To get more info on what assumptions are used in technical analysis, it is important to know that technical analysts do not care whether a particular instrument is under or overvalued. What only matters to technical analysts is the past trading data of the instrument and what this particular information can provide about the movement of the instrument in the future.
Technical analysts use some very important assumptions and one should know them to get the best results from the market.
As per technical analysts, the market discounts everything. This means that information about the instrument is reflected in the price. This information could be something known or unknown. Let’s assume that an insider in the company knows about the company’s earning and is thus accumulating the stocks. The stock chart will show this particular information on the chart. While this is a secret, the price reacts to this information and technical analysts known that it is a good buying opportunity.
The technical analysts are not interested in why something happens. Like in the above information they do not want to know why the insider is accumulating the stocks. The only information that the analysts want to know is how price of the stock or any instrument react to particular information.
The next assumption is that price tends to move in trends. All the movement that happens in the market is because the price of the instrument moves in a dominant trend. Trend is basically what forms technical analysis. Any upward movement in the market does not happen over the night. It happens in slow phases and as the trend gets planted the price also proceed in the trends direction.
And lastly, a very important assumption of technical analysis is that the trend tends to repeat itself. The trend of the instrument will keep repeating over and over again. This occurs due to the traders in the market react to the price movement every time in a similar fashion. Thus, every time the price tends to move in a similar fashion. When the market is trending up then the traders get greedy and they want to buy even if the price is so high. When there is a down trend then the traders tend to sell even when the price is so low and attractive to buy.
This is human emotion and technical analysts believe that emotions too keep repeating similarly.