Which of the following factors is an underlying assumption of technical analysis?
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A. B. C. D.A
Supply and demand is driven by rational and irrational behavior.
Technical analysis is a method used by investors and traders to make investment decisions based on the analysis of historical price and volume data of a security or market. It relies on the premise that past price and volume patterns can provide insights into future price movements.
Among the given options, the underlying assumption of technical analysis is best represented by option C: "Prices move randomly." This assumption forms the basis of many technical analysis techniques and strategies. Here's a detailed explanation:
A. Supply and demand is driven by rational and irrational behavior: While this statement acknowledges that supply and demand are influenced by both rational and irrational behavior, it does not specifically address the assumption of technical analysis. Technical analysis focuses on analyzing historical price and volume data rather than directly examining the rational or irrational behavior driving supply and demand.
B. The actual shifts in supply and demand cannot be observed in market behavior: This statement contradicts the underlying assumption of technical analysis. Technical analysis assumes that shifts in supply and demand can be observed and analyzed through market behavior. Technical analysts believe that the price and volume patterns reflect changes in supply and demand dynamics.
C. Prices move randomly: This statement captures the underlying assumption of technical analysis. It suggests that price movements are not predictable through fundamental analysis alone and that prices tend to follow random patterns. Technical analysts argue that these random patterns can be identified and analyzed using various tools, such as chart patterns, trend lines, and technical indicators, to forecast future price movements.
D. Prices are not determined by supply and demand: This statement contradicts the basic principles of economics and is not aligned with the underlying assumption of technical analysis. Technical analysis assumes that prices are determined by the interaction of supply and demand forces in the market. Technical analysts believe that studying price and volume patterns can provide insights into the dynamics of supply and demand and help predict future price movements.
In summary, the underlying assumption of technical analysis is that prices move randomly, and this assumption forms the basis for analyzing historical price and volume data to forecast future price movements.