The 3 Biggest Assumptions Made in Technical Analysis

By mercurial9 | mercurial9 | 5 Sep 2020

Technical analysis is probably the oldest method built to conquer the market. Early literature indicates that its origins can be traced back to the articles published between 1900 and 1902 by Charles H. Dow in the Wall Street Journal, and its basic principles became popular following contributions by Hamilton (1922) and Rhea (1932). However, others argue that this honour should be attributed to Munehisa Homma (1724-1803), a Japanese rice merchant! He explores the psychology of commerce in his book "The Three Monkey Record of Wealth!" Since then, many traders now take their purchasing and selling decisions based on technical analysis.

3 Assumptions of Technical Analysis

Technical analysts base their choices on three critical sources of information: changes in price, volume and movements of markets. These historical data series are analyzed to get an educated view of future market moves and future expectations.

The market discounts everything

Nothing known which could affect a market fundamentally, strategically and socially has already been factored into the price. A critique of technical analysis is that it just takes account of market change and ignoring any problems or developments regarding the cryptocurrency. Technical analysis assumes, however, that in every given time, the price of a cryptocurrency reflects all that has or may have an effect on the cryptocurrency. Traders and analysts believe the fundamentals, along with broader economic and market psychology factors, are priced into the cryptocurrency price. Therefore, this leaves the study of price movements which is determined by the supply and demand of the cryptocurrency in the market.

Price moves in trends

Price moves follow trends which are assumed in technical analysis. Although markets tend to move sideways in general, there is no denying market trending ability. This means that the future price change is more likely to be in the same direction as the trend, after a trend has been formed, than against it. Most technical analysis trading strategies are based on this assumption. "The trend is your friend" is a well-know trading proverb that underlies this tenet.

History tends to repeat itself

In technical analysis, another significant concept is that history appears to repeat itself, primarily in terms of price change. Market behaviour, stability and persistence are based on the assumption that consumer psychology and human emotions (such as greed and fear) are reasonably constant; in other words, market participants appear to have a consistent response over time to similar market stimuli. Technical analysis uses patterns of charts to examine market dynamics and to explain trends. While many of these charts have been used for more than 100 years, they are still considered to be vital as they show trends that often repeat themselves in price moves.

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