The target of every trader is to be successful in their attempt. For this purpose, he wanted to know the direction of the given investment momentum. With the advancement of technologies, several technical tools or indicators are developed to guide traders.
These indicators are used with other techniques to help out in checking new strategies. When we see the outcomes of these tools we are surprised that all these do not earn for us. Many newcomers in trading may ask why such a heavy and advanced tool is not helpful in a consistently profitable trader. Let’s see the root cause.
Why does technical analysis fail?
Technical analysis is a powerful tool but sometimes it fails due to a longer frame of time, manipulation of developers, biased behavior of traders, and use by an uneducated user. It makes trade more complicated that often traders could not sense the true picture of the market.
It is best to use them combined with fundamental analysis and recent price action of your stock.
But remember to improve your learning; first check these on demo accounts and then on real accounts. Let’s move further to have a closer look at its failure.
What is Technical Analysis
Technical analysis is a trading computer tool used to evaluate securities and try to forecast future action by analyzing statistics collected from trading exercises such as price trends and volume.
Why Do Technical Analysis Not Work
During the use of technical analysis, you can check many market indicators like price trends, market volumes, moving averages, and chart patterns. This will predict something helpful in the decision-making process.
But sometimes this useful tool is not helpful in a profitable trade. Due to poor results, you stop trusting them. You should not do this but try to find out the truth. Here are some main factors that fail the technical analysis.
1. Interference Of External Elements
Technical analysis works only in a free market. But it does not remain free when the market is polluted by any external force like the Government/Fed or by some biased developer. Now it is not the investment or human psychology that controls the market. It is the time when the market runs according to the desire of external forces, not the trader.
2. When the Market is Bullish Or Bearish
During extreme fear (bearish trend) and optimism (Bullish Trend), the market moves in an abnormal pattern. It destroys the person’s ability to think and understand. At this time TA does not work because TA depends on past data and the market has quite changed now.
3. Which Indicator Is Useful
It is crucial to study which indicator is used in some specific conditions. If you did not learn about the use of TA correctly how can you apply it to your trade?
There are hundreds of indicators used in the market to track your trade. Selecting the correct one is necessary for guidance. For example, MACD works only when the market is in a broad range and trending.
When Technical Analysis Fail
The developer designed the TA to function in specific market conditions. They can rig it to show the excellent market condition. Yes, they can do it.
In the FX market, developers show some currency pairs in the best condition by optimizing their data. Their work is quite a fabrication. Though some developers also work legally with some modifications, the majority of developers fail over an extended period.
The main point of all discussion is that indicator-based strategy is always based on condition. If it is designed to work in a trending market, it may empty your account when the market begins to shrink.
Is Technical Analysis Reliable
Technical analysis is a reading of market sentiments through charts, graphs, patterns, and signals. No one can doubt its effectiveness but the success rate based on its signals is not high. So, a trader can’t rely solely on it if its accuracy remains uncertain.
The best way is to use technical tools and indicators in tandem with other techniques such as fundamental analysis to improve its trustworthiness.
Why Does Technical Analysis Fail Most Of The Time( 8 Reasons For The Failure Of Technical Analysis)
History repeats itself’’ famous saying indicates particular human behavior. Men mostly rely on past data to make future decisions. But why does technical analysis often fail in successful and consistently profitable trade? Here we describe a few reasons behind it…
- The big picture of the market gives you better information about the sector you invest in. For example, if you have to invest in some shares, you should know the company, its sector, city, and even the country that is missed in TA.
- The correct location is very important. The data of some other country you observe don’t need to be also good for you.
- For low liquidity and small-range markets, these tools do not work.
- Bias and favoritism behavior of traders easily fail your Technical analysis.
- If you look at a stock that is being manipulated by some developer, it may be harmful and never work for you.
- The emergence of new fundamentals fails your trade. It is not the fault of the TA because the Technical analysts do not start their work on them.
- It does not work properly for very small periods of trade( within seconds) or longer duration.
- Sometimes TA makes simple trade more complex.
Which Is More Effective, Technical Analysis Or Fundamental Analysis
Fundamental analysis helps you forecast future price movements and measure whether a stock is undervalued or overvalued. It is very helpful in the long-term benefits. But the TA has a short-term approach. Fundamental Analysis also tells about the company strength in which you invest. In this way, you can invest in such companies that have low share prices. Because the well-reputed company makes a profit in the long run.
So the Fundamental Analysis is better for long-term Swing or position traders but for Day traders and scalpers TA is the best.
Does Technical Analysis Work Better With a Shorter Time Frame?
Popular time frames for Technical analysis are a 5-minute, 15-minute, hourly chart, 4-hour, and daily chart. All these clearly state that Technical analysis works better in a short time frame. Remember for more reliable and perfect signals a longer time frame is used. As you work down for longer, charts are polluted by different factors.
However, for Scalpers and Day traders Shorter time Frame is the best and TA work for them.
What To Do If Technical Analysis Fail
One thing that is not dependent on market conditions is Price action, price action, and price action. Are you surprised?
We are not against technical analysis, but it complicates our trade through different indicators. If you want to become a great trader, price action saves you from shifting to useless indicators.
Please concentrate on your chart. It is a ground where you can work more precisely and accurately.
Spend your time learning how to read price action. It helps you in the long run even if you use some indicator-based strategy.
Learning trading like Forex is quite simple. Don’t make it complicated through technical analysis. Make one or two price action strategies, and check them through indicators but remember only and only price action makes you successful in all conditions.
Technical analysis is a popular trading strategy that relies on the use of technical indicators to predict future market movements. While this approach has been shown to be effective in the past, it is not always accurate.
There are a number of reasons why technical analysis can fail, and it is important to understand them in order to avoid making the same mistakes. By understanding why technical analysis can fail, you can develop a more effective trading strategy that will be more likely to succeed.
If you found this blog post helpful, please share it with your friends and colleagues. Together, we can help spread awareness about the dangers of relying too heavily on technical analysis and help people identify better trading strategies that are more likely to succeed.