What is technical analysis really.
Horizontal support and resistance. One of the very first topics that comes up when talking about technical analysis is the issues of support and resistance. These are horizontal levels that form in the market due to an increase in supply or demand. The idea is that the market will somehow respect these levels if it returns to them at some point in the future.
Whether you are trading a simple strategy or something more complex, horizontal support and resistance levels are essential when it comes to technical analysis.
Think of trendlines as the diagonal equivalent of horizontal support and resistance levels. The concept of support and resistance is the same whether or not the level is horizontal, as in the chart. All of these levels serve the same purpose - to outline an area in the market where supply or demand may be at extreme levels, thereby signaling a potential reversal point in the market.
Technical analysis versus fundamental analysis. Forex traders often argue which of these two types of analysis is better. In fact, to understand the full range of markets you trade in, both technical and fundamental analysis are required. Fundamental analysis is concerned with understanding and studying the causes of price behavior. On the other hand, technical analysis is about understanding and learning what price will do.
Many traders consider technical analysis in isolation. Sometimes technical analysis works and sometimes it doesn't. One of the main differences between fundamental and technical analysis is that the former is subjective.
Interpretation may vary depending on the amount of information available. On the contrary, technical analysis is objective. Only when you combine the strengths of both of these forms of analysis will you get a complete picture of the market.
Does technical analysis work?
The answer to this question depends on how you apply technical analysis. For example, you might be one forex trader using technical analysis on a 5 minute chart, while another might be using the same study on a larger time frame.
The purpose of both of these different approaches in technical analysis is basically the same: determine what price will do and then determine if it is ideal to buy or sell.
Until a certain point, technical analysis can work for traders. This is because you are, after all, studying the price of the security in question. The price displayed on the chart basically reflects the sentiment of the traders behind it.
In a sense, technical analysis is also one of the ways to study market sentiment and the trader's opinion of the security in question. Since patterns tend to repeat themselves, technical analysis has been able to benefit from this over time.
For example, when you see a bearish engulfing pattern on a price chart that forms near a resistance level, you know that price will fall rather than rise. Technically, this may seem like a bit of a mystery.