Question

What are the underlying assumptions of technical analysis?

Answer 1

Technical analysis : Techinical analysis is method of analysing stock/securities based on chart, trend, statistical model and provide buy, sale or hold recommendation. Techinical analysis does not take into account fundamental of the company rather it looks upon price and volume of securities.

Assumption of techincal analysis : Three basic assumption are as below

a) Price discount everything : Techinical analysis assume that all macro/micro fundamental of companies etc. are already factored in into price of the securities there for there is no need to consider these for making any decision. Only price and volume based on chart, trend etc. will be driving techincal analysis.

b) Securities price move in trend : Technical analysis assumes that price moves in trend it may be long term, sort term or medium term trend. There is no rendom movement of prices.

c) History repeat itself : Techinical analysis assume that prices establish a trend in past which will be repeated in future. Past trend can be used to predict future movemement and decision can be taken.