Inherent in the study of technical analysis is the belief that recurring patterns in the market have an order, and are not simply random movements. Another important corollary is that market patterns are not just manifestations of economic data and news reports, but also represent the emotion and logic of the people trading the market.

Many people reject the notion that market activity is repeatable or ordered, because they feel whatever pattern occurred before is random or without precedent. They believe present trading conditions are too unlike anything that happened in the past to make any type of valid comparison. The market has no memory and every situation is unique. There is a fallacy in this way of thinking. Every day and market situation is unique, but there are common patterns which may be generalized, just as every person is unique, but generalities exist for all humans. Everyone may not have the same likes and dislikes, but everyone has likes and dislikes.

The technician assumes that different types of market actions will repeat themselves, in the same way a person's actions are repeatable. A person may react to a variety of situations in many different ways, so there is no way to exactly predict how a person will react to a specific situation. But after developing an understanding of a person's character and background, we may be able to determine, with a good degree of accuracy, how a person will react to new circumstances, even if we have not observed them in exactly similar situations before.

The technician looks for repeating patterns. Note how the market makes a double top on December 27 and a month later on January 22 at the 7850 level. The top is followed by a waterfall decline, which breaks the first line of support established on January 3 at the 7700 level. Over a year later, the June 91 Australian dollar makes a double top in early April and approximately a month later another top in mid-May at the 7800 level. The ensuing waterfall decline occurs and breaks the initial support established in mid-April at the 7650 level.

The double tops and subsequent decline are examples of repeating patterns. These patterns repeat in the same market but also occur in related markets, such as the currencies or other unrelated markets, such as the grains. In May 90 barley makes a double top in December and January near the 121 level. A swift decline follows, which breaks the support level established in early January near the 118 level.

The premise behind technical analysis is that all factors which directly or indirectly affect the market, such as fundamental information, emotional behavior, or natural laws, are manifest in the price and volume information of the market. A better understanding and feeling of what the market may do under various circumstances may be developed by studying the price and volume behavior of the market. We may not understand, or even care about, the interacting forces which fundamentally drive the market, but simply want to know how the market will react in a given situation.

This basic idea is enticing as well as compelling, because we can never know or understand all the factors, nor how much they will ultimately affect the market. This is partly because there are so many factors which affect the supply and demand equation. There also may be certain parties with vested interests in the market, which either keep secret or actively subvert important information essential to comprehensive evaluation of the market.

Technical analysis is a way of looking at the market from many different perspectives. Markets are not simply the reflections of economic facts and data, but the combination of the hopes, fears, and dreams of all the players. Technical analysis is an attempt at representing all this abstract information in graphic and usually quantifiable form.