Answer: Because it works lots of times and when it works, it works like magic. It works because it assumes that people's behaviour is predictable under certain circumstances. Example: People buy the dip when overall market environment is Bullish.
Let me share one Case Study:
Can SBI and PNB stage big rally from current levels?
I wrote this Premium article on smarketpremium.com. I have now moved it in Free section. You can read it here
State of SBI stock Chart back then on Jan 05 2017:
The Idea: When a stock is positioned like the above - it rallies because people have a tendency to buy stock at support. Not a very complex assumption and see what happened - just in a months time
How much has SBI stock rallied from this support? - 14%. Not bad for a large-cap low-risk stable stock
State of PNB stock chart on same day back then
The Idea: Stocks of the same sector move together. SBI was at Horizontal support and PNB was at 200 dma on the same day. Both stocks at solid support levels and hence well positioned to fly from that levels. Just see what happened.
How much has PNB stock rallied from this support? - 27%. Not bad.
One argument people make: Oh the market has rallied and hence what a big deal if these two stocks have rallied. You could have bought anything and it would have rallied. Ok then what IF market would have tanked? Would you have exited? Reading Price Action is like driving on a highway with all the dashboard working and windshield clear. It gives you visibility. The power of tracking price action is that you can know when things are not working out which is as important as when things are working out, so that you can cut the losses. When you buy near support, then you can jump the position with minimal damage when things don't work out.
One of the objectives of writing stateofthemarket.net blog posts is to demonstrate how price action works in a very simplistic manner. I have been writing about markets for years now and have developed a unique way of looking at the market. I have developed a course material if you are interested in learning about this whole space which comprises of the following
1. 13 Video Chapters explaining concepts
2. Trade Book which demonstrates how these concepts work
3. Live Case Study which means demonstrating how pattern works in real world situation
The above SBI, PNB stock chart was a Live Case Study example I shared this month.
Do you want to Learn Science of Stock Price Action with more Live case studies covering Indian and Global stocks - www.smarketpremium.com
— Deepak Singh (@smarket) January 27, 2017
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers