Introduction to Technical Analysis and Assumptions

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Technical Analysis (TA) has an advantage that it can be used on any asset class with past price trend data. The data that is required is related to price information, i.e. open high, low, close, and volume information.

This analogy can be applied to how to learn and apply technical analysis. Just as driving a vehicle does not require much effort once you learn it, the same goes for TA. 

TA is especially advantageous due to its applicability to multiple assets. As opposed to other stock market research methods, such as fundamental analysis of equity, which requires the study of the profit and loss, balance sheet, and cash flow statements, TA can be applied regardless of the asset type. 

Once you master the process, you will be able to apply it to any type of asset, such as stocks, commodities, foreign exchange, bonds or other investments.

However, the fundamental analysis of commodities follows a different approach.

When analysing an agricultural commodity like Coffee or Pepper, the fundamentals are quite different to those of a metal or energy commodity. Therefore, it is important to consider rainfall, harvest, demand, supply, and inventory when making an investment decision as these factors can vary from one type of commodity to another.

No matter which asset is being examined, the fundamentals of technical analysis will remain constant. For instance, indicators such as ‘Moving Average Convergence Divergence (MACD) and ‘Relative Strength Index (RSI) are utilised in the same fashion for stocks, commodities, or foreign exchange evaluation.

The assumption in Technical Analysis

Unlike fundamental analysts, technical analysts pay no attention to the company’s worth. They only focus on the stock’s past trading data like price and volume. This is done to gain an understanding of its future movements.

Technical Analysis is based on several foundational assumptions, and knowing them is necessary to make the most of this analytic tool.

  1. Markets take into account all publicly available and unknown information in their stock prices. For example, an insider may buy up a large amount of shares in private prior to the release of positive quarterly earnings, which will be revealed through the stock price. This enables the technical analyst to recognize that something is about to happen with regards to the share values.
  1. It can be concluded that the ‘how’ is more important than the ‘why’. Going ahead with the same example, a technical analyst would rather focus on the stock price reaction to the insider’s action, as opposed to inquiring why they purchased it.

Price movements in the market occur as part of a trend. Technical analysis is built on this concept. Ultimately, when a trend is established, the price follows it.

History tends to repeat itself in the world of technical analysis as well. This is because market participants tend to interact with price movements in similar ways regardless of the price’s direction. 

For instance, when prices rise, people become greedy and seek to buy even at a high cost. In contrast, when prices decrease, traders quickly offload their stocks regardless of how low the cost may be. Such consistent behaviour has been mirrored for years. History indeed repeats itself. 

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