Why do technical analysis always work?

Being a forex trader, before getting into the juicy details of how to perform technical analysis, you first need to understand why this stuff works.

This is important because it will give you insight as to whether a level is worth trading or not.

Once you can see why it works, you’ll have a better understanding of what other traders (including banks) are looking for in a level.

This insight will give you guidance when analyzing your
What is technical analysis?

Technical analysis means making the trading decisions based on the price movement and time scale of a currency pair in the foreign exchange market.

Here, by “technical analysis” we are mostly referring to levels of support and resistance (supply and demand). After all, as price action traders that’s all we’re really after. We’ll leave all the other messy indicators to someone else. That’s not our kind of stuff.

1- Intervention

There is an inherent difference between technical analysis in the equity markets and technical analysis in the Forex market. What is it? It’s that priorities differ between major players. In other words, the big boys like to keep their currency at specific levels during certain periods of time.

We all know the central banks are powerhouses in the Forex market. Whether you watch key levels or key news events, we all pay attention to areas at which they might intervene. We also know that some banks like to intervene more than others * cough cough * CHF and JPY. In our opinion, this leads to greater predictability than what you may see in the equity markets.

2- Volume

It’s a well-known fact that there’s about $4 trillion that exchanges hands every single day in the Forex market. However, there’s one problem with this figure. It’s wrong. The Forex market now averages more than $6.7 trillion a day ($5.3 trillion as of April 2013 to be exact). The odds are that the number is closer to $7 trillion a day now. This means that over the last few years the Forex market has increased more than 25% regarding volume. So now only is it the largest financial market in the world, it’s also the fastest-growing.

This is a huge advantage for us as price action traders. One of the major tenets of why technical analysis works is that it’s “self-fulfilling.” In other words, the outcome of a standard price action pattern is the result of the observation of the pattern and actions taken by other traders. Perhaps a better term would be “group” fulfilling. Either way, technical analysis works because enough traders see the same pattern, know the likely outcome and then take action.

The pin bar is a great example. We would argue that 90% of traders know this pattern as a potential reversal signal. Whether they call it a pin bar, a hammer or a shooting star, the shape of the candle is what stands out for most traders. When traders see this candle at a swing high or swing low, the market stands a good chance of reversing simply because enough traders are in alignment after seeing the pin bar.

Hopefully, you now understand why volume plays such a huge role when it comes to technical analysis. The more traders there are watching and acting on these technical patterns, the more likely they are to move in the intended direction. Once you analyze the price action of a pair, BINGO ! There you go!

Happy Trading! Best of luck!

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Hi @TheForexInc, can you explain how you calculate the volume in the Forex market, since it is a decentralized market? Thanks.


Volume in the forex market is measured by counting the tick movements.

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Technical analysis works because of self-fulfilling prophecies. It is very noticeable in stocks, just watch how their price bounces off from key levels. It’s also applicable to forex pairs but to a less extent, because shorting is easier and gains traction faster.

That’s right. Technical analysis is important for both forex and stocks.

Correct, it’s self fulfilling prophecies. Somebody says a double top means it goes down, so people trade it to go down. This is why so many people lose money, because the technical pattern is meaningless, there is a reason why price goes somewhere, sometimes just sentiment, but the fundamental value of a stock or currency has nothing to do with what a chart looks like.

If you look back through charts, particularly in forex, you see lots of examples of where “this candlestick pattern works”. The problem is that it’s easy to spot these patterns when they’re at the change of direction. You often see the same candles in the middle of trends too, and the price just ignored it. Lower time frames are worse for this.

What do you think of Eliot waveform analysis?

It’s often said that trading with technical analysis you trade human psychology. Price bouncing from key levels is market anomaly (impossible to observe in efficient market) so any attempts to find logical grounds behind them are futile.

Let’s say that the order book for GBP/USD is this:

Sell Orders

$300K at 1.2200
$15K at 1.2201
$100K at 1.2202
$25K at 1.2203
$100K at 1.2204

A buy position of $1 million is enough to fulfill all these offers and the price goes from 1.2200 to more than 1.2204 in one tick.

In another scenario we have this order book:

Sell Orders

$3M at 1.2200
$150K at 1.2201
$100K at 1.2202
$250K at 1.2203
$100K at 1.2204

A buy position of 1M is not enough to move the market, not even one pip.
In this case you have no tick or tick of a few decimal pips.

How can you measure the volume if the same volume can have different impacts based on the market structure?

Technical analysis is essential for catching the market trend. But traders focus less on fundamental analysis that keep them away from profit. Fundamental analysis always ensures a quality market forecast.

Making profits is not easy in forex. If you want your trades to work for you, learn and practicetechnical analysis. You can also learn it by reading books like ‘Getting Started in Technical Analysis’ by Jack Shwager and ‘Technical Analysis Explained’ by Martin Pring or can prefer courses, videos and free material online.

Trying to make a binary distinction between “TA always works” and “TA does not work” is the wrong starting point, the wrong question.

Its an undeniable fact that past prices have a relevance to trading or investment decisions. This can be price-positive or negative but its the trader who decides what the TA means they should do. Unfortunately, most traders are usually wrong. This does get TA a bad name, but that is like blaming the car when the driver takes the wrong road.

Technical analysis will work based on how well you can interpret the chart patterns and make decisions based on that. You still need a strategy to work with and using some reliable indicators can help to make the analysis much more precise. Technical analysis is ideal when you want to analyse the forex market for a short time frame only.