Using forex technical analysis methods, it's possible to use price charts to understand the psychology of the market. Out of all informed speculators / investors, whom do not look at price charts before buying or selling? Even those whom don't believe in technical analysis, no doubt unknown to them they subconsciously pick up information from a price chart. For example, at the most basic level they will take into account where price has been in the past and when that occurred. This is called 'reading the tape' or reading the chart.
The big debate rages as to whether using technical analysis can be
used to predict future price action. A lot of fundamentalists claim that
technical analysis is of no benefit in predicting the future.
Are they right or wrong?
If we consider the evidence we can gain an appreciation that sometimes the fundamentalists are correct. "Sometimes".
The movement of currency prices, stock prices or commodities are
not governed by any law. Prices move either up or down or remain the
same based on the following principles;
Larger volume of instrument being bought = higher prices.
Larger volume of instrument being sold = lower prices.
Same volume of buyers and sellers = prices remain the same.
[Principles of supply and demand]
WD Gann in his writings mentioned that prices moving either up or
down was due to 'human psychology'. He said that there was nothing new
on Wall Street that had not already happen in the past because 'human
nature' always remained the same. People living right now have the same
characteristics as they had in the past ... like fear and greed. He
believed, this was what really drove the market and the evidence of this
could be seen or read from the price chart.
Hence, this is the argument that technical analysis does indeed work.
Real evidence that technical analysis works is in the performance of automated trading systems, known as expert advisors or trading robots. Most ea robots are built around technical analysis indicators. Brainyforex sets up and tests ea robots and displays live trading results for the public's inspection here.
We will now consider how to read the price chart using some of the more popular forex technical analysis methods;
Double Top & Double Bottom Chart Patterns
How to reduce false signals using MACD here.
Lets put some of WD Gann's technical analysis to the test and apply it to the EUR/USD currency pair. Check it out here.
Further reading on technical analysis is available at the articles section here.
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