Technical Analysis and Its Assumptions

One approach for equity investment was fundamental analysis while other is called technical analysis which is the study of technical characteristics and hence determining the price of stock, in other words it is not concerned with the intrinsic value of stock.

Technical analysis uses various tools and techniques to study past patterns and predict future price of the stock and the basic assumptions underlying technical analysis are as follows –

1. According to technical analysis market value of stock is determined by the supply and demand for a stock which in turn is governed by several factors which can be rational or irrational and not by intrinsic value of stock.

2. Stock prices tend to move in trends which continue for a substantial period of time so if there is a bull market going on then minor corrections is treated as opportunity to buy by technical analyst.

3. Also change in trends in market can be detected sooner or later and hence substantial profits can be made.

4. Technical analysis depends more on market related information such as stock prices volume of trading, sentiments of general public then on information in the financial statements like balance sheet or profit and loss account.

Hence it can be said that technical analysis is not based on any strong conceptual framework but rather it is based on use of past movement of stock prices to predict future prices.

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