are also 10 minutes, 30-minute, one-hour periods, and so on. The significance of the study of time lies in the study of when the market turns in the end. Gann's theory believes that time is the most important factor in the operation of the market, more than the price. Later, when we talk about Gann's theory, we will elaborate on his theory.


The fourth space, space refers to the fluctuation range of stock price. Predicting the price is to predict the range of stock price fluctuations. It is very difficult to make accurate predictions. "The bull market does not say the top, the bear market does not say the bottom". Do not say that the top has been reached easily during the bull market, and do not say that the bottom has been reached easily during the bear market. "Time-for-space" refers to the time-for-space of stock prices. According to the Chinese proverb, "how long is the horizontal and how high is the vertical", there will be more room for the price to rise as long as the trading hours are.


The technical analysis of the stock market is to analyze four elements and their relationships. These are the three assumptions and four essentials of technical analysis.

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