The important assumptions that TA makes about financial data

Investing with moomoo joined discussion · Jul 13, 2021 17:43

The important assumptions that TA makes about financial data

There are three things that you must verify are true about a security before you can apply standard chart and/or indicator analysis to the security's chart. These three key assumptions are:

High Liquidity

Low liquidity stocks are often very low priced that means that their price can be manipulated by someone with lots of resources. Many amateur investors may fall into this trap. When you buy a stock with low liquidity, you probably won't get it at the price you were quoted because there are no one selling at this price.

High liquidity means that shares have the ability to trade quickly without dramatically affecting prices. For example, if someone buys 1000 shares of Amazon today, that trade by itself will have almost no effect on the price of the stock. Because Amazon is extremely liquid with lots of buyers and selling at any given moment.

No Artificial Price Changes

Besides the fear and greed , anything else that changes prices is considered “artificial” and needs to be eliminated before applying any standard technical analysis techniques.

The artificial behaviors includesplits, dividends, and distributions.For example,stock splits (let's say 2-for-1) means shareholders can get double the shares at half the price - a net-zero transaction that doesn't change their opinion of the stock one way or the other, so the market participants don't really care. However, the stock's chart will show a huge (50%) gap down on it. And, because technical indicators are dumb, they would all give bearish “sell” signals at that point.

No Extreme News

Technical Analysis cannot predict extreme events, for example, a company's CEO dying unexpectedly or the huge tragedy of pandemic. When “extreme news” happens, technicians have to wait patiently until the chart settles down and starts to reflect the “new normal” that results from such news.

This is not to say that charts are useless when one or more of these three things occur. It means that standard technical signals and predictions cannot be accurately used in those circumstances.

More moomoo courses athttps://live.moomoo.com/college

Learn more:Technical Analysis 101: Introduction to technical indicators
How to customize technical indicators in moomoo?
Technical Analysis 101: How technical analysis help you profit?