The Assumptions in Technical Analysis of the stocks

In technical analysis, we project the possible future trends based on the past performance of the stock. Since its inception, a lot of theories relating to technical analysis have emerged. Extrapolating past trends into the future are based on three simple assumptions in Technical Analysis. These assumptions are known as pillar assumptions on which all the technical analysis is based.

These three Assumptions in Technical Analysis are

1. Market Discounts Everything
2. Price follows trend
3. History Repeats itself

The Assumptions in Technical Analysis of the stocks1. Market Discounts Everything

The technical analyst assumes that the stock price of a company reflected on the stock exchange at any time reflects the true value of the stock. This means that the stock’s price has adjusted itself by incorporating all the information that could affect the price of the stock. So the price of the stock on the stock exchange reflects all the information affecting the stock in its price.

The Assumptions in Technical Analysis of the stocks 22. Price Follows Trends

According to this assumption, technical analysts say that price of a stock always follows a trend. Once that set trend or pattern is recognized the stock is likely to follow that price. And if there is any movement in the price of the stock, this would most probably favor the set trend, rather than moving against it.

 

The Assumptions in Technical Analysis of the stocks 33. History is self-repeating

Patterns set for over 100 years have been recognized and saved for future consultation. This assumption assumes that human psychology rarely changes, if at all. And the pattern of a stock price repeated in the history is doomed to repeat itself in the future as well.

 

There is a difference of opinion on the real purpose of the technical analysis for analyzing and projecting a possible future cost of a stock. Technical analysis by some is a means of studying the emotions of the human beings and the patterns established. While others argue that this is not the actual purpose intended for the study. Technical analysis, they say is purely for making the profit through analyzing past set established trends.

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