Technical Analysis Assumptions
Introduction of Technical Analysis: Technical Analysis Assumptions
The foundation of technical analysis consists on the following three key presumptions:
Present pricing discounts all information
Possibly the most basic idea of technical analysis is the assumption that the present price discounts everything. When doing technical analysis, the analyst has to make the assumption that all information that is currently available and potentially affect the asset's supply and demand is reflected in the asset's current price. Acts of God, such as earthquakes and tsunamis, are the only exception to this rule because they are unpredictable natural occurrences. However, the market swiftly discounts the impact of such occurrences and incorporates them into the asset's price once they do place.Price variations are not random
Possibly the second most significant technical analysis premise is this one. When analyzing an asset, the analyst has to make the assumption that price trends and price fluctuations are not random. This assumption is based on the fundamental idea that an analyst cannot analyze an asset from a technical perspective unless they acknowledge price trends. Actually, the goal of technical analysis is to determine the asset's current trend and then follow it until indications appear that the trend may be reversing or has already done so. Three categories of trends exist; we'll talk about each in turn.History repeats itself
The idea that history repeats itself is the second major assumption of technical analysis. As the course progresses, we will talk about a number more price trends in the future. Since these price patterns have historically performed admirably, it is reasonable to expect that they will continue to do so in the future. The ability to identify a particular price pattern that is developing and the knowledge that similar patterns have historically performed well allow an analyst to utilize this information to forecast the movement of an asset in the future. Ultimately, although time is constantly changing, the fundamental human psychology surrounding greed and fear does not, which leads to recurring patterns.
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