Good Trading requires the Best Charting Tool!People offer wonder, is technical analysis useful or is technical analysis useless. They also brood over another question that, “can technical analysis beat the market?”. Does technical analysis work? Can we answer those questions as “yes” or “no?” Let us not make hasty decisions and discuss this in detail. After reading this detailed article, you may find your answer. Let’s begin!
- Technical analysis is a probabilistic science.
- It works on most assets and timeframes.
- It helps frame
What is technical analysis?
The technical analysis revolves around the study and observation of the market’s price data to predict future price movements. Now, the question is, “can technical analysis beat the market?” The answer is “yes.” The technical analysis leads to finding patterns that have the potential to predict future movements. In this regard, technical analysis has the potential to beat the market. However, it depends on how good you are at conducting a thorough technical analysis. A good and reasonable technical analysis offers the following advantages as well.
- Technical analysis is equally good for short-term and long-term trades. The pioneers of technical analysis were long-term investors and traders. Nowadays, traders are using technical analysis for short-term and day trading. That means it helps traders on all timeframes ranging from one minute to weekly and monthly charts.
- Technical analysis is great for individual traders as well as for large companies. Even investment banks have professionals to conduct technical analysis.
- Technical analysis substantially enhances the success rate. It is a proven fact as we know several successful investors who benefited from technical analysis. Can technical analysis make money? The answer is yes. Technical analysis has helped those investors to accumulate significant wealth and money. You can know about those successful figures from a renowned book “Market Wizards: Interviews with Top Traders” by Jack Schwager.
- Several ready-made technical analysis software is now available and has made technical analysis exceptionally easy. Such software has made it easy for traders to earn easy money.
- Technical analysis, when conducted efficiently, has the potential to accurately predict prices.
Does technical analysis work?
After covering a few of the major advantages of technical analysis, let’s proceed to the main question. Does technical analysis work? Most people believe that technical analysis is nothing and it’s just silliness to trade on its basis. They also wonder how someone can gain profits through lines and price charts. People jump to a conclusion before conducting any research. They don’t know about the history of the successful traders.
It is important to note both types of technical analysis, predictive and reactive. The predictive analysis revolves around the prediction of future price movements. They employ volumes, trend lines, and levels of support and resistance to get the clues. The reactive analysis involves getting indications from current price signals backtesting as profitable. The reactive analysis helps traders to enter or exit the market to maximize profit or minimize losses.
Why does it work?
Using both types of technical analysis share the common goal to find out what prices will do and whether to buy or sell. So, consider this and its other advantages. Can you draw a conclusion? We say, yes. Yes, technical analysis works but up to a certain point. Technical analysis works and helps traders a lot. It helps because price patterns tend to repeat themselves over time and technical analysis takes full advantage of it.
Moreover, chart patterns reflect market psychology. They are, in fact, a visual representation of investor’s psychology. Chart patterns reflect a shift in demands. They reflect how buying and selling of a particular stock are shifting. Expert technical analysts use such signals to make trading decisions. That is why we say that technical analysis works.
When does technical analysis not work?
This is a pertinent question that when does technical analysis not work? As we all know that technical analysis is the study of past market data. According to a very popular saying, “history repeats itself.” That is why technical analysis is so effective. But, what if a market is being manipulated or when there is a time of unprecedented fear or unprecedented optimism? Under such circumstances, technical analysis will not work as it does under normal and controlled conditions. So, technical analysis doesn’t work when:
- Powerful entities like Feds or governments manipulate the markets. Market manipulation means that the investor’s psychology will no longer drive the market. Instead, a higher and powerful entity will drive the market according to its own interests and wishes. That is the point where the technical analysis will work. It works only in free markets. When markets are being manipulated, technical analysis loses its power.
- Times of great uncertainties such as times of fear or optimism are other occasions where technical analysis fails. Lack of rational decisions is the reason. During such times, no one makes rational decisions and everyone acts in a way that cannot be predicted. So, technical analysis also fails under such circumstances.
Final thoughts
Despite discussing a few advantages and debating the usefulness of technical analysis, it is extremely difficult to approve or disprove the effectiveness of technical analysis. Yes, technical analysis works but at the same time, it has a subjective nature. There is no proven system that works absolutely right. If there were one perfect system, there would be millions of millionaires in the trading world. To be a successful trader, you need to work on probabilities and risk management. Taking into account a wide range of fundamental and technical factors is the key.
Moreover, no matter how good you are at technical analysis, you cannot be a successful trader until you have:
- An effective tried, and tested trading strategy
- Probabilities and risk management
- The correct trading psychology
If you don’t have any of them, you cannot be a successful trader. Furthermore, it is true that technical analysis doesn’t work under certain circumstances but it works usually. It is the courtesy of technical analysis that has made various traders so much successful. Most of those successful traders have shed light on the usefulness of the technical analysis. Let us conclude our discussion with a very popular quote of a genius and a very successful trader and investor:
“I always laugh at people who say, “I’ve never met a rich technician.” I love that! It’s such an arrogant, nonsensical response. I used fundamentals for 9 years and got rich as a technician.”
Marty Schwartz
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