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.
Just
because Ralph and Joseph 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.
