Technical analysis is the interpretation of price action through the use of charts and indicators.
Indicators have a very specific place in trading. The majority of popular indicators do not perform consistently in volatile conditions. There is too much whipsaw or up and down price activity. Because of this, indicators are best used on larger time frames and trading in markets with low volatility.
For this reason many individuals steer away from volatile markets. The reality is volatility is a good thing when traded correctly. Volatility equates to more profit taking opportunities, and the forex is the world's most volatile market. A key feature of the forex market is consistent price swings in very short periods of time. What this means to the trader is frequent short-term profit taking opportunities. It is important to understand this same volatility can get a trader into trouble trying to trade using the incorrect time frame. As one who trades technically based on price, you embrace this volatility. As a technical trader you do not care what the reason is behind this volatility. You just want to be able to understand the movement and, more importantly, take advantage of it.
Technical analysis operates on the theory that price reflects all known factors affecting supply and demand at that time. Hence a price chart is all we need to use to identify good trading opportunities or set-ups.
Markets are a reflection of human emotion. People make and move markets, not balance sheets. So by developing the skill to interpret price action, you develop an understanding of the view of all those trading it.
Price charts tells us what has happened in the past. And since the past tends to repeat itself, it can give us an indication of what might happen in the future.
In fact, technical analysis is the most powerful trading tool an individual can use. And because of this, technical analysis provides the framework for a systematic approach to trading. More importantly, it gives us the confidence to make our trading decisions. And both these aspects are critical for success.
Technical analysis provides precise mechanisms for trade entry and exit. Strategies that are based on technical analysis afford the trader higher probability trading opportunities.
One needs to remember there are countless patterns and strategies that fall under the umbrella of technical analysis. It is important to be trained in how to select the correct strategy to apply to the current market condition you are monitoring as well as the timeframe you are trading on.
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