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Published Feb 24, 2022
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Technical analysis (TA), we often come across this word in the financial markets, some traders or investors denounce it as a superficial study of charts and patterns without any concrete, conclusive or credible results. Others believe it as a holy grail once mastered it can unleash sizable profits. These different viewpoints has led to many misconceptions about technical analysis.
Before we investigate the myths around technical analysis (TA) let's define it here. Technical analysis (TA) tries to capture market psychology, direction & sentiment by analyzing price trends and chart patterns for trading & investment opportunities. Now, let's debunk some of the myths around it.
#Myth-1: It is meant only for day traders
Many people think technical analysis (TA) is meant for day traders only but that is not true at all. The pioneer of technical analysis Charles Dow, and many other legendary traders and investors used TA for long-term trading & investing.TA can be used by the traders or investors on all time frames from minutes to yearly, due to the fractal nature of price & markets.
#Myth-2: Only individual traders use TA
While many individuals and retail traders or investors do use TA, big hedge funds and investment banks also use the TA as their primary factor or a secondary factor. These large institutions have dedicated trading teams that use technical analysis. Around 60 percent of the hedge fund traders focus on employing technical factors when making decisions. Having said that, you may not find them announcing it publicly. Investment banks as well make adequate use of technical analysis with dedicated teams who track the market momentum & directions.
#Myth-3: TA has a low success rate
Technical analysis can be performed with a higher success rate, than the rate at which most are performing, by understanding the concepts clearly & following rules with discipline. Most of the people who use TA are not disciplined with the practice & carry irrational subjectiveness. If we look at the list of successful market traders, who have a multi-decade of profitable trading experience, this myth will be automatically debunked. For example, Market Wizards: Interviews with Top Traders (Wiley, 2012) by Jack D. Schwager features interviews with many professionals who have profited solely by using technical analysis.
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#Myth-4: TA is quick and easy
Internet is full of fakes gurus and courses that promise you trading success and making millions. Most of us start our journey in trading by placing our first order with the help of some simple indicator but to be successful in trading one needs to have discipline, in-depth knowledge & a risk management plan.
#Myth-5: TA can provide precise price prediction
Many novice technical analysts & traders expect their TA strategy to work with 100% precision. For example, inexperienced traders may expect a prediction as specific as, "stock ABC will reach ₹ 62 in two months." However, experienced technical analysts usually avoid quoting prices so specifically. Rather they tend to quote a range such as, "stock A could move in the range of ₹59 to ₹64 in the next two to three months."
Traders betting their money on technical recommendations should be aware that technical analysis provides a predictive range, not an exact number. Technical analysis is also about probability and likelihoods, not guarantees. If something works more often than not, even though it doesn't work all the time, it can still be very effective at generating profits.
Technical analysis is often conceptualized poorly by many market participants. It is important to know the benefits of technical analysis, both for traders and investors, understanding that there are various levels upon which you can function/use technical analysis, from basic price & chart observation with disciplinary approach, from complete objective & quantified rule-based trading, to complete rule-based quantified & automatic execution algorithms
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Scott Hathaway, CFT
Proprietary Technical Analyst of Financial Markets
1y
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