The Core Assumptions of Technical Analysis: A Simple Explanation

Technical analysis is built on a few fundamental beliefs about how markets behave. These assumptions are not theories written in textbooks—they emerge from decades of real market behaviour and trader psychology. To understand technical analysis deeply, you must first understand these core foundations.

Let’s break them down using simple examples and relatable analogies.

1. Markets Discount Everything

To illustrate this idea, imagine this scenario:

The Onion Analogy

In October 2019, unexpected rains destroyed onion crops across major states. The supply dropped sharply. The moment middlemen learned about the damaged harvest, they immediately increased the price of onions—without debating why the rain came or how the weather system failed.

They simply reacted to new information.

The market works exactly the same way. When traders expect lower supply or higher demand, they adjust prices instantly.

A Real Market Example

Often, you’ll hear analysts say:

“The company is expected to post a 10% rise in profits.”

Before the announcement even comes, the stock price already rises in anticipation. And when the actual result comes in, the price often doesn’t move at all—because the news was already “priced in”.

This is what “markets discount everything” means. Price reflects expectations, forecasts, rumours, and sentiment before events occur.

2. The “How” Matters More Than the “Why”

A technical analyst focuses on price behaviour, not the story behind it.

Just like onion traders reacted to rising demand and reduced supply without questioning why the monsoon failed, technical analysts focus on what price is doing now.

• Why did a stock fall?
• Why did it rise?

These are often unanswerable questions in real time. Price movement, however, is clear and visible.

Technical analysis is built on the belief that price action tells the truth, while the narrative behind it is often slow, unreliable, or confusing.

3. Prices Move in Trends

One of the most important assumptions in technical analysis is:

Price tends to move in identifiable directions—up, down, or sideways.

For instance, if you open the weekly chart of Tata Motors, you’ll clearly spot phases where the stock:

• rallied steadily for months
• declined over a long period
• or moved sideways for extended stretches

Trends exist because:

• buyers and sellers behave in herds
• sentiment builds over time
• new information drives prices gradually

Recognising a trend early is one of the biggest strengths of technical analysis.

4. History Tends to Repeat Itself

Markets are driven by human behaviour—and human behaviour doesn’t change much over time.

For example, consider this price pattern:

A stock crashes 10% in a day, but buyers step in aggressively. By the close of the day, the stock has risen 15% from its low, ending the day with a net gain.

This forms a pattern called a Hammer candlestick.

Why is this important?

Traders have observed this pattern for decades, and it often signals that:

• the selling pressure may be exhausted
• buyers have regained control
• the stock may rise in the short term

Just like onion prices reacted the same way in 2019 and again in 2030 in our analogy, markets keep repeating similar behavioural patterns.

Technical analysis is built on this repetition.

Key Takeaways

• Markets react instantly to news, expectations, and sentiment—price often moves before the event.
• Technical analysts focus on how price behaves, not why it moves.
• Trends exist, and recognising them is critical to trading success.
• History repeats itself through recurring patterns, making charts predictable to some degree.