If the random walk hypothesis is right about the market prices evolve according to randomness and thus markets cannot be predicted, then you could be constructing a series of price movement by simply flipping a coin to figure out what is going to happen next and there is no way to tell the difference between a synthetically constructed random walk and real price movements.

Contradicting to this theory is the use of technical analysis, method of predicting price movements and future market trends by using formulas on yesterday’s prices on charts to identify what is likely going to happen next.

It is associated with actual price movements, not the reasons for them where else fundamental analysis uses a wider ranging factors which include economic data, political and environmental events or anything that could have an effect on the market movements.

Technical analysis is the most widely used analysis to determine market price movements. It is based on these three essential assumptions:

1. Market action discounts everything - this means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. The pure technical analyst is only concerned with price movements, not with the reasons for any changes.

2. Prices move in trends - technical analysis is used to identify patterns of market behaviour that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also there are recognized patterns that repeat themselves on a consistent basis.

3. History repeats itself - chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little with time.

The idea behind technical analysis is that by combining previous traded price over some formulas, computing the outcome of a series of numbers to form lines on your charts that can derive a conclusion with the potential to predict the future price actions. This will then provide you with an edge to trade accordingly to your intentions and accept the risk of the trade with confidence.

As there are no guarantees that all forms of technical analysis are accurate, you’ll only make money when you are on the correct side of the flow order, thus many trader uses a combination of a few different types of technical studies to determine a more accurate conclusion.

The point is that you should never lead yourself to a situation where you imagine or anticipate that a signal is going to happen, for example, a crossover signal and reverse or uncross. This is something that could happen all the time.

In other words, never use these indicators to predict the outcome or else you would not be in tune with your analysis. Just wait for it to happen, it should give you confirmation signals and not predictions.

Always remember that these indicators are just a part of your trading process and you should very well know its limitations. Whatever technical analysis you are using, it should be combined with a systematic approach of defining your risk and reward projection. A trading plan helps to reinforce discipline and eliminate any chance of reckless trading.

“It requires a very unusual mind to undertake the analysis of the obvious” - Alfred North Whitehead, English mathematician & philosopher (1861 - 1947)

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