History repeats itself

Because all the concepts of technical analysis are based on studying historical data, validity of this premise is crucial. Several studies have shown that particular events occur repeatedly in the market. These events are reflected in market price, which is again the primary source of information for particular indicators and chart analysis. Many of them are based on patterns in human psychology that do not change. For example, one such situation is regularly visible when resistance (a psychological barrier limiting the price rise on the upside) is broken. If the price breaks above the resistance level, traders who have opened long positions cheer, but at the same time they regret that they didn't buy more. Traders with short positions realize they are on the wrong side of the trend and hope that the price will drop back to the level of former resistance, so they could exit their positions without incurring losses. Traders that have not yet committed any money in the market are waiting for the price to drop towards the level of former resistance as well, in order to be able to initiate long positions and capitalize on the upward trend, while buying cheaply. Because all these groups intend to buy near the level where the resistance was, this level becomes a support for price – prices will not fall under this level because of high demand. Technical analysis includes many such concepts.