The framework through which traders evaluate price movement is known as technical analysis.
According to the notion, a person can use historical price movements to forecast present trading conditions and probable price movement.
A technical analyst is someone who employs technical analysis. Technical traders are traders who employ technical analysis.
The main reason for utilizing technical analysis is that all current market information is theoretically reflected in the price. The majority of technical traders believe that “it’s all in the charts!”
This simply indicates that the current market price incorporates all available essential information.
If price reflects all available information, then price action is all that is required to make a transaction. Technical analysis examines the price action’s rhythm, flow, and trends.
Have you ever heard the saying, “History tends to repeat itself?”
That is, after all, the essence of technical analysis!
If a given price has historically served as a big support or resistance level, forex traders will keep an eye out for it and base their trades on that historical price level.
Technical analysts seek similar patterns that have occurred in the past and form trade ideas based on the belief that price would respond the same way it did previously.
Technical analysis is about POSSIBILITY rather than PREDICTION.
Technical analysis is the study of historical price activity in an attempt to detect patterns and predict future price movements.
Technical Analysis is the Study of Historical Price Action
So, how does one “study historical price action?”
When someone says “technical analysis,” the first thing that springs to mind in the trading industry is a chart. Charts are used by technical analysts because they are the simplest way to display past data!
Technical analysts are commonly referred to as chartists since they live, eat, and breathe charts.
Price activity, according to chartists, is the most dependable predictor of future price action. You can use historical data to identify trends and patterns that may lead to profitable trading chances.
Furthermore, with so many traders relying on technical analysis, these price patterns and indicator signals tend to become self-fulfilling.
The more forex traders that hunt for specific price levels and chart patterns, the more probable it is that these patterns will appear in the markets.
However, you should be aware that technical analysis is HIGHLY subjective.
Just because Michelangelo, Donatello, Leonardo, and Raphael are looking at the same chart setup or indicators does not guarantee they will arrive at the same conclusion about where the price is headed.
The most crucial thing is that you grasp the ideas involved in technical analysis so that you don’t get nosebleeds anytime someone mentions Fibonacci, Bollinger Bands, or pivot points.
Next Lesson: What is Fundamental Analysis?