Assumptions of Technical Analysis
Technical Analysis’s Assumptions: Three underlying presumptions form the basis of this field:
1. Everything is discounted in the market.
2. Prices follow trends.
3. The past frequently repeats itself.
1. Everything is discounted on the market:-
– Technical analysis is often criticized for its exclusive focus on price fluctuation, which ignores the underlying aspects of the business.
– Nonetheless, technical analysis makes the assumption that a stock’s price, at any given moment, represents all of the factors that have affected or may affect the company, including fundamental ones.
– According to technical experts, the stock already takes into account the company’s fundamentals, broader economic issues, and market psychology, so there’s no need to take them into account individually.
– The investigation of price movement remains, as technical theory sees it as a result of supply and demand for a particular stock in the market.
2. Price Moves in Trends:-
– Price movements are thought to follow trends in technical analysis. In other words, once a pattern has been formed, it is more likely that prices will move in that manner going forward than the opposite. This is the underlying premise of the majority of technical trading systems.
3. History Tends To Repeat Itself :-
– Mostly in terms of price movement, history tends to repeat itself is a key concept in technical analysis.
– Technical analysis uses chart patterns to analyze market movements and comprehend trends.
– Market psychology is responsible for the repeated nature of price movements; that is, market participants tend to respond consistently to similar market stimuli over time.
– Despite the fact that many of these charts have been in use for almost a century, they are still seen to be important because they show patterns in price movements that frequently recur.
