THE PRINCIPLE - One of the reasons I love looking at charts is that they give you amazing insight into what might be. While there is nothing out there that will tell us what's coming around that corner, the charts are as good a fortune teller as anything we've got. The basic principle that supports this idea is that history has a way of repeating itself. If you believe this to be true, you will quickly discover just how valuable the study of technical analysis can be in helping to isolate wonderful opportunities, while anticipating fundamental shifts. People often look at technical analysis and dismiss its effectiveness given the fact that you are looking at lines on a chart. But I always say technical analysis is the purest form of fundamental analysis.
DISCOUNTED - So why do I say technicals are the purest form of fundamentals? Well, if you consider the fact that everything is discounted into the price, which is to say that anyone who has any interest in a specific market is expressing that interest through a bid or offer, then nothing else matters and everything is already laid out in the price action itself. So when you're studying the chart, you're effectively looking at a blueprint of the entire makeup of the market. If I'm a fundamental trader, I might have a view, but that view could be completely negated by someone else out there with a differing fundamental view or alternative approach to markets, be it quantitative, flow related or technically based. As a non-technical trader, I'm not able to see that entire blueprint of the market.
THEORY APPLIED - But as a technician, you can quickly scan a chart and get a very good idea about which view is prevailing at that moment in time, which view might be looking exhausted and which view might be coming on a little stronger. We may not even know exactly what the view will be that will inspire that shift, but we will be able to see the greater probability that a fundamental shift is coming. As an example, the US Dollar has been hit hard of late and there doesn't seem to be anything out there that will inspire a fundamental shift in favor of the Buck. And yet, the charts are showing the Dollar beaten up so much that there should be a fundamental catalyst that inspires a Dollar recovery in the sessions ahead.
CLARITY - If we're to come full circle and take it back to the principle highlighted at the outset, it becomes easier to understand why a chart is a good predictor of what might happen in the future. If we look back at our history, there is a common pattern of repeated cycles and behaviors. All of this stems from our make up as human beings and our natural state of moving in ups and downs at all times. And so, again, if we accept this fundamental truth or even believe that most accept this as a fundamental truth, it makes it easier to buy into the idea that a market that has been moving one way for an extended period of time, will not do so forever. Once you understand this, it just comes down to refining your skill set in determining when a trend might shift and then having fun guessing what it might be that will trigger that shift.