• What is Technical Analysis
  • Principles of Technical Analysis
  • Advantages of Technical Analysis
  • Criticisms of Technical Analysis
  • The Dow Theory

Technical Analysis Definition

Principles of Technical Analysis

Market Action Discounts Everything

  • All Economic, Political, Social and Psychological factors (the fundamentals) are reflected in the price
  • The price also includes the hidden fundamentals
  • If prices are rising it means demand is greater than supply
  • If prices are falling it means supply is greater than demand
  • “Buy the rumor and sell the fact”

Prices Move in Trends

History Repeats Itself

  • Investor’s behavior tends to repeat itself over time
  • Identifiable price patterns can be studied to predict similar future patterns
  • Greed and fear have been showing up at market tops and bottoms forever
  • Basic human psychology does not change
  • Patterns which worked in the past will work in the future

Advantages of Technical Analysis

  • Flexibility and adaptability
  • Applies to different trading mediums
  • Applies to different time dimensions
  • Plays a role in economic forecasting

Flexibility and Adaptability

  • Chartists can easily  follow many markets , which is generally not true of the fundamentalists who tend to specialize in one group of assets
  • Technicians can rotate attention and capital in order to take advantage of the rotational nature of the markets
  • A trending phase is usually followed by a trendless period while at the same time another market will be experiencing a major trend

Different Trading Mediums

Because it is based on the study of price action, technical analysis applies to different trading mediums 

  • Stocks
  • Commodities
  • Forex / Currencies
  • Bonds

Different Time Dimensions

  • Technical analysis applies to different time frames
  • Short term – Hourly charts
  • Medium term – Daily Charts
  • Long Term – Weekly Charts
  • The opinion that technical analysis should be used only for the
  • short term is NOT true

Economic Forecasting

  • The charts of commodities can indicate the strength or weakness of the economy as well as the direction of inflation
  • Rising commodity prices suggest a stronger economy and a rise in inflation
  • Falling commodity prices warn for a slowing economy and a drop in inflation
  • Interest rates are generally positively correlated with commodity prices and inflation and inversely correlated with bonds
  • The U.S dollar and other currency futures also provide early guidance about the strength or weakness of the respective economy

Criticism of Technical Analysis

  • Self-fulfilling prophecy
  • The past cannot predict the future
  • Efficient market hypothesis
  • Random walk theory

Self-Fulfilling Prophecy

  • The use of price patterns has been widely publicized
  • Traders are familiar with these patterns and act on them in concert
  • This creates a “Self – Fulfilling Prophecy”
  • Technicians debunk this myth by confirming that they only trade after the completion of the pattern
  • Markets are driven by supply and demand, technicians’ actions only distort them temporarily

The Past Cannot Predict the Future

  • Can the past predict the future?
  • Critics of technical analysis often raise this question
  • In every statistical analysis the past is used to predict the future –This is true for economic, fundamental and technical analysis
  • Analysts can only estimate the future by projecting past experiences into the future
  • The use of past price data to predict the future is based on sound statistical concepts – descriptive and inductive statistics

Efficient Market Hypothesis

  • Efficient Market Hypothesis holds that prices fluctuate randomly about their intrinsic value
  • It also holds that the best market strategy to follow would be a “buy and hold” as opposed to any attempt to “beat the market”
  • It assumes that existing prices already incorporate the news and data that comes to everyone at the same time
  • The basis of technical forecasting is that important market information  is discounted in the market price long before it becomes known

Random Walk Theory

  • It claims that price changes are “serially independent” and that price history is not a reliable indicator of future price direction
  • Price movement is random and unpredictable
  • All markets exhibit a certain amount of randomness or “noise” but to believe that all price movement is random, is unrealistic
  • Price movement appears random to those who have not taken the time to study the rules of market behavior
  • Empirical observation shows that prices DO trend

Dow Theory

  • Charles Henry Dow (1851 –1902) was an American journalist who co-founded Dow Jones & Co. with Edward Jones and Charles Bergstresser
  • Dow also founded ‘The Wall Street Journal’ and invented the ‘Dow Jones Industrial Average’ 
  • He developed principles for analyzing market behavior which later became known as ‘Dow Theory’, the groundwork for technical analysis
  • William Peter Hamilton, Robert Rhea and E. George Schaefer organized and represented “Dow Theory,” based on Charles Dow’s editorials
  • Dow Theory has six basic tenets or principles as summarized by Hamilton, Rhea and Schaefer


1- The Market has Three Movements

  • The main movement lasts for more than a year, and possibly several years
  • The secondary movement usually lasts between three weeks to six months
  • The minor movement lasts less than three to four weeks

