The study of stock and forex market dynamics is known as technical analysis. It examines volume, prices, and open interest to forecast the direction of future price movement. Technical analysis is typically represented in the form of charts.

In Forex, price history is most often used, as price data is generally accessible to all and is usually viewed in real-time. In the Forex market, open interest is not calculated, and only tick volume is available. Tick volume refers to the number of ticks (quote changes) per unit of time. It is a conditional indicator because it has little to do with the market and only partially shows market activity. Hence, prices are considered the main element for technical analysis, and other factors are examined to predict the correct direction of price movement.

Technical analysis dates back to the early century. According to Charles Dow’s theory, it is based on three postulates.

Market Movements Account for Everything

The essence here is that every factor (political, economic, psychological) that influences the current currency rate or security value is accounted for in advance and reflected in the chart. In other words, every price fluctuation corresponds to a change in external factors. Therefore, there is no need to study how fundamental factors will affect the price. The history of prices is sufficient for successful forecasting.

This is the basis of technical analysis and where it fundamentally differs from fundamental analysis. Fundamental analysis requires predicting the factors that affect supply and demand to forecast price fluctuations. In technical analysis, changes in supply or demand coincide with price fluctuations, but this does not matter, as the price has already changed.

This postulate argues for the correct tracking and study of price dynamics. When a trader analyzes price charts and a multitude of other indicators, the market indicates the most probable direction of its movement.

The most common criticisms of this postulate are:

• The postulate claims that no news can hit the market for which it is not tuned. However, shocking breaking news that most analysts cannot predict is often published.
• The postulate assumes that every investor receives information simultaneously, but this is not the case. For example, traders who trade on daily charts very rarely refer to news published mid-day.

Prices Move in Trends

This statement claims that the price cannot move chaotically, but many trends constantly affect the market. Such a market can be analyzed (unlike a chaotic one).

Therefore, there are two implications:

1. The prevailing trend will most likely continue and not reverse. This implication rules out the possibility of chaotic market movement without a discernable pattern.
2. The current trend will continue until it reverses.

Directed price movement or trend is one of the most important concepts in technical analysis. The main task for an analyst is to identify new trends on the price chart from early stages of development (the trend’s birth), utilize these trends in trading, and timely exit the market before the end of the trend (trend reversal).

Trends can be of three types:

• Downward price movement – this is a bearish trend;
• Upward price movement – this is a bullish trend;
• A time when the price hardly moves – this is a sideways trend, flat, or range.

These types of trends never appear purely in the market and cannot be reflected in a straight line movement. Thus, an upward trend occurs when upward movement dominates downward movement, and vice versa for a downward trend.

The most common criticisms of this postulate are:

1. The postulate doesn’t explain what can be referred to as sideways, downward, and upward trend.
2. The postulate is trivial as it doesn’t make a precise statement about price movement.

History Tends to Repeat Itself

Market crowd and human psychology are mostly unchanged in similar scenarios. Therefore, it is believed that if certain patterns once brought you profit, they can do so again in the future.

For example, over the past 100 years, numerous graphical price models have been identified and confirmed, which reflect essential characteristics of market psychology. If these models have worked, it is fair to assume they will work again, as they are grounded in human psychology, which tends to remain consistent. This postulate teaches people to study the past to understand the future.

Thus, a detailed analysis of past price behavior allows making a forecast for price movement in situations similar to the present.

The most common criticisms of this postulate are:

• Mass market behavior is based on mass psychology and methods used by traders. These methods can be quickly modified, changed, and create new ones.
• The postulate doesn’t explain why mass market behavior won’t change after some time. However, traders learn from their mistakes.

This means that technical analysis helps to provide a statistical assessment of human psychology. It is generally believed that the ideal state would be the uniform operation of technical methods across all markets. This requires enough data about past market movements or a representative history of prices.