It forecasts the future price of securities by using support and resistance, demand and supply of the security, candlestick patterns, chart patterns, and various indicators.
Basic Technical Analysis Assumptions
The following are the fundamental assumptions of technical analysis:
Everything in the market is discounted: Technical analysis assumes that everything that happens to or affects the company will be reflected in the share price at any given time.
Price moves in a trend: Another assumption of technical analysis is that the future price is more likely to move in a trend than against it.
History has a tendency to repeat itself: Technical analysis assumes that share price patterns are repetitive and can be used to generate buy signals. Technical Analysis's Limitations
The limitations of technical analysis are as follows:
The possibility of sending a false signal:
Though technical analysis is based on various mathematical and logical factors, it can produce signals that contradict the market. While technical analysis may indicate that the market will move upwards, the market can also move downwards and vice versa.
Analyst bias: There is no hard and fast rule to follow when performing technical analysis. As a result, the analysis will be based on the individual's personal bias. If a person is naturally bullish, the bullish bias will overshadow the analysis, and vice versa. Because there are various methods of analysing data in technical analysis, it is always open to interpretation. Two people looking at the same charts can see two different patterns, each with logical support and resistance levels that justify their positions.
Fundamentals are ignored
Because it is based on mathematically based market data, technical analysis excludes important elements such as corporate reports, economic releases, and outside events that have an impact on the company's share price.
Technical analysis can be performed too late:
By the time a trend is identified using technical analysis, a stock may have already moved significantly. Because the stock has already made a significant move, the risk-to-reward ratio for individuals will be less