The 'how' is more important than the 'why'

Namaste to all #Hive and #Leo finance community members. 🙏

Were you aware of this critical assumption in technical analysis?

First, let me tell you that two primary methods are used to analyze securities and make Trading/Investment decisions: #Fundamental analysis and #Technical analysis.
Fundamental analysis is an approach to studying a business.
Whereas technical analysis is an approach to studying the price charts.

Image by upklyak on Freepik | Edited on Canva

The first and foremost #assumption in technical analysis tells us that everything from a company's fundamentals to market psychology, all known and unknown information in the public domain is reflected in the price of the stock.

The 'how' is more important than the 'why' is like a deep dive into the first assumption (Markets discount everything) I first learned about this assumption from Zerodha Varsity. I did not pay much attention to it then, but in my trading journey till now, I have done simple and accurate analysis thousands of times based on this assumption.

Under this assumption, the technical analyst will not be interested in questioning why the #insider bought the stock, as long as the analyst knows how the price reacted to the insider's action.

Let's understand this with an example:
Suppose you are doing a technical analysis of a stock by observing the price and volume data on the chart and you notice that there has been a lot of buying in the stock recently due to which there has been some increase in the price and it is holding itself. Here, being a technical analyst, you do not need to worry about who made those purchases and why, as long as the chart shows you how the price is reacting to that action. Meaning, that it doesn't matter who and why bought the stock; what matters is that the purchase has been made and it is reflected in the price action. And with that action, if the price remains above important levels and shows follow-up movement then you can take it as a strong signal.

On the contrary, Suppose you are doing a technical analysis of a stock and you notice that there has been a lot of selling in the #stock recently which has led to some decline in the price. Here, again being a technical #analyst, you do not need to worry about who and why is selling, as long as you can see that in the data on the chart. So it doesn't matter what the news is behind this selloff; what matters is that selling has been done and it is reflected in the #priceaction. With that action, if the price remains below important levels and shows follow-up movement then you can take it as a strong signal.

Now the rationale behind this concept of 'The how is more important than the why' is relatively easy to understand, but trading confidently purely based on your analysis often requires so much #practice and #patience.