Why Does Technical Analysis Work?

When it comes to either speculating or investing in the financial markets, there are two main approaches. The first being fundamental analysis and the other being technical analysis. Both these fields of study of the financial markets are different. Yet, they point to the same goal of buying low and selling high.

In forex, technical analysis is the go-to form of study. Technical analysis is merely the study of past prices in order to predict future price movements. Traders focus on a number of methods such as studying chart patterns or using technical indicators derived from price to understand what price will do.

In a way, technical analysis is predictive in nature. It can tell you, with some amount of confidence where price will be at, studying the past price behavior.

Technical Analysis vs. Fundamental Analysis

Traders often debate about which of these two types of analysis is better. The truth is that in order to understand the full scope of the markets that you are trading, both technical and fundamental analysis is required.

Fundamental analysis deals with understanding and studying the reasons behind the price behavior. On the other hand, technical analysis is all about understanding and studying what price will do.

Many traders view technical analysis in isolation. Sometimes, technical analysis works and at times it doesn’t. One of the main differences between fundamental and technical analysis is that the former is subjective in nature.

The interpretation can vary depending on the amount of information one has. Contrarily, technical analysis is objective. It is only when you combine the strengths of both these forms of analysis, that you get a full picture of the market.

Does Technical Analysis Work?

The answer to this depends on how one applies technical analysis. For example, you can be one trader using technical analysis on a 5-minute chart while another can use the same study but on a larger time frame.

The goal with both these different approaches in technical analysis is basically the same, which is to identify what price will do and then determine if it would be ideal to buy or sell.

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