Investing is a complex task, with goals and strategies that can vary greatly from investor to investor. The return on an investment is the difference between what you invest and how much you get at the end of the investment. This difference will come from cash flow that will be produced by the financial asset you bought (it is the difference between the purchase price and sale price).

Both prices are subject to high variability. For example, in the case of an equity investment, depend on the cash flows of the issuer’s business and the stock price by a complex web of facts, estimates and expectations. All of this will determine the price at which some investors will be willing to sell and others to purchase.

It’s probably impossible to accurately predict the trend of prices of financial securities – unless one is a “genius” of finance – but it is necessary. Making oneself able to anticipate the possible development in market price of stocks is important but not the ultimate (I know I making a statement which is in big disagreement with the popular belief about stock investment). If you want to invest with good earning potential you need to focus elsewhere then trying to predict future price of stocks. You should be more concerned and focused on factors that drives market price of stocks.

For this purpose the “financial thinking” has produced various theories and various disciplines. One of these is known as “Technical Analysis”. The main tool of the Technical Analysis is the study of charts of price over time is based on the history of the price that technical analysts attempt to predict future performance. Among the basic concepts of the Technical Analysis, one concept stands tall among others which says that “the stock prices follow directions accurately, at least for some time, and carry with them at any time all available information that support that price and creates a resistance.

The three pillars of technical analysis

One of the peculiarities of technical analysis, also recognized by the skeptics, is to be a valuable support with the ability to synthesize in a few moments and in a very simple after all, the enormous amount of data and information from which we daily “bombarded ”

Technical analysis is based on three fundamental theoretical assumptions:

1. Fundamentals of Stocks are built in the stock price;
2. the market moves in a “trend”;
3. history repeats itself.

Fundamentals of Stocks are built in the stock price – We have already mentioned, the basic premise is that the prices resulting from the encounter between supply and demand reflect / contain all the information available on the market, even including those with only a small group of people. This is why the technical analyst does not bother to investigate the fundamental data, and not just because it finds that they probably unimportant, but simply because it believes they are already reflected / content in the prices.

The market moves in a “trend” – The market does not move in a completely random or erratic, but follows the trends, “trend”. This trend will be valid until clear signs of exhaustion coming on or a reversal. Technical analyst’s goal is therefore to identify the trends currently in place to take positions consistent with the direction of the trend itself, having no claim to buy or sell on the lowest maximum, but settling for “able to work / ride” much of the trend.

History repeats itself – The story tends to repeats itself because the “actors / operators” are always the same, ie human beings who want to earn, they are afraid of losing, and that consequently act / operate sometimes frantically taken by alternating phases of enthusiasm and fear. In this sense, the past can provide useful information for future market developments. By analyzing time-series graphs can in fact find the “patterns”, or figures that tend to resolve more likely in a specific direction, and so the technical analyst who will help in formulating statistically based forecasts.

Conclusion

An objective analysis technique is not to reach a level of infallibility absolute forecast, “guessing” what will happen increasingly in the markets, but to make the prediction that 7 out of 10 times prove to be correct, or at least provide operational guidance to move with rationality and discipline even in the market was particularly difficult and dangerous

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