Technical analysis is the framework in which traders study price movement.
The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement.
Someone who uses technical analysis is called a technical analyst. Traders who use technical analysis are known as technical traders.
The main evidence for using technical analysis is that, theoretically, all current market information is reflected in the price.Technical traders generally ascribe to the belief that “It’s all in the charts!”
This simply means that all known fundamental information is priced into the current market price.
If price reflects all the information that is out there, then price action is all one would really need to make a trade.
Technical analysis looks at the rhythm, flow, and trends in price action.
Now, have you ever heard the old adage, “History tends to repeat itself“?
Well, that’s basically what technical analysis is all about!
If a certain price held as a major support or resistance level in the past, forex traders will keep an eye out for it and base their trades around that historical price level.
Technical analysts look for similar patterns that have formed in the past and will form trade ideas believing that price could possibly act the same way that it did before.
Technical analysis is NOT so much about prediction as it is about POSSIBILITY.
Technical analysis is the study of historical price action in order to identify patterns and determine possibilities of the future direction of price.
Technical analysis is the study of historical price action.
So how the heck does one “study historical price action“?
In the world of trading, when someone says “technical analysis”, the first thing that comes to mind is a chart.
Technical analysts use charts because they are the easiest way to visualize historical data!Technical analysts live, eat, and breathe charts which is why they are often called chartists.
Chartists believe that price action is the most reliable indicator of future price action.
The Philosophy Behind Technical Analysis
Technical analysis is rooted in several key philosophical principles:
- Market Efficiency: Prices reflect all publicly available information, making fundamental analysis less relevant.
- Crowd Psychology: Market participants’ emotions and behaviors create patterns and trends.
- History Repeats Itself: Human nature and market dynamics lead to similar patterns and cycles.
- Fractals: Markets exhibit fractal properties, with small patterns resembling larger ones. Market patterns repeat at different scales and timeframes.
- Probabilistic Thinking: Technical analysis deals with probabilities, not certainties.
- Adaptive Markets: Markets evolve, and technical analysis adapts to changing conditions
You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities.
What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling.
As more and more forex traders look for certain price levels and chart patterns, the more likely that these patterns will manifest themselves in the markets.
You should know though that technical analysis is VERY subjective.
Just because Michelangelo, Donatello, Leonardo, and Raphael are looking at the exact same chart setup or indicators doesn’t mean that they will come up with the same idea of where price may be headed.The important thing is that you understand the concepts under technical analysis so you won’t get nosebleeds whenever somebody starts talking about Fibonacci, Bollinger Bands, or pivot points.
Now we know you’re thinking to yourself, “Geez, these guys are smart. They use crazy words like ‘Fibonacci’ and ‘Bollinger’. I can never learn this stuff!”
Don’t worry yourself too much. After you’re done with the School of Pipsology, you too will be just as… uhmmm… “smart” as us.
