the hAnDbook of teChnICAl AnAlysIs1.6 Basic Assumptions of Technical Analysis
Technical analysis is based on a few fundamental assumptions. The first assump-
tion is that market action, which includes price action, reflects all known informa-
tion in the markets. The market discounts everything except acts of God.
This means that the markets can only discount:■ (^) Known information
■ (^) Expectations about known information
■ (^) Expectations about potential events
The market cannot discount:
■ (^) Unexpected events
■ (^) Unknown information
Market action is representative of the collective trading and investment deci-
sions of all market participants, which directs the flow of supply and demand in
the markets.
This implies that the technical analyst need only refer to the charting of mar-
ket action, since all known information and expectation about such information
has already been discounted by the markets. The actual cause or underlying rea-
son driving demand or supply is irrelevant, as it is only the effect of such action
that really matters, that is, prices rising or falling.
Some detractors of technical analysis contend that the assumption that all infor-
mation is absorbed or discounted by the market is flawed. They argue that, with the
exception of illegal insider trading, price cannot possibly discount an unexpectedly
fIgure 1.26 Underlying Market Symmetry on the 4‐Hourly USDCAD Bar Chart.
Source: MetaTrader 4