Why technical analysis works and sometimes not works
What is technical analysis?
Technical analysis is nothing but study of psychological and emotional representations of crowd behavior in the form of prices. And that why technical analysis work most of the time, because peoples make same decisions, mistakes or actions under similar conditions and which gives same price patterns or technical patterns on charts over and over again. Trend can be recognized on charts with the help of moving averages and indicators. While limit of the trends can be analyzed by straight and simple method of plotting support and resistances on charts. When prices move above resistances then it is called as bullish breakouts and when they breach support zones then it is called as bearish breakdown. Breakout or breakdown is and works on prices as well as indicators. By historical experience, breakout works 80-90% of times and gives smart profits to traders. Breakout and breakdown many time occurs at reversal and gives smart profitable rallies to traders.
Why technical analysis does not works?
Sometimes, technical analysis does not works due to lack of experience. That mostly happens with amateur traders. That why experience always count in successful trading. Sometimes Amateurs and but get different results. Secondly, technical analysis sometimes fails for the reason that traders too much count on indicators and prices patterns and does not see physical market reality out of their cocoon. Professional traders knows well that not every technique will work all the time. They tune them with market conditions and volatility. For example, you can see many false breakout or breakdown during volatile markets but that time you have to stick with primary trends. In bull market prices tend to trend or rally upside in overbought conditions for weeks to months and gives false sell signal as every retracement. Sometimes some techniques works when major market participant uses same technique and believes it will work, this is also called as “self-fulfilling prophecy”. Some technical traders use out of the line technical strategies and still succeed. Because these custom made strategies have grip on market and that why they works. In trading only one thing is important and that is making money not to remain scientifically correct.
Discovering technical analysis
price forecasting technique and it does not works 100% every time. But that does not means it is not reliable. All forecasting businesses has there drawbacks that does means they can’t work or we cannot rely on them, like meteorology. In financial markets, value of an analytical method is determined by whether it make money or not in long run. If it is then it might be scientifically wrong but technical traders still use them. Because at last our goal is not getting always scientifically correct.is