So a couple of weeks ago, I wrote a post titled When Does Technical Analysis Not Work. This post is like a mirror of that post. It describes under what circumstances does technical analysis work. Recently, the art of technical analysis has been under some fire, and I hope to demonstrate that under the right circumstances, technical analysis can generate handsome profits.
- There is no force that’s manipulating the market. The basics of technical analysis such as support and resistance state that the markets reflect investor psychology. However, when there’s a force that’s manipulating the market, prices no longer reflect the market psychology. Prices now come to reflect what that one individual force wants to do.
- When the markets aren’t in extreme craziness. Technical analysis uses indicators of the past. It’s based on past data, aggregating them, and analysing the data. However, in times of extreme bullishness or bearishness, you can no longer predict the immediate future using past data.
- When you know what indicators to look at. Not all technical analysis indicators work all the time. You need to know which indicators to use at the right time. For example, the MACD doesn’t work when the markets are only fluctuating a little bit.