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.
The main evidence for using technical analysis is that,
theoretically, all current market information is reflected in price. If
price reflects all the information that is out there, then price action
is all one would really need to make a trade.
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
price level held as a key support or resistance in the past, 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 will act the same
way that it did before.
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!
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 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.
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.
