Have you ever wondered why technical analysis works?
Technical analysis is the study of chart patterns and technical indicators used to develop entry and exit points for placing trades. Here is a great online free resource, a course in technical analysis.
Aside from the self fulfilling prophecy, often times price moves in the stock market result from groups of people anticipating the same result, only the resulting move it turns out, is in the opposite direction as the masses first thought.
Think about it…
If a stock moves from $50 to $100 and begins to pullback, the traders who missed the first move will be interested in getting in. Some will feel they must chase the move and will end up buying at highs instead of patiently waiting for the next pullbacks. There will however, be a group of traders, who patiently wait for the stock to pullback to say, $75. They have their entry pin pointed and as soon as they get filled place their stop on the trade, in this case the trades placed their stops between $70 and $72.
As luck would have it the market continues to slide through the $75 level and upon dipping into the $60’s is met by a flurry of stop orders which sends the stock back down to the $50 range