Good day to everyone who trades in the markets, is interested in this process or just reads my blog! Today we will talk about the interaction of prices with different types of technical analysis. Rather, it is about how we perceive price movement in relation to the types of technical analysis. “Price should bounce“- such a phrase can often be found in analytics and market forecasts. There are also phrases that the price should break through some level or some line. We carefully consider the market situation on the chart and mentally work through a possible scenario. At the same time, we do not even think about the true meaning of the phrase “the price should …”. Although analysts making public forecasts try to consider several alternatives. In doing so, they avoid the aforementioned phrases.
The price doesn’t owe anything
Every stable earning trader knows this phrase. The price of any asset or commodity includes everything. This is the cost of costs, demand for an asset, the state of the economy and even force majeure circumstances. Only some serious global event can turn the price around. But at the same time, it will again include everything. If someone saw a pattern on a chart or a graphical figure, it doesn’t mean anything yet. The price owes nothing to anyone. That is, the resulting pattern or figure may not work out as described in trading textbooks. Although quite often everyone talks about the simplest trading method using patterns or chart figures.
Looking for patterns
But this type of market analysis did not appear out of nowhere. Someone noticed a regular price behavior after a pattern or candlestick formation was formed on the chart. The study of historical data revealed patterns of price behavior in some situations. Indeed, if the situation described in the textbooks appears on the chart, then there is a high probability of the coincidence of the price movement scenario. But, also, there is a high probability that events will develop differently than described in the textbook. This does not only apply to patterns or candlestick formations. A similar picture is observed when analyzing and forecasting the market using indicators. Historical data is also analyzed. The regularities of the interaction of the indicator signal lines with the price movement are determined. And on the basis of these patterns, rules are drawn up for trading systems.
Open a position or wait for a price reaction?
This is also a very topical question for traders. If the price is approaching a significant level, you can expect three options for its behavior. Option one – the price can bounce off the level and reverse. The second option – the price bounces off the level and moves flat along it. And the last option – the price breaks the level and moves to the next one. Which option will work this time? Those who believe that the price will rebound place pending limit orders. Those who believe that the level will be broken, place stop pending orders. Although the fourth option is not excluded – the price will make a breakdown of the level with the capture of liquidity. That is, it activates the stops of buyers and sellers, and then it will continue to move. So it is unreasonable to think that the price should bounce or the price should break the level. The price will move regardless of our analysis and forecasting.
Jul 9, 2021