What is Technical Analysis of Stocks?
The study of stock market action mainly through use of charts and other tools to forecast future trends is called Technical Analysis. In technical analysis, mainly the Price, Time, Volume and the Breadth of the stocks are considered. In other words we can say that technical analysis is the science of recording the actual history of trading in a geographical form to identify the stock market pattern.
Basic Assumptions of Technical Analysis
1. Market discounts everything: – Technical analysis is criticized as it considers only the price movement and ignores the fundamental factors of the company. However it is assumed that the stock price reflects everything which affects the company including fundamental factors. Technical analysts believe that whether it is the company’s fundamentals or the broader economic factors or the market psychology, they all need not to be considered separately because all these factors are priced into the stock.
2. Price moves in trends: – The price movement in technical analysis is assumed to follow trends which indicate that once a trend has been established, the future price movement is more likely to be in the same direction.
3. History tends to repeat itself: – One of the most important assumptions in technical analysis is that the history tends to repeat itself especially in terms of the price movement. Technical analysts mainly use chart patterns to analyze the market movements and further understands the future trends even though many of these charts have been used for the past several years. They still believe that these charts are relevant because they show the price patterns that often repeat themselves.