Furthermore, movement of price lies in the trends. A trend in price is the stock’s price prevailing direction over certain time period. The trend concept perhaps is the quintessential thought when performing technical analysis as most technical tools or components are designed so that they can identify and follow the present trends. When performing technical analysis, what is looked at specifically is price data patterns that signal continuity or trend reversal try to maintain. It is a must for traders to understand circumstances signally continuous trends so that the trend can be ridden as farther as possible. It is also essential to look at situations signalling trend based reversal so that stocks can be sold prior to the turns of trend or purchase of stock at the reverses moment. An example can be quoted here that if one holds a specific stock in an upward trend; the trader is looking at continuing in the upward trend for confirming this position as well as reversals so that the position can be exited prior to the stock going into downward trend. Therefore, traders look at stocks that are in trend presently in order to try and analyse the key achievements for that particular trend and either purchase or sell based on the present position. For the technical analysis methods to be of value, it is essential to take it under assumption that prices will form trends.
When technical analysis based trading is done, it is essential to examine data from stock price for patterns of price which might in certain manners predict price direction in the long term future. Consequently, it is essential to assume that patterns of price form with a specific consistency and that patterns of price which have gained success in the past, will continue to be of success in long term future. As evident that financial markets are fuelled through acts of humans and expectations, Murphy (1999) attributed the regular formation and predictive pattern of price as well as calculation of price for a study within human psychology and team dynamics dependent upon behaviour finances.
Financial theory initially was based predominantly over the hypothesis for efficient markets. This hypothesis originally stated that traded assets price are efficient informationally implying that their price always completely reflects all known data and changes to new data instantly may take place. Every market agent furthermore is such that they maximize utility along with having rationalized expectations. Considering such an assumption, all attempts to analyse previous price and trading stocks is a waste as it would not be possible for consistently outperforming markets as all known data is integrated within price and every agent values the information in an equal manner. Successful theoretical and empirical work was supported by the theory and was considered widely as proved. From the dominance height, however, the theory has gained much challenge and its focus has transitioned towards behaviour based finances.
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