What Is Stock Market Technical Analysis?
Technical analysis is a process of measuring securities which typically involves/influences the statistical analysis of market activity, for example, volume and price. The experienced technical analysts attempt to analyze the fundamental attributes of a security. The method doesn’t evaluate the security’s intrinsic value. Rather, the analysts use charts and various other tools in order to identify patterns which can be further used as a primary basis for making wise, intelligent, and meaningful investment decisions.
There can be various forms of technical analysis. For an example, some technical analysts may prefer to rely on specific chart patterns. Whereas, others may tend to use technical oscillators and indicators. In general, a combination of both of the aforementioned techniques is widely used for stock market technical analysis. During the process, the analysts use the historical price, volume data, and past trading data in order to gather proper insights about the possible future price movements.
Technical analysis mainly follows three key assumptions:
- History often tends to repeat itself.
- Price can move with trends.
- The market discounts everything.
I) History Often Tends to Repeat Itself: According to a vast majority of technical analysts, the history often tends to repeat itself. And, the repetitive nature of stock market price movements is generally termed as market psychology. A market psychology features to be pretty much predictable that may be based on general human emotions like excitement or fear. The method of technical analysis uses various chart patterns to properly understand and analyze the basic human emotions & subsequent market movements for drawing a critical inference on future trends. This factor is widely considered to be quite relevant since it can accurately illustrate patterns of price movements that oftentimes repeat themselves.
II) Price Can Move with Trends: Many technical analysts consider that stock market prices move with long-term, medium-term, and short-term trends. More precisely, the actual price of a stock is more likely to continue its previous trend, rather than moving erratically. And, most of the technical analysis trading strategies are solely based on this particular assumption.
III) The Market Discounts Everything: Stock market technical analysis process states that the price of a stock reflects everything that it has (including its fundamental factors). In other words, every important attribute of a stock is already priced. This assumption removes the need of considering these fundamental stock attributes separately while making any investment decision. And, the technical analysts give more priority on analyzing the price movements by considering the demand and supply for a particular stock in the market. Therefore, technical analysis focuses more on price patterns and past statistics of a security and then uses this information to predict the future price movements.
The Bottom Line
With this, you have now revealed the process of stock market technical analysis and its three basic assumptions.