Why does Technical analysis work?

I have been trading for over 6 months now and have come to believe that Technical Analysis(TA) is very helpful and one can make a living out based on trading forex using TA.

Time and time again the Support and resistance, trendlines, head and shoulder patters, and other really basic ones have been really successful.

But I am still not sure what causes TA to be successful ? I mean how is the market driven based on TA ?

  1. Is it because a lot of people in the market have similar TA and make similar decisions at the same time?
  2. Self fulfilling prophecy ? I am not sure what this means but I read about it one other forums
  3. any other reasons ?

I am looking to learn how TA influences the market ?

R2theB2theC

it depends what you look at and depends from what point you look at it.

true technical analysis as the brokers try to promote them with indicators, fibonaccis, oscilators etc. etc. … it simply DOES NOT WORK.

Technical analysis how we here on BP call it,with finding support and resistance levels… well it partially does work, but not because it is a technical analysis but simply because it tells you in another way what you are seeing on the screen.

the basic technical analysis is to spot points of resistance, also called support or demmand. it all comes down to support and demand and nothing else. everything else is just gibberisch which has been added onto it by people either really thinking they discovered something new or people who simply wanted to sell some system.

trading actually is very easy, its the people who make it complicated.

you have to look at it from a very “pure” point of view without mixing in what has been mixed in the last 30 years or so.

the true technical analysis is solely to determin a price at which people find the underlying security either undervalued or overvalued. that is it, theres nothing more to it then this.

Lets say just the example of oil. the lowest price then last 10 years was 27 dollars. then it started climbing again. it takes no genious to figure out that if oil falls down to 27 dollars again the next few months that at exact 27 dollars (where people once, a few months bbefore, though that this price does not reflect the true value of Oil) will trigger a lot of buying and make the price move up again.

It is the same with a stock, or a corrency. when people once thought that euro is expensive at 1,15 then as soon as the price hits 1,15 again the chances that people did not change their mind, and still think its expensive and start selling it, is much higher then the chances that people have changed their mind and think/push the euro above this 1,15 line.

In fact, all the patterns, doubble bottoms, head and shoulders etc. they only appear at key support/resistance zones. or with other words, they appreat at prices where people already thought long ago that the underlaying security was either undervalued or overvalued. you dont need indicators, in fact they only disturb you in trading.

the only thing that people are lacking to be truly sucessfull at trading is patience.

yes in the example above it takes the euro to go to 1,15 months. and people do nt calulate/think in numbers of months. they think they have to earn their 50$ today and tomorrow aswell 50$. but if they were smart and do their due dilligence then they would understand that when you earn $100.000 by a move in oil from 27 to 40 within 1 month that it beats their calculation of (maybe luckily) $50 today and tomorrow by several thousand percent.

not that it beats only by several thousand percents but it beats by time spend, by hours waisted, by “how much effort/work you put into earning one dollar”.

right now i know that at $50 is a very strong psychoogical and technical resistance line on OIL and i know it is going down. the news dont matter. they dont matter now or today, they mttered the last few months, today only driven by technical support and resistance and psychological levels i know that the oil is going to go down the next few days/weeks. the short term technical says no, the long term says yes.

then there is another part of it as you mentioned it. the self fullfilling prophecy which for sure aswell hase a part in technical analysis.

but take a broader look. everything we do, in our lives and in trading aswell is simply a cheap variation of the self fulfilling prophecy.

you have a few thousand people who manage a few billion euros in capital who think that at a doubble bottom the chance of reversal is high. they go in and with their mass push the price higher. then you have another 10000 people with another few billion euros who see the price started rallying and they jump in the train as Trend-FOLLOWERS and pushing the price even higher. one triggers the other. the only thing you need is the mass that starts the movement and the rest will follow.

now to conclude your last question, with my personal opinion: technical analysis is accountable for maybe 2% of the markets moves and behaviours. fundamental analysis is accountable for 8% and the rest the 90% are a mixture of psychology, greed & fear and the pure human will to suceed and to make money and… last but not the least the (self fullfilling prophecy) believe in our capital system and that it superiour enough to make everyone earn money and therefore giving trust to the people in the west. enough trust to trust our economy more then our families, our brothers, our parents, our churches/religions our governments and hell even OURSELVES.

have you never noticed in your life? you can critisize everything, but you are not allowed to critisize the omnipotent economy model we have. you are immediately proclamed as a retard or idiot etc. and you have no clue etc. etc.

when you critisize the money system which is 5000 years old you are demed as a retard and hippie. but if you want the truth, our money system is the biggest so called self fullfilling prophecy that exists. money is nothing but pure believe. either you believe in it or you dont. if you dont your economy is ruined, your country is ruined.

