Technical analysis is sometimes studied as if it contains a grain of secret knowledge or portrays an intrinsic truth about currency movements. Often it is said that a specific chart formation will produce a specific price movement.
Technical analysis does nothing of the sort. A chart is a reflection of past prices, nothing more. In itself a graph cannot predict future price movements. A currency does not trade up or down because of a formation on a chart. It moves because market participants make basic assumptions about future price behavior based on the record of past price action. A charted history of price action is the cumulative story of thousands of trading decisions; it is a record of the past behavior of thousands of individual traders.
Price information is meaningful only because trader's decisions give it predictive power. A simple proof of the limited forward intelligence of historical price action is the well attested notion that fundamental developments always trump technical analysis. If the Federal Reserve raises rates unexpectedly or the Chinese Government announces it will no longer buy US Treasuries there is no chart formation that has ever existed that will prevent the dollar from rocketing up in the first instance or plummeting in the second.
Technical analysis does nothing of the sort. A chart is a reflection of past prices, nothing more. In itself a graph cannot predict future price movements. A currency does not trade up or down because of a formation on a chart. It moves because market participants make basic assumptions about future price behavior based on the record of past price action. A charted history of price action is the cumulative story of thousands of trading decisions; it is a record of the past behavior of thousands of individual traders.
Price information is meaningful only because trader's decisions give it predictive power. A simple proof of the limited forward intelligence of historical price action is the well attested notion that fundamental developments always trump technical analysis. If the Federal Reserve raises rates unexpectedly or the Chinese Government announces it will no longer buy US Treasuries there is no chart formation that has ever existed that will prevent the dollar from rocketing up in the first instance or plummeting in the second.
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