Psychology of Technical Analysis
Technical Analysis is the science of analyzing securities based on various patterns and indicators. A technical analyst usually trades by analyzing the history and predicting the future.
You must be aware of the term Psychology. As you all know, It is a study of human mental functions and behavior. Psychology has the goal of understanding individuals and groups by both establishing general principles and researching specific cases. In respect to the profession of trading, a professional practitioner or researcher who reads is called a technical analyst. Over the years various analysts have developed various tools and indicators which are based on their study of traders psychology.Which is ever increasing and developing with every second.
With the advent of computers, the technical analysis has widened over to thousands of oscillators, systems and indicators like MACD, RSI, Bollinger bands and many many others?
But, Isn’t with the advent of computers the studies would have been refined and lowered in numbers by eliminating those with less to no profitability. So, Why is it so that after so much automation, still the quench for the holy grail has not stopped.
The reason is the Psychology of Technical analysis and the traders.
Why is Traders psychology so important that they have done some much research on it. The answer is that we humans in markets are driven by common forces like greed and fear, optimism and pessimism. Humans act in a predictable pattern and technical analysts have formed descriptions of these emotional patterns that are seen in the price action. This applies to both rational as well as erratic market gyrations. A consensus among market forces is seen as a ‘trend’. Incorrect expectations and failures are considered a ‘breakout or breakdown’. The market highs and lows are really a graphic representation of human desires and fears in action.