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There are four theories to consider when learning technical analysis.
1. History is repetitive
2. Ability to admit you are wrong
3. Price has two states
4. Fundamentals are included in price action
History
That history repeats itself is the most basic of assumptions made in technical analysis. If this assumption didn’t exist, there would be no technical analysis. Whether you are looking at candlesticks, oscillators, overbought/oversold conditions or chart patterns, you are assuming that price will behave as it did the last time you saw a specific condition. In the following example, when the STC crosses down, we make the assumption that price is also headed down. There is only one way around this assumption.
Admit you were wrong
The ability to admit you were wrong is a trait that must be shared by both technical and fundamental analysts. If you have seen a pattern repeating itself over and over, that does not mean the next time you see it, it will perform the same way it did in the past. The best traders, those who have trader for years, rarely get it right 75% of the time. From the same chart above, we see that a cross down in this example, would have produced a loss.
If you can’t admit you were wrong, then there is no way out of a trade and the market will stay illogical longer than you can say solvent
Two states of being
It is commonly believed that the market has but two states, trending and consolidating. These states will appear different on separate charts and time frames. You may see consolidation on the daily chart, but a trend to the top of the daily consolidation on the hourly chart. There is no one way to read a trend. The saying that the trend is your friend is misleading, trending on what chart, what time frame and under what definition.
The range can be as much a friend as the trend is. It all boils down to back testing your system and your ability to trade consistently.
Everything is in price
If the current nonfarm payroll report comes out, and price breaks higher, technical analysts assume that the NFP number is currently being priced into the currency. This is regardless of what else might be affecting the market, and what might happen in the future. Often times the current price action may seem completely illogical based on the fundamentals. The purely technical analyst does not consider this as illogical but logical because price is reflecting what price traders are will to sell at and buy at.
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