There are three rules that form the foundations of technical analysis. Firstly, the market discounts everything. Secondly, prices move in trends. And lastly, history repeats itself. Learn more about technical analysis with this brief introduction.
The three golden rules of technical analysis are:
- The market discounts everything
- Prices move in trends
- History repeats itself
The most popular forms of analysing markets may be divided into two types:
- Technical Analysis
- Fundamental Analysis
While fundamental analysis focuses on the analysis of macroeconomic indicators, technical analysis focuses primarily on the analysis of the charts. In recent years technical analysis has gained in popularity not only because of its simplicity, but also because of its universal approach; meaning that it can be applied to all market segments and to different time intervals. Additionally, technical analysis is a method of market analysis that does not require an in depth knowledge of finance. In order to understand what technical analysis is based on, it’s important to understand the three principles of technical analysis:
The market discounts everything
Technical analysts do not focus on macroeconomic and political events, as they believe that any events occurring around the world will be factored in the price of the instruments themselves. Of course an event - such as a natural disaster or geopolitical tensions - may affect a certain market, but a technical analyst is not interested in the reason. Rather, technical analysts focus on the chart itself and the shapes, patterns and formations occurring on the chart.
Prices move in trends
Technical analysts believe that there is a bigger probability that a certain market movement may continue rather than reverse its direction. In other words, technical analysts believe that prices follow trends. What this means is that if trading is highly based on probability, then in order to increase the probability of the success of a trade, traders should try to trade in the direction of the trend.
History repeats itself
One of the most popular methods of technical analysis is based on the notion that history repeats itself. What this means is that charts tend to form shapes that have occurred historically, and the analysis of past patterns helps technical analysts in predicting future market movements. This principle focuses on the technical analyst’s belief that trading is highly connected with probability, and the analysis of historical shapes provides the analyst with an edge before opening a trade.
