Debunking Some Myths About Technical Analysis

By | February 21, 2018

Photo by Allan Ajifo License, CC BY 2.0

In the world of commodity trading, technical analysis (TA) is a polarizing concept; on the one hand, many traders denounce its value and efficacy while on the other, there are many staunch supporters. Common misconceptions about TA results from the traders’ training and experience: a trader only used to fundamental analysis, for example, will be wary of TA. However, a significant portion of traders across the world confidently use technical analysis as a reliable way to make profits. In this article, we will discuss some of the more common myths about this trading methodology.

Trading Analysis Software Guarantees Easy Money. One of the selling points of most trading analysis software is that it will do all the hard work for you, in turn, generating higher profits. Unfortunately, this just isn’t true! As any experienced trader will tell you, there is no such thing as easy money, and no trading software will guarantee profits. Technical analysis software is a tool that can provide deeper insights into trends and patterns; however, it is up to the individual trader to interpret this data in the correct way. This software can be useful when it comes to information management across several markets; however, it’s a rookie mistake to think that anyone can walk into trading armed with software and cash-in in a short period of time. Real expertise takes time to build, and software isn’t a shortcut.

Technical Analysis is Just Reading Charts. As a methodology, technical analysis is also about understanding and interpreting the psychology of markets to make informed decisions about future fluctuations in price. Comparisons are often drawn between the world of trading and card games like poker because they’re both probability-based pursuits and require a specific mindset. If we take this example further, we can draw a parallel between a poker hand and a trading opportunity. A poker player will choose to play a hand ranking that they have the best chance of winning (like a straight flush), using a mixture of behavioral observations and calculated predictions. In the same way, a trader can implement TA not only to observe the behavior of markets but make calculated predictions on possible future outcomes.

Technical Analysis is Only for Short-Term Traders. Another common myth is that technical analysis is only useful for short-term, computer-driven trading, such as high-frequency trades or in-day trading situations. The reality is this is just not the case. It’s true that as a methodology TA has become advanced with the integration of technology, however, it existed in its manual form long before computers were in common use. In previous decades, technical trends would be monitored over specific periods of time, from days to months, and even in today’s trading world, long-term concepts like 20 or 50-day moving averages are still in widespread use.

Fundamental Analysis is Better Than Technical Analysis. An alternative investment methodology, fundamental analysis is often viewed as more credible than technical analysis. The main reason for that is because in the decades before technology made the process of TA quicker, it was easier to use a method that focused on qualitative and quantitative factors to determine the economic well-being of a commodity. A fundamental approach is the cornerstone of any business decision, whether inside trading markets or not, however, in today’s technologically driven climate, investments are moving as much on technical factors as they are fundamental.

As a trading concept, technical analysis is one of the oldest and still plays a significant role in most trading decisions. Large trading firms use computerized trading systems that are based on technical trends, such as black box or computer modeling, in the present day, and as technology advances, TA will continue to be in widespread use. When combined with a fundamental analysis of the position of stocks and shares, technical analysis can act as both a valuable data point and a key strategy in an investment process.

 

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