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Why Does Technical Analysis Work (you will be surprised)?
The answer may come as a surprise but it will help you to use technical analysis to predict future price action. This is a concept I want you to understand so you can use technical analysis and charts to your advantage.
Some pure chartists may want to take me out and burn me at the stake for heresy as I have a different view of why technical analysis works. Some see it as predictive, like Elliott waves. I see it the opposite. It is not predictive by itself but rather you can use it to predict price behavior and here is the reason why.
There is nothing magic about technical analysis. It works because those who trade and follow markets use it. If they didn’t use it, then it wouldn’t be considered useful for trading. Let’s say the 173-day moving average was considered to be more important than the 200-day moving average. There is nothing magic about this level other than it becomes significant because more people use it in their trading.
In other words, the more people who use the same technical indicator, the more significant it becomes, I personally prefer to focus on chart levels, as I explain below, as it becomes easier to predict the reaction when a level holds or is broken.
Models by themselves do not predict future price behavior. Anticipating how technical traders will react to changes in price can give a clue as to market direction and momentum. This is common sense.
So if I am the only one looking at a specific level, does it really matter?
I prefer to focus on specific chart levels as they are more likely to appear on most traders’ charts. As an example, I am keen on using trendlines but I have to keep in mind that my line may differ from others based on my data differing or how I draw it. The same is true for moving averages (depending on what closing rates are used) and retracements (depending on what range and time frame are used). This is why I focus mainly on chart levels as it is easier to predict the reaction knowing others are looking at the same points as well.
For example, let's say the key support/breakout level on the downside in the EURUSD is 1.2010 seen across multiple time frames. You can then assume there will be a reaction by technical traders if this level is decisively broken.
So why does technical analysis work?
Technical analysis works because people use it. The more people who use it the more significant it can become.
How can you predict price behavior?
The first step is to identify key chart levels and then anticipate the reaction if they hold or are broken.
It will all become clear by signing up for the Amazing Trader, which is programmed to use my uncanny ability to identify key chart levels in real-time and the AT Ladder Strategy guide, which shows how to use this knowledge to take advantage of predictable behavior by technical traders.
Feel free to contact me with any question or comments
Jay Meisler
[email protected]
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