Technical analysis is a powerful tool used by investors and traders to make informed decisions about the market. It involves the study of historical price and volume data to predict future price movements. While technical analysis is not a foolproof method, it is a valuable tool that can provide valuable insights into market trends and potential trading opportunities. In this article, we will list and explain the basic assumptions of technical analysis to help you better understand its principles and applications.

Assumption 1: Prices Are Determined by Supply and Demand

One of the core assumptions of technical analysis is that prices are determined by the interactions of supply and demand in the market. Investors and traders use technical analysis to identify trends and potential bottoms and tops in the market, which can help them make better investment decisions. By analyzing price history, technical analysts can identify patterns and trends that may indicate changes in market sentiment and potential changes in price.

Assumption 2: Prices Follow Patterns and Trends

Another key assumption of technical analysis is that prices follow patterns and trends. Technical analysts believe that prices often repeat historical patterns, which can provide valuable insights into future price movements. By identifying these patterns, technical analysts can make predictions about potential future price movements and develop trading strategies to capitalize on those movements.

Assumption 3: People Are Infrequently Right or Wrong in Their Predictions

Technical analysis assumes that people are often wrong in their predictions about future price movements. This assumption is based on the fact that market trends and patterns can be difficult to predict accurately, and even the most experienced traders and investors can sometimes be wrong. By recognizing this reality, technical analysts can focus on identifying patterns and trends in the market rather than trying to predict exact price movements with precision.

Assumption 4: Prices Reflect All Known Information

Another fundamental assumption of technical analysis is that prices reflect all known information. Technical analysts believe that prices reflect all relevant information about a security or market, including historical price and volume data, news events, and other market factors. By analyzing this historical data, technical analysts can identify trends and patterns that may not be reflected in real-time price data.

Assumption 5: Past Price Actions Are Predictive of Future Price Actions

Technical analysis assumes that past price actions are predictive of future price actions. This means that historical price patterns and trends can be useful indicators of potential future price movements. By analyzing past price data, technical analysts can identify patterns and trends that may indicate changes in market sentiment and potential trading opportunities.

Technical analysis is a powerful tool that relies on several basic assumptions to help investors and traders make informed decisions about the market. By understanding and incorporating these assumptions into your investment strategy, you can better utilize technical analysis to your advantage and improve your overall investment performance.