When it comes to explaining expectancy in the market, you must first look at financial analysis as well as technical analysis. These two types of analysis are usually combined together to gain information on future trades. The first one is related to supply and demand, while the second is related to the more specific aspects of the market.
Both of these, while related to expectancy, can only be used with some degree of certainty. This degree of certainty is in fact not very big. This is all based on probability. There is a main variable on both of these. This variable can be used in some instances as a tool on the trading market. In fact this technical analysis is a very powerful tool. A lot of people just starting out are afraid to use expectancy, but it is actually quite easy to understand. Expectancy is basically an equation; where expectancy equals the probability of a win or average win minus probability of a loss or average loss.
Technical analysis is the study of share prices. By researching the past performance of a share, we can gain an insight into how it will likely perform in the future.
To fully appreciate the power of technical analysis it is important to understand the basics. There are three key principles upon which technical analysis is based:
Everything is discounted and reflected in market prices.
Prices move in trends and trends persist.
Market action is repetitive.
Let’s examine each principle in detail.
The first and most important principle is that everything is discounted and reflected in market prices. All knowledge, regardless of type (fundamental, political, economical, psychological or other) is already reflected in market prices.
It can be time consuming studying fundamental information such as company financial statements, earnings and P/E ratios in an attempt to determine the potential for a share to rise in value. The real value of a share at any point in time is determined solely by supply and demand, as reflected in trades made at the stock exchange.
Technical analysts do not care what the underlying forces of a shift in supply and demand are; instead he or she is interested in what occurs to the price.
