Understand The Assumptions That Technical Analysis Is Based Up On
Technical analysis and fundamental analysis work differently. While the fundamental analysts are very concerned about whether the stocks are over or undervalued, the technical analysts do not bother about these. What technical analysts look for is the past data which is the price and the volume of the stock. They then analyze what information this data can give them that will let them analyze the future movement of the stocks.
There are some key assumptions, continue reading that technical analysis is based upon.
Markets tend to discount everything
This means that the technical analysts believe that all the information that is either known or unknown in the market is reflected in the stock price of the stock. This could be anything like say an insider who is buying stocks of a company or that there is some bad news about the company. Everything about the company is reflected in the stock price.
Why is not important- then how is
Technical analysts are not concerned about the why. They do not bother about why something happens or why did the insider buy the stock. All that the technical analyst is interested in is how the price reacts to the action of the insider.
The price always moves in trend
Everything major that happens in the market is because of the of-of trend. Thetrendisbasically what forms technical analysis. They believe that once a trend gets formed the stock prices will move in that trend.
History will always repeat itself
The price reacts in technical analysis and this happens because the participants in the market react to the news, in the same way, each time it happens. Thus when price moves in a certain direction once, it is believed that every time it will react similarly to the same event. Like suppose there is a downtrend then the market participants will sell in the market irrespective of how low the prices are. Human reactions do not change and this causes the prices to follow the same pattern each time.
As a participant in the market do you have to keep track of all the points where the trade was executed? No. You need to look at the different time scale charts to take trades. The market participant does not have to know the details of every different price point. All that he needs to know is a summary of the action.