2- The Market has Three Phases

Accumulation Phase 

  • “Smart money” begins to accumulate stocks

Public Participation Phase

  • Trend followers and professionals start to participate

Distribution Phase

  • The public is fully involved but “Smart money” sells

3- The Averages Discount Everything

  • Everything there is to know is already reflected in the markets through the price
  • Prices reflect all the hopes, fears and expectations of all market participants
  • Interest rate movements, earnings expectations, revenue projections, political elections and all else are already priced

4- Averages Must Confirm Each Other

  • In order for a primary trend signal to be valid, all averages must confirm each other
  • If one average records a new high / low, then the other must soon follow for the signal to be valid

5- Volume Must Confirm the Trend

  • Volume should increase in the direction of the trend
  • In an uptrend, volume should increase as prices move higher, and decrease as prices fall
  • In a downtrend, volume should increase as prices fall, and decrease as prices move higher
  • Volume should always increase during directional waves, and decrease on corrective waves

6- A Trend is More Likely to Continue than to Reverse

  • A trend is assumed to be in effect until it gives a clear signal that it has reversed
  • “The trend is your friend”
  • “Never go against the trend”
  • By following trends over different time frames traders can increase their profit making opportunities

Technical vs. Fundamental

  • Fundamental analysis is the study of factors that affect an economy, market or asset class in order to find its intrinsic or fair value
  • At the macro level, analysis examines interest rates, inflation, rate of growth, employment, politics, and national sentiment
  • At the micro level, analysis examines financial statements, company accounts, cash flows, debt, and liquidity levels 
  • If this intrinsic value is under the current market price, then the security is overpriced and should be sold and vice versa
  • Intrinsic Value = 1.30
  • If price < Intrinsic value – Fundamentalists buy on the way down
  • If price > Intrinsic value – Fundamentalists sell on the way up
  • Technicians only buy after a reversal ie: On the way up
  • Technicians only sell after a reversal ie: On the way down
  • It is only at critical turning points where the two approaches disagree
  • Fundamentalists cannot explain the factors behind new market movements at the beginning of an important market trend
  • Price tends to lead the known fundamentals
  • Major bull and bear markets in history have begun with little or no change in the fundamentals at all
  • Since fundamentals are directly discounted and reflected in the price, then the study of fundamentals is deemed unnecessary
  • Thus, chart reading is considered as a shortcut to fundamental analysis
  • However, the opposite is not true as fundamental analysis does not include a study of price action
  • Even if fundamental analysis is employed, the timing of market entry and exit has to rely on technical principles
  • When both approaches disagree, use technical analysis


The Story of Desmond Leong

Desmond is your average trader. He started off blowing up 7 (or more.. lost count) accounts amounting to more than 500k, tested over 30 Expert Advisors (EAs) to no success and spent over 10k on stupid useless courses.

Today he runs an award winning trading team and provides market analysis and webinars to some of the largest brokers such as IC Markets, XM, Axi, Tickmill, FXCM, VantageFX, easyMarkets and more.

He now has a simple goal: Creating an army of traders who trade profitably together and keep each other accountable. Guiding them with the most comprehensive no-BS free tutorials so that no one ever needs to go through the pain he went through himself to become a profitable trader.

My Trading Strategy


11 Collyer Quay
The Arcade
Singapore 049317


(t) +65 9336 1245
(e) hq@theforexarmy.com

All rights reserved. All other trademarks appearing on this Website are the property of their respective owners.

© Copyright TFA GLOBAL Pte. Ltd.


Trading in foreign exchange (“Forex”) on margins entails high risk and is not suitable for all investors. Past performance is not an indication of future results. In this case, as well, the high degree of leverage can act both against you and for you. Before you decide to invest in foreign exchange, you should carefully assess your investment objectives, experience, financial possibilities and willingness to take risks. There is a possibility that you will lose your initial investment partially or completely. Therefore, you should not invest any funds that you cannot afford to completely lose in a worst-case scenario. You should also be aware of all the risks associated with foreign exchange trading and contact an independent financial advisor in case of doubt.

Trading Derivatives carries a high level of risk to your capital and you should only trade with money you can afford to lose. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved and seek independent advice if necessary.

Leverage enables traders, using a relatively small amount of money, to take a position that is many times the initial investment. This leverage effect can work both in your favour and to your detriment. The Forex market opens up the possibility to utilize this leverage effect to a high degree; at the same time, however, it also opens up the risk of experiencing high losses. Please trade with caution when you use leverage in trading or investing. Your risk is particularly not limited to the initial investment, but can quickly fall into a negative range in the event of strong movements, meaning you may be obligated to pay far more than your initial wager.