Trends and price channels
by Heidi Schmidt
For the beginner, it is important to know that technical analysis is based on the belief that current
market prices are related to prices that occurred previously. In other words, technical analysis is the
opposite of the random walk theory, which states that prices are not related to each other from one day to
the next. Thus, the technician analyzes past price (or yield) activity hoping to glean from it the future
direction of prices. Technical analysis does not attempt to establish a mathematical model of market
activity, such as an econometric model, but rather studies the symmetry of historical market price moves,
to formulate price projections.
There is no single tool more important to the technical analyst than the identification of trend.
Identification of trend is the heart of market symmetry, for business activity is known to occur in cycles
and the correct and timely identification of a change in trend, marking the change in the business cycle,
can be very profitable. Price channels are the chartist's tool for using trend to their advantage.
Dow Theory is credited by most technicians as being the "grandaddy" of technical analysis and it is Dow
Theory upon which the "bible" of technical analysis is based: Edwards and Magee's Technical Analysis of
Stock Trends, first published in 1948. A basic tenet of Dow Theory is that price moves tend to occur in
trends. By Dow definition, an up-trend in price, a bull market, is defined by successively higher highs
coupled with successively higher lows. A down-trend in price, a bear market, is defined by successively
lower highs coupled with successively lower lows.