Price is Everything

Technical analysis is the study of historical price performance in an effort to predict future price performance (chart patterns). Price is the only accurate measure of investor sentiment -- it is the intersection of supply and demand. Investor sentiment is at least and possibly a more important determinant of price than fundamental factors like earnings, revenues and profit margins.

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. This is why stock price moves can be viewed as patterns on price chart.

Behind the charts and graphs and mathematical formulas used to analyze market trends are some basic concepts that apply to most of the theories employed by today's technical chart analysis.

It can be of great importance to know exactly what stage the market is in. You'll find that different strategies have varying degrees of success depending upon where the market is in a bigger time frame. Technical analysis of a strong uptrending market will show that basing patterns are frequently broken to the upside forming a "stair-step" chart pattern. This is a strong chart pattern in a strong market. However the same trader who continues to use this pattern without recognizing that the market has now lost momentum and is in a basing phase will not have the same success. Traders will find that breakouts do not carry as far and that many breakouts start to fail and become losses.