Basics of Technical Analysis
What this domain tests
The Basics domain checks whether you understand the assumptions behind technical analysis and can read a price chart without importing fundamental narratives. NCFM-style questions often ask which assumption justifies ignoring news, how chart types differ, and how Dow theory defines a trend.
Core rules
- Price discounts everything: all known information is reflected in the quote; technical analysis studies the effect, not the cause.
- Prices move in trends that persist until evidence of reversal.
- History rhymes: repeating price patterns reflect recurring crowd behaviour.
- Dow theory: the averages discount everything; there are three trend lengths (primary, secondary, minor); a trend has three phases (accumulation, public participation, distribution); averages must confirm each other; volume confirms trend; a trend continues until a definite reversal signal.
- Chart types: line (closing prices only), bar (OHLC), candlestick (OHLC plus body colour). Volume is a separate axis and is not a price.
- Time frame changes the message: a daily uptrend can contain an hourly downtrend.
Worked example
A stock prints daily highs of 100, 104, 102, 108 and lows of 95, 99, 98, 103. The sequence of higher highs (100 to 104 to 108) and higher lows (95 to 99 to 103) defines an uptrend even though the 102 pullback looks negative in isolation. A lower low below 103 would be the first structural warning; a lower high after that would suggest a change of character.
Traps
- Treating a single candle or one news event as a trend reversal.
- Confusing a secondary reaction with a primary trend change.
- Using a line chart to judge intraday wicks that were never printed in the close.
- Assuming technical analysis forecasts exact prices; it assesses probabilities and risk.