Technical Analysis Helps Traders Understand Price Action
Defining technical analysis
We call the study of price movements a technical analysis. It is one of the three market analyses together with sentiment and fundamental analysis. This study involves observing and analyzing the price movement’s history, present trading state, and future potential action. If a person uses technical analysis, then we can address him or her as a technical analyst. If a trader uses technical analysis, then he or she is a technical trader.
History repeats itself
People use technical analysis because of a theory. This theory infers that all the things we can see in the price are reflected from the present condition of the market that if we look at charts, we can all see the pieces of evidence and proofs. In short, all information that we are aware of is priced into the most recent market price. If price reflects all known data, then can we conclude that all we need to know in trading is price action?
Technical analysis and price action
Technical analysis observes and studies the price action’s rhythm, flow, and trends. So, technical analysis is all about the price’s history. Forex traders monitor a price level that became a significant support level or resistance level at least once in the past. They tend to base their trading decisions based on that price level that made a mark. People who use technical analysis search for patterns in the past that tend to be similar. In this way, they can develop a trading idea to base their next trading move or decision since that price can repeat the same pattern it once did before. Hence, our theory that technical analysis is all about the history that repeats itself.
Technical analysis is a study based on historical facts and patterns that may be considered a probability rather than a prediction. Technical analysis studies the price’s previous actions to pinpoint identical patterns. With the help of this, people, especially traders, can identify the price’s future probable directions.
Study the price’s past action? How can a person study this?
Technical analysis may sound too complex and complicated, hence its name technical analysis. However, some aids can help us study a price action’s history. Technical analysts and traders use charts. Charts can help us visualize history and data. They make a complex study a lot less complicated since it is a visual aid. Technical analysts and technical traders are even referred to as chartists since they spend a lot of time studying charts.
Is technical analysis important?
Technical analysis, indeed, is an important study in trading. Why? It is because trading gets better if you have a solid basis rather than just hunches or predictions. You will find more great trading opportunities since you know spot trends and patterns than those who do not analyze past data.
However, technical analysis tends to be subjective depending on who is reading and looking at the charts. It means that even if two people are looking at the same chart, they might not have the same conclusion about where the price direction will head next.