Today I want to explain how technical analysis is related to crowd psychology. I will try to make it as simple and accessible as possible.
❗Technical analysis is like psychology in pictures: we fix this component.
It's not far from the truth: when you study charts, you are trying to understand how the crowd behaves in certain situations. Imagine showing a person a butterfly, and they, based on its shape, say where the chart will go. It's a joke, of course, but there is some truth in it.
In general, the essence of technical analysis boils down to crowd psychology. People tend to react similarly to similar situations. If we see many similar situations, we can assume that in the next similar situation the behavior will be analogous.
❗️ However, there is a problem. The trader does not have psychological profiles of all market participants and is also a part of this market. Thus, he is also a stakeholder.
So how can we determine what the crowd is thinking, using only charts?
🔘By patterns. These patterns are called figures. We look for different shapes on the chart, such as 'shoulders', 'triangles', and other abstract figures. Based on their formation, we make assumptions about the further movement of the price.
🔘By levels. We also analyze support and resistance levels to understand where key points for market changes may arise.
Different tools for analyzing charts help us infer possible actions of the crowd. They all work on the principle of finding analogies with previous situations. Ultimately, chart analysis is an attempt to anticipate the actions of another trader who is on the other side of the screen. And from here follows a simple conclusion that you will read from every guru in a paid webinar. 'Don't play against the market, it will eat you alive.'