Does Technical Analysis Work and Why?

If you are a little more skeptical about technical analysis or just getting into technical analysis, I want to share with you the concept of technical analysis and why really it kind of works out in the favor of the trade or in the favor of the stock movements and the way they move. In general when you look at investing we're looking to put some kind of money into something. Then in the end we hope to get back more than what we put in whether that's two times, three times or five times. Whatever it is you put certain amount of cash into an investment and you hope to get more money out of it through a passive means or through appreciation, through dividends or through other methods. This could be through crypto, stocks, buying in antique cars, stamps or rare coins and so on. There's a lot of forms of investing but in either case you put some money in and you hope to get more money out later. There's a couple of ways to do this when you're looking at crypto. One of the common approaches is through fundamental analysis. With fundamental analysis you're really looking at the company’s health, so you are looking at the balance sheet or for example how is the company earning or how are the active users, what are they spending money on. For example if their spending is greater than the money that they're making that's a bad sign but if they're using it to invest and grow their product pipeline then it might be okay. But in either case you're looking at a baseline of how the company's health looks under the company itself, of how the company operates. So that's really fundamental analysis. This is the way most people approach investing in a stock. So if you are fundamentalist, you will look at things more on a fundamental basis or at the company’s scope. The second approach to investing is you're looking more at technical analysis which is what we're talking about. With technical analysis, you're looking to predict ok future prices based on two main things; price history and volume. Those are the main factors. A lot of the other things that go with technical analysis are all based upon the price and the volume. So even if you look at MAC D, stochastics, moving averages are all based on the price and the volume mainly. If you understand price and volume, you can use the other indicators as well because they all stem and drive things from that. But in either case the goal is the same. Whether you're looking for a technical analysis or you're looking at fundamental analysis, the goal is still the same; you're taking money and you're investing it and you're hoping to get more money at some time at a later date. A lot of people can understand why fundamental analysis works because if you have a company that's in good health, if you have a balance sheet that's in good standings, if you have a great active users, good revenue coming in and they're spending less than what they're making and the company is growing then it's easy to see why that company and their earnings would grow in the future as well. With technical analysis because it's not something that we're normally used to as we grow up as a child into adolescence and into mid-20s, we're not always aware of how technical analysis plays a role. It's something that we as traders get put into and we are aware of this concept and then it's put into our lap and then we wonder why does it actually work and does it really work? From my standpoint it really does work and the reason for that is because of crowd behaviour. Its all about crowd psychology and the law of supply and demand. If you want to take a look a little bit more about the psychology of how things work and evolve, there's a really simple and easy to understand video by Derek Sivers on YouTube uploaded since 2010, called “First Follower: Leadership Lessons from Dancing Guy”. If you want to check out the video please visit the following link: https://www.youtube.com/watch?v=fW8amMCVAJQ

It’s a funny video really where basically a guy dancing at the park but it's really a lesson about leadership. It's got millions of views but really what happens in this 3 minutes video is that there's a guy dancing in the park alone. He's the first one just dancing alone but eventually 20-30 seconds later he gets a second person which is the first follower hence the name of the video. Over time, a little bit later you have another person joining in dancing so now you have those two people plus you have a third person who backs up that first follower. After a while this continues to grow so now people feel more comfortable. It's kind of like a social proof so now you have a group of 6-8 people join in and this continues until eventually everybody else joins the party. And now you have a huge group of people joining in and then more and more people, literally in less than 3 minutes there are at least 100 people dancing. So when you're first initially getting started, it's very difficult to move that crypto. But then eventually you have another person that comes in to fuel that crypto then more and more people start to come in and more and more people come in as they start hoping from that crypto. Then this crypto keeps moving due to the supply and demand. Demand is the buyers and supply are the sellers. Sellers are selling the crypto and buyers are buying the crypto. As you have one buyer coming in and while you are looking at a chart, initially that crypto starts to move to the upside. Next, you'll get the scalpers coming in and the day traders then you might get some more value buyers coming in on the second stage. As people start coming in you got social proof. This is when that crypto is starting to head higher and looks to be like there's momentum there. Then again more people coming in and this continues to move up until you get to a certain point where this starts to top off because it starts to look a little stretched. If you're dancing in a little room there's only so much space but when some people actually leave the dance floor you can step in and get on the dance floor because there's only so much space. If everybody's jumping in right away, it's going to fuel that crypto. What does that mean? Well, this is due to the volume. As you start looking at a crypto initially, you might have a small little volume spike. Later as you continue that volume spike might grow even bigger. As more people come in, they will fuel that crypto. Then again you get even more volume that'll come in and this creates proof within that crypto that's moving. As that crypto starts to pull back and as we come back into this price level because the line opens up, as we have an opening in space, that volume might actually start to get weaker. As that volume gets weaker, that's a normal pull back because now the space opens up.

Now the prices are not too high. Then you have more value buyer stepping in, scalpers coming in, day traders, swing traders coming in and they say; “okay, this level is a good buy”. So then what happens to the crypto again is that the volume starts to pick up. Then when the volume picks up, that crypto continues to head higher. You can see the volume is much bigger than before and that's what continues to fuel the crypto. So what does this mean? Well, this means that a crypto is different for everybody at different points and it's all based on that crowd behaviour. Some people won't join in until later, until the bounce or until this price level right or until that crypto bounces, while other people might be early. So we are looking at crowd behaviour or crowd psychology on how that crypto is moving. The issue here is when we have this line between called support and resistance, if there's enough people that are willing to step in on the dance floor the dancing will keep happening. But with crowd behavior the people get tired of dancing because there's no more people that crypto will continue selling off and this is when you look at the volume it's going to tell you some key signs. If you start seeing more selling and you start seeing larger volume as that crypto is selling off, which is why the volume is important, that crypto will roll over and that's where that support is going to break. The same thing happens on the resistance level. If you see it selling off in a heavy way at resistance level then you're looking at the volume, and if volume confirms that, you'll see it selling off even further. But it comes down to the key principle is this social and crowd behaviour. It's all about the buyers and the sellers. It's probably really simple for you to evaluate a dance floor to see when people are getting tired or based on the song when they're going to sit down. It's easy for you to see that because you've seen it happen. It's something you deal with on a day-to-day basis. When we're looking at crypto if there's buyers still coming back into the market, more experienced traders will monitor that and wait until there are no more buyers so they can sell off their crypto for profit. You can look at this concept from an intraday standpoint. Meaning, this happens on an intraday basis, it happens on a daily basis, a weekly basis or a monthly basis and the longer the timeframe you're looking at the more concrete these support and resistance lines are. When we look at the price action or when we look at the movement of a crypto, it all comes down to the crowd behaviour. The psychology behind it it's all about human behavior and it works. That's why the support and resistance works because people come in and they want to value buy. For example if you go to a restaurant and you really loved that place, are you willing to wait five minutes to get a seat or ten minutes? Probably because it's not worth it to go someplace else. It's just not worth the time and effort or energy because you're hungry. Same thing here; you're hungry for an investment to make money so you're looking at a good entry point. You get in when there is a reasonable price and that's what continues to move crypto. That's how it works. No matter what pattern you're looking at, whether you're looking at triangle patterns, support and resistance which are the basic but when you look at any of those indicators we will discuss shortly, it's all about crowd behaviour or crowd psychology. That's how technical analysis works and this is why it works; crowd behavior and the crowd psychology.