Introduction to the Art and Science of Technical Analysis
forecasting Stock prices using Information
Generally, information may be gleaned from various public sources such as
newspaper reports, magazines, online bulletins, and so on, upon which market
participants may then formulate an opinion about the market, making their
own predictions about potential market action. Unfortunately, such publicly
available information usually has little merit when used for forecasting pur-
poses, as those more privy to non‐public material information would have
already moved the markets substantially, leaving only an inconsequential
amount of action for latecomers to profit from, at the very most. This is where
technical analysts have the unfair advantage of observing the markets moving
on the charts and immediately taking action, regardless of the cause or reasons
why such action exists. They are only interested in the effects such activity
has on price. Technical analysts typically do not wait for news to be public
knowledge prior to taking action or making a forecast based on a significant
price breakout.
The use of non‐public material information potentially affords insiders sub-
stantial financial gain from such knowledge, as the release of critical or highly
sensitive company information may cause a substantial change in the company’s
stock price. Hence it is no great feat to be able to forecast potential market direc-
tion based on such prior knowledge, especially if the non‐public material infor-
mation is highly significant or headline worthy. Needless to say, insider trading is
illegal in the equity markets. But the possibility will always exist that it can occur
and in fact has on many occasions. Unfortunately, in unregulated over‐the‐coun-
ter (OTC) markets, nothing stops brokers from front running large client orders,
which is just another form of insider trading.forecasting Stock prices using technical analysis
Technical analysis is essentially the identification and forecasting of potential mar-
ket behavior based largely on the action and dynamics of the market itself. The
action and dynamics of the market is best captured via price, volume, and open
interest action. The charts provide a visual description of what has transpired in
the markets and technical analysts use this past information to infer potential
future price action, based on the assumption that price patterns tend to repeat or
behave in a reasonably reliable and predictable manner. Let us turn our attention
to some popular definitions of technical analysis.
The following definition of technical analysis tells us that charting is the main
tool used to forecast potential future price action.Technical analysis is the study of market action, primarily through the use
of charts, for the purpose of forecasting future price trends.
John Murphy, Technical Analysis of the Financial Markets
(NYIF, 1999)The next definition of technical analysis tells us that the charting of past
information is used to forecast future price action.