The market action sums up all needs, wants and expectations of all participants and as such delivers key information regarding probable future trends.
Technical analysis - or behavioral finance - is the process of analyzing historical market action, primarily through the use of charts, in an attempt to determine the most probable direction of future price trends.
There is a distinction between market action and price action. While the terms are sometimes used interchangeably, market action encompasses all primary sources of information available to a technical analyst: price, volume, time, and, open interest, if applicable.
Fundamental analysis requires that investment and trading opportunity is understood by analyzing macro- and micro-economic fundamentals. While fundamental analysis is a big part of the decision-making process, we believe that a fundamentals-only approach is limited and incomplete. Markets oftentimes remain irrational much longer than traders can stay solvent and sometimes even do the very opposite of what the fundamentals would otherwise suggest they should be doing. Consequently, it is necessary to fine-tune the timing of all and any investment and trading decisions.
We believe that the connection between market fundamentals and market action is profound. We disagree, however, with the projected consistency of perfect correlations between fundamentals and price action. We also reject linear extrapolations of the recent past into the indefinite future as a useful way to approach markets. Much like markets themselves oscillate up and down, so does the importance of specific fundamental variables – and we contend correlations are generally time and/or context-dependent. This is in part because changes in fundamental variables produce non-linear impacts in asset valuations and thus lead to non-linear market outcomes.
Our forecasting model reconciles market technicals with market fundamentals at various points in the economic cycle. The method we use balances the true nature of economic fundamentals with the perceptions towards them, revealing the background and tangible manifestation of mass psychological trends that we contend drive both the markets and the economy.
Technical analysis is based on three assumptions:
Understanding the rationale of technical analysis is the first step in understanding the benefits of charting. In simple terms, technical analysis provides superior flexibility, improves your market timing, and removes a significant amount of subjectivity from your investment decisions.
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