In this article, I am going to discuss Technical Analysis in detail. Please read our previous article, where we discussed the Volume Price Action Analysis. At the end of this article, you will understand the following pointers.
- What is Technical Analysis?
- The basic assumption of Technical Analysis
- Rules for trend
- Application of Technical Analysis
What is technical analysis?
Technical analysis is the study of past market price action to try to gauge what the market might do in the future.
Technical Analysis – Assumptions
The 3 basic assumptions of technical analysis
- History repeats itself.
- Prices move in trends.
- Market Action discounts everything
History repeats itself.
It states that human behavior will not change and commit to similar things repeatedly. Means chart patterns in the technical analysis have been used for more than 100 years, and they are still believed to be relevant and that often repeat themselves. Technical analysis is the study of past market price action to try to gauge what the market might do in the future.
Prices move in trends
Newton’s first law of Motion state that “An object at rest remains at rest, or if in motion, remains in motion at a constant velocity unless acted on by an external force. So, the same way we assume that a trend remains in force till we don’t see a trend reversal price action that has enough force to change or stop it.
3 RULES FOR TREND
- We expect an up or downtrend to continue in its current state until the next support /resistance or unless displaying evidence of weakness within the trend.
- A sideways trend within the framework is expected to continue in its current state
- If strength is shown on an approach to a support or resistance, we expect a breakout
Let’s apply this to the nifty 50 chart
Price in uptrend making higher high (HH) and a higher low (HL)
Market Action discounts everything
All known and unknown information related to security is reflected in the price of the stock. Prices represent the sum total of all the greed, hopes, fears, and Including fundamental or any major event. As soon as new information comes to light it’s immediately reflected in the stock’s price
Applications of technical analysis
- Technical analysis can be used in stocks, indices, futures, commodities, or any tradable instrument where the price is influenced by the forces of supply and demand.
- Technical analysis may not work with micro-cap companies and penny stocks which are controlled and operated by a handful of operators
Next MARKET STRUCTURE
We will discuss
- What is the market structure?
- Principles of Market Structure
- Elements of the Market structure
Please watch the following video if you want to learn and understand the Technical Analysis concept in a better way.
Here, in this article, I try to explain Technical Analysis. I hope you enjoy this Technical Analysis article. Please join my Telegram Channel to learn more and clear your doubts. https://t.me/tradingwithsmartmoney.