Technical analysis assumes that all aspects of a business, like its balance sheet, income statement, etc affect the business’s stock price. Technical analysis predicts the future price of stocks by studying past price movements and assuming that prices move in trends.
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Technical analysis or charting, uses market action such as past price and volume data as indicators of price movement. The latter of these exchange analysis methods is used for any security which has trading data that can be traced back in time. This allows analysts to predict possible future prices better. Technical analysis is based on three assumptions which are mentioned below.
One of the biggest assumptions in technical analysis is that price movement does not take into account the factors that define the company. This form of analysis assumes that at any point of time, the stock’s price is a reflection of everything that affects the organization including the fundamental factors like the balance sheet, the income statement, the cash flow, and the management.
The third assumption in technical analysis of shares is that history repeats itself where price movement in concerned. This repetition of price movement, according to technical analysts, is due to market psychology. The assumption depends on the fact that the market will always have a consistent reaction to similar stimuli.
The second assumption in technical analysis is that prices follow trends and these trends move directionally which is upwards, downwards or sideways or in a combination. What this means is that once a technical analyst recognizes a trend, they predict that any movement in future price of the stock will follow that trend rather than go against it.