We use technical analysis such as Gann Theory, Wave Theory, Golden Section, Fiboracci Lines, Bollinger Bands, Stochastic, and Moving Smoothing Indicators to analyze the market, but why these indicators can guide us in analyzing?
If you only know how to apply these theories and methods of analysis without knowing the causes, it is like a mummy that has an immortal shell but not an immortal heart. The only way to use these methods properly is to look at the root causes from the psychological level. Many people are afraid to talk about "psychology", thinking that it is something very difficult to understand. This is not the case. Let's make a simple explanation.
For the medium to long term trend of the market, it's all about fundamentals. That's nonsense. Let's move on, how do fundamentals determine the medium to long term trend? First, because the fundamentals themselves are slow to change, especially for the market as a whole, and even more so on a quarterly or even yearly basis; second, the core principle of fundamentals is an investment. And since it is an investment, it means that you need to keep an eye on the changes in the performance of listed companies. And changes in the performance of listed companies are reflected through quarterly reports, even if there are unexpected shortfalls or good news, they need to be reflected through quarterly, semi-annual, and annual reports. Moreover, the industry in which the listed company is located, the economic environment in which the industry operates, the rate of change is slow. Therefore, the fundamentals are supposed to be slow; third, fundamental analysis is actually a psychological convergence or an analytical principle that investment pioneers force on the later. Seeing lower P/E ratios, seeing earnings per share growth, seeing net income growth, seeing mergers and acquisitions, one would first react to the idea that the company's medium and long-term trends should be going up. One person thinking this way will not affect the long-term trend of the stock price, and if everyone in the market agrees with the fundamental analysis thinks this way, then the basis for this analysis is established.
People construct rule. As long as someone follows them, rule is valid. This is even more evident in technical analysis. The focus of what we are going to talk about is technical analysis, which is used to determine short-term trends. Why are technicals used to determine the short-term movement of the market? Why does the KD golden cross indicate a rise? Why must a support or pressure at 0.628 of the golden mean? Why is the market supportive and stressed? These are all questions that technical analysis will explore.
We can take support as an example. The market had a low of 1,838 on December 1, 2008. during the four trading day correction from December 24 to December 29, the market repeatedly dipped below 1,838 but closed consistently above 1,838. Why did this circumstance happen? Four reasons:
1. On December 1, many people missed the starting point. Only when it rose to 2100, they find that 1838 was the best position to step in. For the people who missed the opportunity would consider that 1838 points was a safe place. Consequently, these movements supported market;
2. People who build position near 2100 points has lost serious losses in 1838 points. There is a kind of reluctance to sell psychology, that If you lose anyway, you might just hold on. Many people are even adding positions in this position. Consequently, the big short power will suddenly reduce;
3. People who hasn't built a position, discover the big picture may come out from the W bottom. Therefore, they began to build a position;
4. Institutions in the previous low near did not collect enough chips, so in 2100 points began to smash. Until reaching the previous low this recognized point, Institution began to build a position.
Of course, there are other psychological reasons. In short, this is all from the psychological level to analyze.
The author has been in pursuit of a clearer understanding of this market. Although the news is difficult to grasp；although the macroeconomic surface is difficult to predict；although the institutions trading method is always changing; although the stock market supply and demand relationship is increasingly confusing, but all factors are starting from "human" . People have thoughts, and the thoughts of people determine their actions. One person's thought may only determine their own success or failure; a group of people's thoughts, may determine the success or failure of the market. Therefore, we need to do analysis and research on the psychology of majority, and then find out what determines fluctation of the market. Psychological movement are the real internal drivers, and technical analysis is just the external manifestation of public psychology.