History of technical analysis

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History of technical analysis

The centuries copy each other (Ancient Greek Saying)

Technical analysis was probably first used for agricultural trade in Europe in the early 16th century. Then around the 1700s in Asia (precisely in Japan), created a new technique in technical analysis, namely by using Candle Charts to analyze the rice trade in that era. While in America, only in the late 18th century or rather in 1882, Charles Dow and his partners Edward Jones and Charles Bergstresser founded Dow Jones & Co. Dow then poured his recognized and respected ideas as the basis for modern technical analysis today by writing an editorial series in the world’s largest daily newspaper at the time, which is also owned by Dow Jones & Co., The Wall Street Journal. The world finally recognized the theory under the name Dow Theory. Charles Dow himself has never officially launched the book of his writings in addition to the editorial of his newspaper.

dow jones office-reception-area

The Dow Jones & Co. company was also listed as one of the public companies on the New York Stock Exchange with a stock symbol: DJ. In 2007 Dow Jones & Co. was acquired by News Corporation belonging to conglomerate Rupert Murdoch, who was listed as the 33rd richest man in America in 2007 (Forbes).

news_corp_office

In July of 1884, Dow published the world’s first Stock Market Average (Index) with a composition of the closing price of eleven shares, consisting of nine railroad companies and two manufacturing companies. Stock market average is then used as a barometer to measure the performance of the American stock market as a whole. So if the value of the index falls, then it can be said on average or the majority of all shares in the US market is also experiencing a decline and also vice versa.

Then in 1897 the Dow separated the above-mentioned stock market averages into two indices, comprising 12 industrial shares in the Industrial Index and 20 rail shares in the Rail Index.

In 1928, members of the Industrial Index grew to 30 companies and survive today, known as DJIA (Dow Jones Industrial Average) or often referred to as Dow 30. The thirty companies in this index are the companies whose shares are most significantly traded on the American stock exchange, as well as the largest capitalization. Now the DJIA (Dow Jones Industrial Average) is known as the world’s most important stock index and the oldest in the world, and is not only used as a barometer to measure stock market performance, but even become a benchmark of the overall state of the American economy.

nasdaq

Nasdaq

Currently the S & .P500 Index and the Nasdaq100 Index are used to accompany the Dow30 to the top three most-watched analyst indexes from around the world. The only company that still survives to date from the twelve Dow Members is the Prime: General Electric (GE) founded by Thomas Alfa Edison, Chevron (CVX) and Bank of America (BAC), newly enrolled in dated February 19, 2008, replacing Altria Group (MO) and Honeywell International (HON).

In Indonesia alone stock market average was introduced in 1983, known as IHSG (Indeks Harga Saham Gabungan). Currently, there are also LQ45 Index, Sectoral Index, Jakarta Islamic Index (JII) and Kompas 100 Index, all of which are part of IHSG.

The Dow also stated that there are three types of trends in the price movement (Trend), the uptrend, the downtrend, and the fixed price trend (Sideways). Sometimes sideways are also often referred to as trendless or no tendencies.

In each trend is divided into three parts, namely: major trends, secondary trends and minor trends. The most important is the major trend as the main and biggest trend. Then the smaller trend in it is called secondary trend. Then minor trend as the smallest trend contained in the secondary trend. Dow is more focused on the major trend, states that in the trend consists of three phases, namely the phase of accumulation, the phase of public participation and distribution phase. These trends will be discussed in more detail in the next chapter.

minor trend and secondary trend

Figure 2. Shows the secondary trend and minor trends contained in a major trend.

The accumulation phase is a phase in which purchases are generally made by the investors who have the sharpest analysis and / or professionals. In this phase the market is usually in “bad” condition, where every day market is filled with pessimism and negative news. At times like this generally average investors or beginner investors almost no one dare to make a purchase. Market participants colored by panic selling are being filled with fear. If the selling pressure has subsided usually the price will turn up accompanied by news that started positive. It is generally in this phase that the follower’s trend and the public begin to participate, thus referred to as the phase of public participation. Then it continues into the final phase, where almost every marketer is overwhelmed with greedy feelings, many are sorry for buying too little. Every day the market is filled with bullish news and optimistic analysts’ comments, lifting stock prices higher. This condition is often called overbought. As everyone is being filled with euphoria, savvy and professional investors begin to distribute the shares they buy on the ground. This phase is called the distribution phase.

In addition, Dow Theory also requires that between Industrial Averages and Rail Averages (now Transportation Averages) must mutually confirm each other, and the volume of transactions must be large enough and increased to support a trend. The latter mentioned that a trend will continue until there is a “clear signal” of reversal.

The basic principles of Dow’s thinking are evolving with the evolution of time and technology, to date where technical analysis has gained much ease and speed in accessing data, with the help of more sophisticated charting software. In addition to analyzing a single stock, technical analysis can also be used to analyze other investment instruments, such as Futures, Options, ETF, Commodities, Forex, Index, and so on. In this article, if found the word “share”, then it means representing all other instruments mentioned above.

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