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Principles of technical analysis

Principles of technical analysis

 The method of technical analysis is based on three basic principles that apply in all markets of the world:

1- Everything is reflected in the price of a stock. 2- Prices move in the form of trends that resist changes. 3- Market trends are repeated.


The first principle of technical analysis:
Everything is reflected in its share price:

The first and most important principle in technical analysis is that everything and all available stock information is crystallized at its market price. Technicians believe that all available information and knowledge about a stock, regardless of whether it is fundamental, economic, political or psychological, is reflected in the stock market price. There are some bigoted technicians who find it futile to study companies’ information and financial statements and their revenue and supply and demand factors. Some technicians also wisely use fundamental methods in parallel with their technical analysis. There is a saying in the stock market: When you hear good news about a stock, sell it. Why? Because if that news is true, it has already had an impact and raised stock prices. Therefore, that share will not increase much from now on.

The second principle of technical analysis:

Prices move in the form of trends that resist change:

The second principle of the technical analysis method is that prices move in certain directions or trends, and these trends are resistant to sudden changes. The supply and demand for a product cause the stock price movement of the company that produces this product to be in equilibrium. When a movement begins, it does not change unless it ends. If the stock price starts to rise, it will continue to rise until it reaches a certain point of return. For example, consider how a car moves. Suppose you (as an investor) are a “motorcyclist” and the stock you are interested in is a “car” moving in front of you. When the stock or the car starts, it has a low speed at first. But it gradually increases its speed to reach a certain speed. If the car wants to change course and, for example, move in the opposite direction, it first slows down (in the case of cars, this slowdown can be detected. It decreases with the day, for example, from 5 to 4, 3, 2 and 1 percent) until its speed reaches zero, and then it gradually turns (or goes around) and takes a new path. While the car has a high speed, it can never change direction all at once and it has to slow down. The same thing applies with stocks. The so-called “share of inertia” can be said. Stocks first start a path that is decreasing or increasing, thus creating a “trend”. This process exists until the price change gradually slows down and, so to speak, “guides” that, oh people! Know that I want to change direction. Then, the stock changes direction and changes its course. At this point, stocks begin a new “trend.” Never forget that “your friend’s trend”. When a process begins, it is most likely to continue. Then, following the trend, the possibility of profitability also increases. 

The third principle of technical analysis:

Market trends are repeated.

The last key principle of the stock market technical analysis method is that market trends are constantly repeating. That is, certain patterns can be found on charts at different intervals, patterns that are constantly being repeated. This principle of technical analysis goes back to a very important psychological principle that humans react to in similar situations. Because the capital market is also a reflection of human performance, technicians study these reactions so that they can predict similar reactions in similar situations.


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