Technical analysis is based on three fundamentals:
Every asset in the market will be discounted with the time.
Prices move in trends, and the future price goes after the trend.
History repeats itself. Same circumstances cause the same reactions.
Deeper in technical analysis
Broadly speaking, traders define the market direction using two approaches, known as fundamental and technical analysis. Fundamental approach relies on economic information of an asset, while technical analysis focuses on the historical prices and charts to predict what might come in the near future. Let’s dive deeper in the fundamentals the analysis is based on:
1. Every asset in the market will be discounted with the time.
Technical analysis is based on price movements of the asset, not considering outside factors, since it assumes that all outside factors are already reflected in the price. So, all needed is the examination of the price.
An unexpected event – like a political tension or natural disaster may affect a market or many markets, but an analyst which is oriented by technical facts is not interested in the reason which causes the effect, he is focused on the chart itself, shapes, patterns and formations happening on the chart.
2. Prices move in trends, and the future price goes after the trend.
Technical analysis believes that price movements follow certain trends. After a trend has been established, the next price movement is more likely to be the same as the trend, than against it. Many technical analysts base their decisions on this concept.
There are many different techniques to identify the trends, but like weather forecasting, technical analysis doesn’t take into consideration all the possible influencing factors. Instead, technical analysis provides investors with what is likely to happen with the price directions in the future.
3. History repeats itself. Same circumstances cause the same reactions.
The keystone of technical analysis is the idea that history repeats itself. Technical analysis uses historical prices data to forecast the future prices. Charts tend to form certain patterns that tend to repeat under the same market pressure.
This is highly connected to probability and analysis of historical patterns, which create certain arguments of why and how the price will move on.
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