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What Is Technical Analysis

Technical analysis is a widespread approach for examining markets. It leverages charts to dissect past price movements and, based on these insights, aims to predict future price trends. This analysis equips traders with tools and techniques to identify potential opportunities within the market.


Cornerstones of Technical Analysis

Three fundamental principles underpin technical analysis:

  • Market Encompasses All Information: This principle suggests that all relevant information affecting a security's value is reflected in its market price.

  • Price Trends Rule: Technical analysts believe prices tend to move in established directions, either up (uptrends), down (downtrends), or sideways (consolidation).

  • History Offers Clues: A core assumption of technical analysis is that historical price patterns tend to repeat themselves, allowing analysts to identify potential future movements.


The Market Absorbs All Information (Market Discounting):

This core tenet posits that a security's market price reflects every relevant piece of information that might influence its value. This encompasses economic factors, political climates, social trends, and even psychological influences on the market. Essentially, the price already incorporates all reactions from traders to these various factors.


Trends Rule the Market:

Technical analysts subscribe to the belief that prices tend to follow established directional movements. These trends can be uptrends (prices rising), downtrends (prices falling), or sideways movements (consolidation periods). Identifying the prevailing trend is a key objective for technical analysts, as the goal is often to capitalize on its continuation.


Echoes of the Past (History Informs the Future):

Another fundamental assumption in technical analysis is that investor behavior exhibits repetitive patterns over time. These recurring behavioral patterns are believed to leave recognizable price formations on charts. By studying these historical patterns, technical analysts aim to forecast similar price movements in the future.

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