Here are the basic assumptions of TA..
- Markets discount everything – This assumption basically tells us that all known and unknown information in the public domain is reflected in the latest stock price. For example there could be an insider in the company buying the company’s stock in large quantity in anticipation of a good quarterly earnings announcement. While he does this in a very clandestine way, the price reacts to his actions thus reveling to the technical analyst that there is significant buying in the stocks.
- The ‘how’ is important than ‘why’ – This is kind of an extension to the first assumption. Going with the same example as above - one would not be interested in questioning why the insider bought the stock as long we know how the price reacted to his action.
- Price moves in trend - All major moves in the markets is an outcome of a trend. For example the recent up move in the NIFTY Index to 7900, all the way from 6400 dint happen overnight. This move happened in a phased manner over the last 11 months. Another way to look at it is, once the trend is established, the price moves in the direction of the trend. There are many tools within TA’s gamut that lets you identify a trend.
- History tends to repeat itself – The price trend tend to repeat. The happens because the market participants consistently react to prices in a remarkably similar way each and every time the price moves in a certain direction. For example in up trending markets, market participants get greedy and want to buy irrespective of the high price. Likewise in a down trend, market participants want to sell irrespective of the low attractive prices. This human reaction ensures that the price history repeats.
THANKYOU friend i think this is dow theory am right?
These are generic TA assumptions celva, applicable to all aspects of TA.