The Importance of Technical Analysis

Compared to fundamental analysis, technical analysis has at least five important advantages. Firstly, fundamental analysis does not take into account the psychology of traders, on which price movements sometimes depend even more than on financial indicators, market ratios, economic forecasts, etc. One gram of emotions can cost more than a kilogram of facts. As the economist John Maynard Keynes observed, "there is nothing more disastrous than a rational investment policy in our irrational world" [3] . Technical analysis is the only way to measure this "irrational", emotional component present in all markets. Here is one funny story about how much the psychology of traders can influence the behavior of the market. This is an excerpt from The New Gatsbys by Bob Tamarkin, set on the Chicago Board of Trade. “Soybean prices have gone up sharply as a drought has been raging in the Illinois soybelt region, and if it doesn't end soon, there will be a severe shortage of beans in the market. ‹…› Suddenly a few drops of rain hit the windowpane. “Look! someone shouted. - Rain!" More than 500 pairs of eyes turned to the large windows. It really rained in Chicago. The drops hit the glass more and more and finally turned into a downpour. “I sell! Buying! Buying! Selling!” - the cries of traders merged into a roar, not inferior to thunder outside the windows, and the price of soybeans first slowly crept down, and then fell like a tropical downpour to the ground. It was pouring rain in Chicago, but nobody grows soybeans in Chicago. In the heart of the soybean belt, three hundred miles to the south, the sky remained blue, the sun shone, and it was still very dry. But even if the rain didn't irrigate the soybeans, it was in the heads of the traders, and that was what mattered. No factor means absolutely nothing until the market reacts to it. Opinions and emotions are involved in the game” [4] . To see how important mass psychology is, consider what happens when we pay money for food or clothes? Why is it possible to get real material values ​​in exchange for a piece of paper or a piece of metal, which in themselves are worth almost nothing? The reason is the same psychology for all: people take money because they know that they themselves can always exchange it for the right things. If this mass psychology stops working, then money will become nothing. The second advantage of technical analysis is that it helps to maintain disciplined trading and overcome emotions, one of the main enemies of all traders. As soon as you start making real deals, emotions immediately take a place at the helm, and reason and objectivity turn into passengers. If you don't believe me, try trading on a demo account first, without risking anything, and then move on to trading with your own money. You will notice very quickly how much emotional tension and fear of losing began to reflect on your actions - usually this is in direct proportion to the amount invested. Technical analysis tools return objectivity to the driver's seat: they will suggest when to enter the market, when to exit it, at what levels to set stop losses. Unfortunately, a person tends to see the market the way he wants, and not the way he really is. Let's say a trader buys and then the price falls. Will he close the position at a loss? Often this does not happen, even if there is not the slightest hope for growth: the trader begins to cling to any fundamental news that supports the belief that the price will still move in the direction he needs. Perhaps the market is trying to tell the trader something important, because the markets communicate with us, and we can decipher their signals using technical analysis. What if the bullish trading idea has already completely exhausted itself, and prices may not only not recover, but may continue to fall? Our hero, perhaps, simply closes his eyes and ears, not wanting to perceive information that is unpleasant for him without emotions. If I'm not mistaken, the first person to say that the whole is best seen from a distance was a well-known trader from the early 20th century. Jesse Livermore. Technical analysis allows you to sort of take a step back and take a broader look at the market situation, making decisions more objectively. The third benefit of technical analysis is that it works even if you don't fully believe in it. Sometimes technical factors become the main cause of price movements, and since they themselves affect the behavior of the market, they should be taken into account. Fourth, although theoretically the price should always form in the market no matter what it was in the past, in reality this is not entirely true. The pricing process depends on the psychology of people who remember previous prices and rely on them when making certain decisions. On the one hand, only people decide where prices will move, but on the other hand, prices themselves sometimes dictate what people's actions will be. Price is the main subject of study in technical analysis, and one who neglects technical tools simply forgets about it. Fifth, price action analysis is the easiest and most accessible way to understand what is happening with the balance of supply and demand. The general public may not yet know some fundamental news, but it is highly likely that they are already priced in. After all, the one who first gets access to important information usually starts buying or selling in advance. When this information becomes public, the market often reacts to it with restraint, because by that time it has time to win back