What is technical analysis?

 Technical analysis

When we engage in trading in the stock market, we look at the price of a particular share before making a purchase. The goal is to swiftly profit from short-term price movements, as prices of shares tend to change rapidly in the short term. However, how can we gain insight into which trading decisions to make and in which sectors, to ensure profitability? This dilemma is addressed by technical analysis. Technical analysis is a method that helps us predict the future movements of shares by examining their historical price movements.

Three Basic Assumptions of Technical Analysis Theory

1. Market Discounts Everything: 

At any given time, a company's share price already reflects all essential information related to that company. Thus, any new information related to the company won't instantly change the share price. This assumption rejects the need to specifically examine factors related to the company's fundamentals, such as the quality of its business, profit potential, and earnings prospects. Instead, our complete focus should be on the share price, leaving aside these fundamental factors.

2. Stock Prices Move in Trends: 

This assumption underscores that share prices move in discernible trends. Each share's price follows a particular pattern of growth and decline. This assumption suggests that a share price will continue to follow its pattern, either upwards or downwards, to a significant extent.

   - Uptrend: In an uptrend, the share's price consistently follows an upward pattern.

   - Downtrend: A downtrend involves the share's price following a declining pattern.

   - Sideway Trend: This type of trend sees the share's price moving in a fixed range, adhering to a specific pattern.

3. History Tends to Repeat Itself: 

The stock market is known for the recurrence of historical patterns. This assumption implies that if a share's price followed a certain trajectory in the past under specific conditions, there's a high likelihood it will repeat a similar pattern under similar conditions in the future. This concept stems from the idea that prices are often influenced by investors' behaviors and emotions.

How to Use Technical Analysis?

Utilizing technical analysis involves predicting share price movements. This prediction relies on historical data; if a specific situation or condition in the past led to a price increase, a similar situation in the present will likely result in a similar increase. To access historical data, numerous books and e-books are available as resources.

If this pattern worked in a certain way in the past, there is a probability that it will work in a similar way in the future as well.

Limitations of Technical Analysis

It's important to note that technical analysis doesn't predict the exact movement of stock prices; rather, it indicates the most probable movement. If a particular historical condition occurred in the past, it's possible, but not certain, that it will occur again now. Technical analysis is a tool that assesses the likelihood of price movement in a certain direction, rather than providing an absolute prediction of the direction itself.