What Is the Purpose of Technical Analysis in Trading?


Once you enter the world of forex trading, pattern day trading, or even penny stocks trading, there are a number of ways you can go at it. Actually, no two people are alike and in the same vein, no two traders would be expected to trade the same way using identical rules. There are an abundance of rules to follow in the forex market, but narrowing them down to meet your specific trading style can take some research, experimentation and even trial and error. While some traders might prefer to trade strictly “by the book” with the fundamental basics of trading, other people are more suited to technical analysis. The tools available in technical analysis will lay out price forecasts.

How Technical Analysis Works

The point of technical analysis is that it processes what the market has done historically to try to make assumptions as to how a specific currency might be traded currently. But there is a specific science to how the system makes the predictions. Looking back in many areas of life can teach us about the future, and technical analysis follows that trend. For instance, it appears to be that if a market trend is heading one direction, it’s more likely to continue in that direction than to suddenly do an about face. By looking at any price chart, this can be deduced. The trader who is paying attention to the charts will see the market direction, lock into that path and trade it timely so as to profit. Technical analysis takes all of this into account.

Repeating Past History

By studying the past, we can learn what might be down the road for us. According to studies, behaviors tend to follow trends. There are patterns that get repeated over and over again. Because humans tend to react the same way under certain conditions, we only need to find the pattern, right? It might sound simple but tracing those patterns are a real science. Through technical analysis, we can identify what types of conditions trigger traders to make decisions. Even if the markets are totally unpredictable from one day to the next, people aren’t. That’s the beauty of technical analysis. As humans, we think we are so unique! But history has a different story. Under the same conditions, most of us will take the same actions and make the same decisions over and over and over again.

Using Behavior Patterns in Trading

To use technical analysis, we need to understand that even though price movement might seem to be totally random and unpredictable, the trader’s responses can be predicted. Why is that? Because habits are rarely broken. So if a trader can get results by taking into account the habits of other traders, that information can be used for predicting price direction.

What is the bottom line in using the tools of technical analysis to make trades? It’s to remember that this is only one of the many tools used to make successful forex trades. Whatever tools you are relying on, they need to be the ones that line up with your trading style and your trading rules.

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