Fundamentals of Technical Analysis:
In order to make use of technical analysis for predicting stock prices, we have to presume that there is some relationship between historical chart patterns and future stock prices. In this way we can use historical data to predict future prices. There are three fundamental hypotheses in the technical analysis of stocks.
MARKET PRICES REFLECT ALL THE INFORMATION ABOUT A STOCK:
Fundamental Analysis anxiety itself with financial and other information about a stock. Technical analysis of stocks, though completely separated from fundamental analysis, works on a similar basis. Technical Indicators actually indicates use this information when making buy or sell decisions. This information subsequently gets reflected in the stock’s price and ultimately the stock chart..
PATTERNS TEND TO REPEAT THEMSELVES:
The chart pattern that validates a technical analysis is that trends are repetitive. In other words, suppose a stock chart moves in a hypothetical pattern. Based on technical analysis, in this way to tell where the price will go next by simply looking at a chart.
STOCK PRICES FOLLOW TRENDS:
Technical analysis of stocks is based on the idea that each stock chart has its own unique trend. Prices move only within this trend. Every move in the stock price will indicate the next move.
Similarly, even for stock charts, we know the trend from past experiences. Basically, the move in either direction may be larger or smaller than before. However, the pattern of these charts will not change dramatically.