Assumptions in Technical Analysis

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Given are the certain assumptions in technical analysis.




1.       The market discounts everything: This assumption says all the information which are known and unknown to the investor or trader do affect the price of the stocks.
If there is movement in the price of a particular stock then we can consider that something has happened with that stock. Its means, if a stock breaks its previous resistance then it will be going up to some extent again.

2.       “How” question is more important than the “Why” question: “How” question is important than “Why”. The technical analysis is for the short term. So traders do not consider the answer to why, but the answer to how. How the price is reacting in the market. It will be moving up or down for a certain period of time.

3.       Market price moves in trend: This statement saying that the market price always moves in a trend.  Here, we could use Newton’s first law i.e. “An object at rest stays at rest and an object in motion stay in motion with the same speed and in the same direction unless acted upon by an unbalanced force". Similarly, also moves in trend unless something hit it and forced to stop and take reverse price movement.


4.       Historic trend repeats itself: And the final assumption about the technical analysis is the historical price will be repeating itself at least once. This all happens due to the market participant's psychological concept. Ok, if the price of the stock is moving up more and more market traders will be involving it and the stock’s price will be going up and up. Similarly, when a stock price is going down more and more participants want to rid off from it so they start selling it in the low price that makes the down and down in stock price.
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