I don’t mean this to be mean or disrespectful, just to hopefully get folks to think about things before they start using them, but why did/do you use Technical Analysis if you don’t know why it’s supposed to work?

  1. Is it because a lot of people in the market have similar TA and make similar decisions at the same time?
  2. Self fulfilling prophecy ? I am not sure what this means but I read about it one other forums
  3. any other reasons ?

I am looking to learn how TA influences the market ?

At it’s core, TA is about observing the patterns of trader/investor behavior, which tend to repeat. When I first started trading it wasn’t looked upon with much respect, so things where a bit simpler. These days things have flipped around. That means now you have to consider the influence of those using TA on price action. It turns into game theory at times.

This clears up a lot of my questions. And when I say TA, I mean the real basic trendlines, Support and Resistance, etc. By no means I am a fan of indicators pushed by the Brokers.

Combining trend lines with Supply and Demand has without a doubt yielded very good results for the last couple of months and I will be trying to get more data as we progress ahead.

Your Oil example is bang on and confirms that prices react in a very similar fashion at a particular price point in the same was as they had reacted in the past.

Thank you for the teachings Master Turbo!

Why I started using TA without knowing why?
Simple answer, I was and still kinda am an amateur at this. So started with what everyone else is doing. A little technical here, some fundamentals from there, but that didn’t work out for me. My bad.

Nowadays I am just looking at trendlines, Support & Resistance, patterns and Supply & Demand which have yielded fairly good results.

Hello r2theb!

Have you read THIS thread?

http://forums.babypips.com/forextown/80601-technical-indicators-completely-useless.html

You will find it useful…

On it PMH!

This - exactly.

If you want to read an interesting, much longer, more detailed explanation of those patterns and [U][I]why[/I][/U] they tend to repeat, there’s a particularly good one in Dr. Alexander Elder’s book [I]Trading for a Living[/I] (he used to be a psychiatrist before becoming a professional trader, and he “knows about these things”). But what Rhodytrader said, above, about repeating behavioural patterns, is certainly what it boils down to.

he did like everyone did who started trading after the 1990ies. technical analysis is proclaimed as the holy grail system by brokers, bucket shops and god knows who else. its advertised as the best that can make you money in markets and it is advertised because its so pretty and colourful with all the fancy indicators. comparable with a casino with many fancy colours and “hidden seecrets which lead you to sucess”. it is what people want to see and it is what tells them its easy and what makes them start trading. just look at the advertisements advertising fancy charts and superb trading platforms in tv. add to that every few months a newspaper advertising “some guy” from “somewhere” who is a complete beginer in trading and made with an initial investment of 1000 in a year 1.000.000

im in no way hinting that technical doesnt work or is a scam. but it is what attracts thw new people to trading because its much prettier and much easier then going through the cash flow or the win/loss calculation or the future prospecrs or the KGV Of companies listed in S$P or the Dow or the Nasdaq. its prettier and more fancy then reading a hundret white papers with half a million numbers and its much easier taking way less effort.

and if you want my opinion. for people who did not educate themselves on a college connected with economics or got grown into the investment and trading field by very experienced people- it is the only weapon they actually can use to try to be sucesfull.

100% agree!!!

Thank you, Dr. Lexy!!!

The funny thing for me is when I started in trading technical analysis was largely seen as highly dubious.

My father says the same.

I think it still is, in some quarters, but for different reasons and in different ways from “the old days”?

And in these days of online forums where huge numbers of aspiring/amateur traders can exchange notes, there also tends to be quite a bit of confusion between “technical analysis” and “indicators”, with some people imagining that these terms are more or less interchangeable.

I believe its a self-fulfilling profecy.

Guilty of assuming technical analysis and indicators are almost the same thing! Glad to have cleared it out in the beginning of my trading career though!

If you don’t mind, can you please elaborate what exactly that means ? #AmateurQuestion

I have started learning forex trading recently, and many posts here make me requestion TA.

If you think what you think about TA, what piece of advice would you give to a beginner ? (Except reading Pipsology and practising in a demo account)

its going to take you 2-4 years of hard work and learning before you see any decent profits.

I agree with Turbo, there is no quick road to success…

It means that so many people follow certain types of technical analysis methods that they essentially cause the market to move in the indicated direction.