Foundations of Technical Analysis: What are the assumptions?

(1) Price is determined solely by the interaction of supply & demand

(2) Supply and demand are governed by numerous factors both
rational and irrational. The market continually and automatically
weighs all these factors. (A random walker would have no qualms
about this assumption either. He would point out that any irrational
factors are just as likely to be one side of the market as on the other.)

(3) Disregarding minor fluctuations in the market, stock prices tend
to move in trends which persist for an appreciable length of time. (
Random walker would disagree with this statement. For any trend to
persist there has to be some collective 'irrationality')

(4) Changes in trend are caused by shifts in demand and supply.
These shifts no matter why they occur, can be detected sooner or
later in the action of the market itself. (In the financial economist's
view the market (through the price) will instantaneously reflect any
shifts in the demand and supply.

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The price side of the coin:

In a way, fundamental factors supply the road map of what happens in the forex market. Navigating that map — that is, actually trading — is usually a matter of analyzing price
action, especially for short-term traders.
The FX market is well-suited to price-based techniques such as technical and quantitative analysis. In terms of trading with technical analysis, as long as you use charts and indicators,
trading the euro currency/dollar currency pair is just like trading shares of Microsoft or E-mini futures.
One of the most common gripes about technical analysis is that it fails to consider the very factors that result in the move - ment of exchange rates; it only looks at statistics and patterns,
which are derivatives of market activity, not causes of it. As a result, some argue technical analysis is an ineffective forecasting tool.
Although this is undeniably true, it is also misleading. The advantage of technical analysis and other price-based techniques is they do not involve forecasting or predicting — they consider only what is actually going on in the market re g a rd i n g who is buying and who is selling. This is the true information in the market, and it is the only information that matters. The market
is simply a battle between buyers and sellers — and thus, technical analysis reasons, looking at the statistics behind this “battle” is all that is really needed to determine what really is going on in the market, and how to profit accordingly.

Implications for currency trading:

Ultimately, the most successful trading scenarios tend to be the ones supported by both technical/quantitative and fundamental arguments.
A great example of this is the breakdown of the
dollar against the yen in October 2003 — the pair declined 6
percent between October 2003
and February 2004 (see Figure
2).

At that time, both technicals
and fundamentals called for
gains in the yen against the dollar.
Technically, the dollar/yen had broken below longer-term support (a price level that has acted as a floor to past price declines), while fundamentally, Japan was finally showing economic growth after 10 years of stagnation.
It is important traders consider both schools of thought when trading currencies as fundamentals can shift the technical trend, while technicals can be used to forecast short-term movements

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