Stock Price Charts

What is the underlying theory behind technical analysts using charts to determine stock price ascents/descents

Public Comments

1. That trader's behavious is to a degree predictable - which it is and is becoming more so as more trading decision are made by computers. If you understand the algorithms (or types of at least) that people and machines use to make trading decisins then you can spot those signs and join the trade. For instance if the 3 day moving average rises aboove the 30 DMA than that may trigger enough buyers to go long to force a price rise even if the fundamental data remains totally unchanged. There are all sorts of patterns that get bourne out again and again (of course not all the time) and funnily enough they tend to hold true for stocks, commodities and FX. To an extent, the more that people use technical analysis then more self-perpetuating it will become but there are enough different ways to analyse technicals and enough fundamentalists, ignoramuses and extenuating circumstances to prevent the whole thing locking up. Read the book the Way of the Turtle for more insight.
2. In very, very brief terms, the philosophy behind technical analysis is that price patterns repeat over time, so if you familiarize yourself with specific chart patterns, you can hopefully recognize them when they form again in the present to be able to forecast the future.
3. The argument that I've heard is that trading charts represent what people think about a stock, and that the psychology of trading is fairly predictable.