"The future influences the present just as much as the past."
Friedrich Nietzsche (1844 - 1900)Technical Analysis is built on some fundamental assumptions in regards to the fashion in which a market operates.
These assumptions are not only integral to you as an aspiring Technical Analyst, but are also central to Technical Analysis as a theory.
In summary, these assumptions include:
1. Price discounts everything.
2. Prices usually always move in trends and
3. History repeats itself over time.
A more detailed explanation of these assumptions will now be explored.
Price Discounts Everything
What exactly does this mean?
In a nut shell, this first assumption seeks to incorporate all the fundamental, political, macro and micro economic data as well as the risk component of a stock into the current market price at any one period.
This infers that the market price can be heavily influenced by an investor's perception of supply and demand, as well as the general broad economic overview at the time the price is captured.
Therefore, it can be assumed that Technical Analysts believe that the current market price of a stock reflects all the relatively important information that Fundamental Analysts are seeking to provide qualitative and quantitative explanations for.
This is one of the key reasons that Technical Analysts do not focus on the underlying data behind price variation, but rather focus on what the market is valuing the stock at.
Prices usually always Move in Trends
Prices usually occur in Trends, although some theorists argue that prices are completed random. Randomness of price is specifically related to the Efficient Market Hypothesis.
This theory is based on the fact that markets are "efficient" and information dissemination occurs instantaneously across the market.
In the real world however, this is never entirely achievable because of a varying number of factors and therefore complete randomness -- in its true form -- is never absolutely reflected.
Quite simply, the more efficient a market becomes, the faster information is dispersed to the market and as a consequence, the faster price changes to reflect this information.
From a charting perspective, this infers that prices follow a distinctly more "step-like-pattern" as opposed to a smooth trend for inefficient markets.
