Technical analysis was first introduced by Charles Dow and the Dow Theory in the late 1800s. Trading any asset is impossible without understanding technical analysis. Thanks to technology, more and more patterns and signals are now evolving from TAs.
No one can deny the importance of learning TA for a deep understanding of trading. There are two schools of thought; one believes that Technical Analysis works, while later argues that TAs are bullshit.
In this post, we’ll discuss everything against and in favor of this blame: Is technical analysis bs?
Yes or No both, TAs are real in the sense that many successful traders rely on them for years. TAs are bullshit in a sense that relying only on this analysis is not enough to place a winning trade; you need fundamental analysis as well.
What is the base of TAs? It is obviously the price of assets and the movement of price. If price itself is the base, then why rely on TAs and not on price?
What Is Technical Analysis
Technical analysis is a trading methodology in the form of statistical trends to analyze trading activity. It mainly focuses on price and volume. The main purpose of understanding TA is to identify trading opportunities during charting patterns.
TAs are mostly based on past price movements. The supporters of TAs strongly believe that past price movement is a powerful indicator of future price prediction. They are also used to set short-term or long-term trading signals.
TA is applicable to any security with a history of trading data. TAs operate in stock, commodities, income, currencies, and crypto.
Why Technical Analysis Is Not Bullshit: 5 Reasons
The biggest claim of technical analysis is that it can tell the future of price movement. Chart readers draw patterns in quest of price prediction. We neither say all patterns are bullshit nor all are real. The Chart Lovers might not feel good at the end. But we’re here to bring reality, not myths.
There are a few solid reasons to believe TA is shit; lets readout:
1-Price Is Not Random
The people who are strong supporters of TAs believe the price is a random entity. On the other hand, the group against TAs believes that price is not a random entity.
2-Price That Give Information About Market, Not TA
TA followers state that only TAs decide price movement, while non-believers still argue. They believe that TAs have nothing to do with market movement. Its price, price, and only price decide TAs and market movement.
3-Focusing On Price Is Better Than TAs
The stockholders of livestock only rely on price rather than TAs. They believe they can predict further price movement by relying only on price and don’t need TAs anymore. However, we can’t neglect the importance of TAs in the forex market, crypto, and stock.
4-Patterns Are Only For Simplicity
If TAs have nothing to do with the market, then why do people spend time studying patterns? The question here is why there are regular patterns such as head and shoulder, cup and handle, double tops, and bottoms.
The supporters of TAs validity group argue that patterns are everything, and they make prediction easier. However, the school of thought against TAs claims that candlestick patterns are just recognition points. They are bound to price. They make price study easier, but they don’t predict price movement accurately.
5-No One Can Predict Turning Points
Despite studying charts, no one can predict turning points accurately every time. TAs don’t work for all types of traded commodities, stocks, indices, and options. They do work in stable political and economic conditions, but not every time. Stability is rare as the market is volatile.
5 Harsh Facts About Technical Analysis
If you are new to the trading world, you will have to learn TAs. It’s important to start and understand your trading journey. But the validity of TAs is questionable.
We can’t say that TAs only are enough for winning trades. Similarly, it is difficult to say that trading without TA is always winning. Below are a few harsh facts about TAs
- Chart lovers see randomness in charts and consider price as a random entity. Everything behind the TA scene is Price
- It’s good to have knowledge about the history of price. But it’s wrong to believe that the price past is a powerful indicator to predict the future of the price. In reality, the history of price is a weak indicator of predicting price movement in the future.
- No one can predict when the market will dump or pump even financial analysts can’t tell the right time
- TA are illusions and correlations on which traders base price speculation
- The accuracy and precision of TAs are questionable even for chart lovers
7 Misconceptions About Technical Analysis
Traders who denounce TAs believe in certain misconceptions. They call it pseudoscientific and less realistic tools to predict the market. They think that they are just tools to get a glimpse of past price data and nothing else.
Let’s discuss seven misconceptions about TAs with a factsheet:
Misconception#1- TAs Help Only In Day Trading
When you say TAs are bullshit, you must have arguments to prove this statement. The non-believers of TAs argue that they are designed only to facilitate short-term day trading strategies. They have nothing to do with long-term pending trades.
This is just a myth. The fact is that TAs were invented long before computer technology was most popular. The inventors of TAs were long-term, primarily traders. So it is wrong to say that they only apply to short-term day trading strategies.
Misconception#2- TA is Designed For Only Retail Traders
One more blame on TA is that they are designed only for individual traders. However, this is a false belief.
The fact is that many hedge funds, banks, and financial institutes also use technical analysis. Almost all types of trading of securities or currencies is highly dependent on this.
Misconception#3-The Success Ratio Of TAs is Very Low
Indeed, TAs are not 100% accurate in all situations. You need to have ample knowledge of fundamental analysis, news, and other geopolitical situations to make your trade successful.
We can’t say that TAs fail every time. Many successful traders rely only on them, such as Mark Wizard.
Misconception#4- Technical analyses are Simple & Easier
It is really the biggest misconception to think that TAs are easier to understand. Traders have to spend time and effort understanding these indicators. Not everyone can master TAs. Only traders with strong statistical and mathematical skills can learn TAs quickly.
Misconception#5- Technical Analysis Are Applicable To All Markets
It is wrong to say that all markets rely on TAs. They are indeed applicable in many markets, but not all. The requirements of equities, commodities, and options are different from stock. So, it would be wrong practice to apply indicators of one asset to another.
Is technical analysis useless?
No, not at all; many successful traders use them for trading long-term and short-term. Although TAs don’t bring money, they’re helpful tools to make trading easier and more effective. For day trading or short-term trading, TAs are more effective than long-term trading.
Does Warren Buffett use technical analysis?
No evidence or research is saying that Warren Buffet uses technical analysis. There is no such evidence on the internet that he is charting or getting help from charts.
Do professional traders use technical analysis?
Yes, more than 70% of professional traders use technical analysis. Some rely on fundamental analysis as well. Most of them rely both on TA and fundamental analysis.
Is technical analysis a science?
It’s more like pseudoscience and statistical data. It’s better to call TA social science study of financial facts. Nowadays, traders include it in applied sciences. It is mainly a study of financial markets with respect to geopolitical situations.
It’s wrong to say that technical analysis is bull shit. If they are not really why do more than 70% of traders rely on TAs? It’s true that relying only on TA may not result in winning trade, you need fundamental analysis as well.
In my opinion, 80% of a successful trade is due to understanding TA and the remaining 20% is due to fundamental analysis. So, both contribute 80 and 20 ratios to make trade successful.