One needs to be able to read technical charts and know different technical indicators that are used for predicting price trends and also signal reversal of price trends.
Also, another important thing to remember is to combine the knowledge of technical indicators with the patterns of volumes traded. Without combining all this knowledge, one may not be able to predict the price movements accurately.
Let us take an example where technical analysis can work but only if the combination of factors is taken into account.
Suppose the price of a stock is in an uptrend and the volumes are also good, then, it is a bullish signal.
On the other hand, suppose the price of a stock is rising at a good pace but the volumes in the support of the price rise are not high enough, then, it could be a bull trap.
So, if a trader has not been paying attention to the volumes of the trade happening along with the price rise, he/she might have lost money by entering in long positions.
Support is a level where the bullish forces start overpowering the bearish forces after the price decline has already taken place for some time.
Resistance is a level where the bearish forces start overpowering the bullish forces after the price rise has already taken place for some time. If these breakouts and breakdowns are not supported by volumes of trades, then, those could be false breakouts and false breakdowns.
One has to be always cautious while doing technical analysis.
Sometimes, buy and sell signals are generated on-screen on the basis of technical indicators but you always need to be vigilant and always play with an already defined stop loss in order to protect yourself from unfavourable stock price movements and heavy losses because of them.
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