Future prices can be predicted using the previous prices and the volume data. This is the method of technical analysis. Since the beginning of time, it has been used to analyze market behavior. Although it does not guarantee success for a business if applied alone, technical analysis can help give the business an edge in the market.
To understand how technical analysis works, here’s a summary of its history and evolution throughout time:
Technical Analysis in Primitive Form
Marketing and trading were practiced by people during primitive times. Manuals and journals show that primitive merchants kept substantial information about the market, products, prices, and trading routes.
Dutch Market in the 17th Century
Joseph De La Vega authored and published the “Confusion of Confusions” in 1688. He was a poet, philosopher, financial expert, and diamond merchant in Amsterdam. He wrote the descriptions of the trading pool, call market, investment puts, and market speculations in specific detail. He used this De Vega technique to define and predict the movements of stocks and prices. It also gave modern-day traders a guiding light in effective technical analysis.
Technical Analysis in Asia in the 18th Century
Homma Munehisa developed a special charting tool that he called “Candlestick.” This technique was regarded as the oldest form of technical analysis throughout Asia. Homma’s Candlestick chart is called the “Sakata” chart in Japan. The Japanese traders used this chart during the Edo period to analyze the future of Osaka’s rice market.
In a part of the East China Sea, traders and merchants used a specific manual to help them predict the movement of prices of commodities and goods in the Imperial China market. This Confucian manual provided them with a guide in identifying the movement of the markets.
Technical Analysis in the US in the late 19th Century to early 20th Century
The development of the Dow Theory by Charles Dow became the foundation of technical analysis in the US from the late 19th century to the early 20th century. The technique was used in forming the modern technical analysis, which was based on patterns, business cycles, and periodical averages of market movement.
Technical Analysis in the 20th Century
Goichi Hosoda from Japan developed the “Ichimoku Kinko Hyo” charting technique in 1920. The Ichimoku, which means “one look” in Japanese, is a technique that is based on moving average analysis. With just one look, traders can easily predict the market movement.
After 30 years of committed work, Hosoda finally completed the technique in 1960 and released the book in 1969. However, despite being famous and well-applied in different countries in Asia, Ichimoku charting technique earned respect in Western countries only in the 20th century.
William Hamilton wrote the editorial “A Turn in the Tide” in 1929. Charles Dow’s successor in “The Wall Street Journal ” also wrote “The Stock Market Barometer” in 1922 and worked to refine the Dow Theory.
Ralph Nelson Elliottas, inspired by Charles Dow and his Dow Theory, developed the “Elliott Wave Theory” in 1930. The pattern of waves as they appear in repetition shows the forecast of stock market movement and prices. Moreover, Elliott also used the significant recurrence of geometric patterns in the stock index price. Elliott’s theory, “The Wave Principle,” was published in 1938.
Meanwhile, Robert Rhea studied the Dow Theory and the analysis released by Hamilton in 1932. He decoded more than 200 of Dow and Hamilton’s editorials and published the book “The Dow Theory.” His tools focused more on the long and short market positions.
William D. Gann developed the Gann Angles in 1935. He also created the Master Charts, which uses Spiral Chart, Circle 360, and Hexagon Chart. These tools are Gann’s collections primarily created for technical analysis. They were formed based on astronomy, astrology, and geometry. The same methods were used in his book “The Basis of My Forecasting,” published in 1935. He focused on using the 45-degree angle, known as the 1:1 angle. For him, it shows the perfect balance of time and movement of price.
John Magee and Robert D. Edwards developed the most influential method in technical analysis, the Technical Analysis of Stock Trends. It mainly focuses on chart patterns, volume, and trend analysis. The book also detailed the market movement’s predictable behavior and repetitive patterns. Thus, it becomes the basic modern technical analysis.
Richard Donchian formulated the Donchian Channels in 1949. According to his theory, the moving average calculations generate three lines, the upper line or band indicating the highest price, the lower line or band marking the lowest price, and the middle line or band is the Donchian Channel.
