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Three Principles of Technical Analysis Used in Trading

Technical Analysis Technical Analysis

Technical analysis has always been a top strategy for investors in reading and analyzing the price movements of a certain asset. With more and more investors using technical analysis, plenty of tools and indicators have emerged for more precise prediction of market price movements. Investors and traders must not disregard these important indicators that may help them in their decision-making. 

  1. Market information reflects assets prices 

The first major tenet of technical analysis is based on the assumption that all market information - the past and current ones- take notice of and serve as the reflection of the prices of financial assets such as stocks and currencies. 

Market information includes how investors perceive inflation or how they react to macro-economic developments, such as interest rates and everything that may affect assets prices before the close. When new market data comes in, it is immediately priced into the market. 

  1. Assets prices are moving in trends 

For technical investors, the movements of assets prices always go with a noticeable trend. According to this principle, an asset will set a trend and will follow the same direction in the future rather than separate from it. In other words, if a stock price has been on upward trend for the first quarter, it will more likely be on the same page on the second quarter. 

  1. History has fixed patterns 

In technical analysis, there is always a fundamental belief that history will repeat itself. 

Since all market data are considered, including past information, technical traders believe that past price movement of an asset could actually happen again. This in fact gives highlight to market psychology as previous market patterns remain relevant. 

Good analysis will combine past, present and future into one whole while taking into account the psychology of investors; that is to say, their probable reaction to the asset’s prevailing trends.