Technical Analysis and Market Psychology

Filed under: Learn Forex Trading |

For those of you who are new to the world of trading, there are basically two ways of trading any market – this is by fundamental analysis (making trading decisions based upon things like a company’s profit/loss figures, a news event, or wider economic conditions) or through technical analysis (making trading decisions based upon the patterns of a price chart). Personally, I am a technical analyst, but both ways have their own unique merits; and some people succeed by using a combination of both.

 

Screen shot 2013-08-20 at 10.30.41Technical analysis is all about reading the psychology of the market, and we can do this when we see certain price patterns in technical charts. For example, a pin bar suggests that the market (a mass herd of traders) has tried to break through a certain level, and failed; after which, it is natural for them to try to get out at breakeven. An inside bar setup suggests that the market is consolidating and taking a breather after some significant action, and an engulfing pattern suggests that the bears have taken over from the bulls, or vice versa. The direction of a chart can also tell us the overall sentiment of the market (for example, a bull or bear trend), and all of this can be used to inform our trading decisions.

 

It is likely that some technical analysts take all of this a little too far, and overcomplicate the process of analysing a chart. The main emotions present in any market are fear and greed, and these are the emotions that drive forex-trading charts. I believe that it is much better to keep things simple (rather than layering your charts with a plethora of technical indicators), and to trade based upon simple price pattern setups at important areas of support and resistance. It is a simple method, but one that works for me. However, there are many other methods that also work that might better suit your personality, and it is ultimately up to you to decide which method this is.

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