echnical analysis can be explained as the framework which helps traders to define price movement.
Only one thing matters in technical analysis – the HISTORY of the price.
If you know how the price moved before, you can predict how the price will move in the future.
That’s the first and foremost rule of technical traders.
It is a way of analyzing the past behaviour of a currency pair in order to anticipate its future direction without looking at the economic circumstances.
Technical traders presume that all currently available market information is incorporated by the price and has already been reflected via the price action.
“It’s all in the charts!”
The chart records price movements and presents them in the form of a chart of historical data.
When you observe a graph, you can find certain patterns that have been repeated many times in the past.
Technical traders loveeee charts, because it is the easiest way to visualise historical data. Sometimes, the trading world calls them chartists.
Through identifying patterns of the price in the past these technical traders “technically” determine probabilities of the future direction of price.
It is believed that if a model has been observed in the past and followed by a decrease or increase in price, then the same thing is very likely to happen again.
Technical analysis is NOT so much about prediction as it is about PROBABILITY.
For example, if a certain price has turned out to be significant in the past – either as a support or resistance level – then there’s a good chance that, barring any overriding external factors, the market will behave similarly the next time it is met.
What’s interesting is that these trends predicted by technical traders tend to become self-fulfilling.
For example, if many traders place a stop-loss order at a certain price of a currency pair, when it reaches this price, there will be a large number of sell orders.
This way, other traders will see the price decrease and also sell their positions, reinforcing the strength of the trend and confirming the movement traders anticipated.
There is a big BUT here, a technical analysis can be VERY VERY subjective.
Just because your friends Mr Watermelon and Mr Orange are looking at the exact same chart, it doesn’t mean that they agree upon where the price may be headed.
Mr Watermelon might read the indicators of this chart through his subjective point of view, because he has his own systematic way to read patterns which can be opposite to Mr Orange’s experience of patterns until this moment.
You need to understand the concepts under technical analysis in order to make successful trades.