The foundation of Technical Analysis Assumptions rests on three essential principles that guide how traders and analysts interpret price movements in the financial markets. These assumptions are:
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The market discounts everything.
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Prices move in trends.
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History tends to repeat itself.
Let’s explore each of these core ideas in detail.
1. The Market Discounts Everything
One of the key assumptions of technical analysis is that all available information is already reflected in the market price.
This means that every factor — whether it’s economic data, company performance, political events, or investor sentiment — is already incorporated into a stock’s price.
Therefore, according to this view, there is no need to separately analyze fundamental data. Technical analysts believe that studying price movements alone provides enough insight, since the price represents the collective impact of all known and anticipated factors.
In simple terms, the market acts as a reflection of everything — fundamentals, economic conditions, and even emotions — all combined and displayed through price action.
2. Prices Move in Trends
Another vital Technical Analysis Assumption is that price movements follow trends.
Once a trend is established, it is more likely to continue in the same direction than to reverse suddenly.
This principle forms the basis of most trading strategies used in technical analysis, such as trendlines, moving averages, and breakout trading.
In essence, technical traders operate under the belief that “the trend is your friend,” aiming to identify and follow existing trends rather than going against them.
3. History Tends to Repeat Itself
The third and final Technical Analysis Assumption is that history tends to repeat itself, especially in terms of price behavior.
This idea is rooted in market psychology — human reactions to market events are often consistent over time.
Because traders and investors respond in similar ways to familiar patterns or situations, price movements tend to form recurring shapes on charts. These recurring formations, known as chart patterns, help analysts predict future price behavior.
Even though many of these chart patterns have existed for decades, they remain relevant today because human behavior and market psychology have not fundamentally changed.
In Summary
The Technical Analysis Assumptions — that markets discount everything, prices move in trends, and history repeats itself — form the backbone of all technical trading strategies.
By understanding and applying these principles, traders can interpret market movements more effectively, identify potential opportunities, and make informed decisions based on price action rather than speculation.
