Principles Behind Technical Analysis

Technical analysis refers to methods that aim to predict future price movements in the financial market by using charts and qualitative methods. Different methods are utilized in technical analysis but they all rely on the same principles, like price patterns and price trends exist in the market that can be identified and exploited. Understanding the basic underlying principles of technical analysis will help you to trade with a complete ease.

Let’s check out the basic principles behind technical analysis:

Price discounts everything.

This means that the actual price is the reflection of all the components that is known to affect the market, including some of the major factors like fundamentals, supply & demand, political and economic factors. Pure technical analysis is mainly concerned with up and down price movements, not with the reasons for those changes. This is one of the major technical analysis principles.

Price move in trends

One of the other principles behind technical analysis is the theory that price moves in a trend. Technical analysis is used to identify various patterns of the behavior of a market that are known to be significant. For many given patterns there is always a high probability of producing the expected results.

History tend to repeat itself

The other principle of technical analysis is the fact that history always repeats itself. The basis that history repeats is the foundation of technical analysis, which is the analysis of historical data to forecast future movements. In the chart patterns, forex markets have been noted for more than fifty years, and from that it can be observed that human nature does not change a drastic extent for a long period of time. Various patterns in charts of different years are always repeated.

Political and economic situations in a country may always repeat itself. Sometimes, a country may experience prosperity when it comes to its political and economic arena; while other times, it may experience a huge slump. All these factors may happen time and time again, and there is really no definite means of controlling it as so many other factors would affect it.

The above mentioned technical analysis principles will help you to understand why currency prices are the way they are.