The Cornerstone of Technical Analysis
Before diving into complex patterns, we must understand the fundamental belief of technical analysis: "The market price reflects everything." According to Technical Analysis of Stock Trends, the price of a stock in a free market represents the sum of all investors' knowledge, hopes, fears, and expectations. Whether it is fundamental data, insider information, or market sentiment, everything eventually leaves its mark on price through supply and demand.
The Market is Not Random
The Elliott Wave Principle further points out that the market is not chaotic as the Random Walk Theory suggests. The market is made up of people, and human social behavior is subject to specific laws and nature. Because human nature does not change, the cycle of human emotion from optimism to pessimism repeats itself, creating recurring chart patterns.
Charts as Battlefields of Supply and Demand
Charts are not just records of the past; they are the results of the battle between supply and demand. When buying (demand) exceeds selling (supply), prices rise; otherwise, they fall. The task of the technical analyst is to identify these recurring patterns to determine which side is winning and thus predict future probabilities.
Conclusion
Whether it is Edwards' trend analysis or Elliott's wave patterns, the core lies in one truth: History repeats itself. Mastering these patterns constructed by collective human psychology is the first step to profitable investing.