What is Technical Analysis and why does it work? Two things you need to know.
What is Technical Analysis and why does it work? Two things you need to know.
Technical analysis is the study of supply and demand
Technical analysis is the study of supply and demand and the resulting price action for the purposes of trend identification and risk management.
The Chartered Market Technicians Association, of which I am a member, offers the following.
Definition 1) Technical Analysis is the study of data generated by the action of markets and by the behavior and psychology of market participants and observers. Such study is usually applied to estimating the probabilities for the future course of prices for a market, investment or speculation by interpreting the data in the context of precedent.
Technical analysis is NOT about predictions.
There is no reliable, repeatable method to accurately predict price action over any timeframe. All a trader or an investor can do is seek to identify trends and patterns and manage risk.
Why does it work?
Because prices are driven by supply and demand, and because human emotion and reactions to the forces of supply and demand lead to behaviors that are repetitious. That allows them to be identified and observed. Even though each occurrence is unique there are many common details, or patterns.
The study of these patterns and their utilization for effective risk management is the foundation of technical analysis.
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