I recently answered a question on www.quora.com . The question was: What is the theory on which Technical Analysis is based? This is what I wrote: The assumption is that the psychology of market participants is a main driver of price moves. Technical analysis is a tool to visualize and measure market psychology. In this sense technical analysis does not actually predict anything, it just relates current price to price history and gives you an indication of market direction. Thus increasing your odds of a successful trade if the general market direction persists. Developments which change the fundamentals of a market and thereby the investor’s evaluation of price in relation to price history, will result in a re-calibration of market psychology. For example, a surprise rate increase/cut by a central bank can break down strong trend in the forex markets. Any feedback is welcome.
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