Investment and Portfolios assignment - Essay Example

When a trader can foresee these changes, it provides a clear picture of the market trends. For these reasons, traders would be in a better position to make entry when the chances of making profits are high and make an exit when the trends are not favorable. According to Murphy, (1999), there are three concepts that describe technical analysis. These were described as market action discounts everything, prices move in trends, and history repeats itself. Murphy (1999) defined market action discounts everything as source of information availed to traders.

Such information may include volumes of data or prices of commodities. The concept assumes that the market action discounts everything, which illustrates that everything that is likely to influence the prices like psychology, politics, and other fundamentals were integrated and therefore reflected in the volumes of data or the prices. Therefore, the price provides a direct measure that could be used to study trends in demands and supply. Rises in the price would signify that the demands ought to exceed the supply while ensuring that the fundamentals are kept positive.

Price trend denotes the directions taken by the stock’s price over a given period. Technical analysis dwells on prevailing patterns of price data to signal reversal or continuation of the trend. It offers the opportunity to recognize continual situations that guide continual ‘riding on the values’ to get optimal out of it. Although, most the basis of doing price move in trend is to recognize continual signals, it also offers the opportunity to identify any signals for reversal so that the owners can sell their stock before the trend goes bad.

Technical analysis examines data on the stock prices to establish price patterns that could assist in the prediction of the next direction for future prices. If existing data on pricing shows that past projections were