Tuesday, July 31, 2007

Lesson-2,History of TA

The oldest known branch of technical analysis is the use of candlestick techniques by Japanese traders as early as the 18th century, and now one of the main charting tools.

Munehisa Homma, a successful rice trader in 18th century Japan, wrote the first book on technical analysis. He addressed the market's bullish and bearish cycles, and said that successful trading depends on understanding market psychology.

Dow Theory is based on the collected writings of Dow Jones co-founder and editor Charles Dow, and inspired the use and development of modern technical analysis from the end of the 19th century. Modern technical analysis considers Dow Theory its cornerstone.


To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior does repeat itself so often, technicians believe that recognizable (and predictable) price patterns will develop on a chart.

Technicians use surveys to help determine whether a trend will continue or if a reversal could develop.they are most likely to anticipate a change when the surveys report extreme investor sentiment.

Surveys that show overwhelming bullishness, suggests that an uptrend may reverse, the reason being that if most investors are bullish they have already bought the market (anticipating higher prices).

And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.

Just as there are many investment styles on the fundamental side, there are also many different types for technical traders. Some rely on chart patterns, others use technical indicators and oscillators, and most use some combination of the two.

Excerpts Edited by me and with contents courtesy-Investopedia and answers.com
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