George Lane developed the Stochastic Oscillator in 1950. It is a momentum indicator that compares prices over a specific time. The high and low prices indicate the uptrend and downtrend, respectively. If the pattern changes, it means that there is momentum. In the said Stochastic Oscillator, %K is used for fast stochastic, while %D is for slow stochastic.
Lane believed that his Stochastic Oscillator method works best if applied with other significant technical analysis techniques. Lane’s stochastic theory became popular, but it was not George Lane alone who got the credit. C. Ralph Dystant put up his own school, the Investment Educators, where he introduced the scholastic oscillator technique to his students.
P.N. Haurlan is the person behind the Haurlan Index in the 1960s. The Haurlan index is a tool that indicates the moving averages. Based on the A-D or advance-decline daily difference, it is easier to ascertain the timeframe of the market movement and track the stock price patterns in the market.
During this period, Gerald Appel also came out with his own method, the Moving Average Convergence/Divergence or MACD. It is another powerful tool to indicate an exponential moving average or EMA. With this tool, investors know more about a period’s strong and weak trends.
Bands and envelopes, as well as channels, are crucial in modern technical analysis. The trend of bands, whether upward or downward, shows the movement, and these bands are used to get the moving average.
Wilfrid Ledoux and Chester W. Keltner are among the first to mention bands and envelopes as a tool for technical analysis during the 1960s. Ledoux’s Twin Line Chart and Keltner’s Keltner Channels have been used by prominent traders and investors since then.
Richard Arms Jr. formed the TRading Index in 1967, popularly known in the world of technical analysis as TRIN. Using the AD or advancing-declining data, the AD ratio is compared with the AD volume. Until now, New York Stock Exchange displays the TRIN on its central wall during the trade.
In 1969, the Oscillator and Summation Index were developed. Sherman and Marian McClellan created this technique to indicate the market breadth and to identify trends in their strong and weak points. The oscillator also offers primary structures, the positive one denoted by an inflow of money and the negative one for the outflow of money.
JM Hurst studied the cycles of the financial market using the modern technology available in the 1970s. Because of this, he was called the ‘father of modern cyclic analysis.’ He wrote and published his book, “The Profit Magic of Stock Transactions.” It is about the use of curvilinear channels to indicate the natural cycle of stock prices.
In 1970, the Market Technicians Association was established. The MTA organization is composed of professional technical analysts formulating and applying modern technical analysis to study and predict the market.
Moreover, J. Welles Wilder Jr. developed the Relative Strength Index in 1978. RSI measures the movement of prices and their speed. He wrote the book “New Concepts in Technical Trading Systems.”
Jim Yates came up with “The Zone System” in the 1980s. His concept employs implied volatility to analyze bands. This system is developed to help determine whether the price of an asset sold or bought is at an average amount.
In the same year, Yates and John Bollinger met. Bollinger found Yate’s Zone System very impressive, and so he used it to develop his own concept, the Bollinger bands. Surprisingly, Bollinger’s band is applicable to different classes of assets, including commodities, forex, futures, and equities.
Thomas Aspray, on the other hand, gets his inspiration from the MACD. He combined it with the divergence histogram, thus forming the MACD histogram. It is used to expect crossovers and analyze critical market movements.
In the latter part of the 20th century, the Japanese Candlestick chart of Asia reached the US and the Western region. In 1991, Steve Nison wrote the book, Japanese Candlestick Charting Techniques and introduced it to the Americans. Nison was the first recipient of Chartered Market Technician.
Technical Analysis in the 21st Century
The Securities and Exchange Commission accepted and recognized the CMT charter from program levels 1 to 2. However, SEC amended and improved Rule 344 in 2005. SEC also allowed the recognition of the CMT charter.
In conclusion, the technical analysis method is applied and practiced even during primitive times. As time goes by, the techniques and methods are improved and developed for the benefit of investors, traders, and marketers.
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