You’ve probably heard the term that “history repeats itself”, and with good reason. It doesn’t matter whether we are talking about society, politics, governments, religion – there is a good chance that whatever goes on today that makes the headlines, there is some kind of context that is has to be explained in. This isn’t to say that human beings are mindless creatures that don’t learn from mistakes, and simply repeat history over and over, but to say that there are themes and contexts that always have to be considered.
This is the same with the market, believe it or not. Technical analysis is all about studying the HISTORY of price movement, because – you guessed it – there is a good chance that there is a pattern that can be identified, and the market will react the same way. In this way, where there is historical support, or resistance, these represent strong levels to consider when opening your trade – long or short.
Now, what is the most important tool when it comes to technical analysis? Bonus point if you said the chart. The chart is where all of the information is plotted, and where you can plainly see patterns and levels that may be of interest to you. You want to have as much information as possible, don’t you?
Charts give you information with as much history as you like, whether you are looking for the price action within a week, or within five years.
It’s also important to note that there is a psychological aspect to technical analysis. Consider this, if there are millions of people around the world using the same chart to identify support levels and resistance levels – they might use it to their advantage, and try to purchase as much as they can at a support level, and start selling at resistance levels. In this way, it is important to remember that there is a subjective nature to technical analysis, even if it relies on historical data.