The topic is like the opening of the Pandora’s box. I will try to keep it short but all hell can break loose debating it with many opposite views. I personally find it very important because I am aware of the gap that exists in the thinking between the retail trader and professionals.
Firstly, this blog post is especially directed to novice ”wannabe” retail traders, from who the vast majority are completely unaware how much of a disadvantage they have against other market participants, blinded by their aspiration for the riches the industry advertise and ”Holy Grail” trading systems that will enable them quick and easy profits. Sadly but quite reasonably, the world of retail trading (irrespective of the market, whether equities, commodities, bonds, foreign exchange, cryptocurrencies or any kind of derivatives) is full of danger, the technical analysis being only one of the traps that a novice retail traders fall into. Putting aside all the misleading industry marketing, broker shenanigans, false prophets, trading gurus, charlatan educators, and outright scams, let’s focus on TA.
Technical analysis (TA) is a trading tool employed to evaluate securities (or any other traded market – cryptocurrencies in our case) and attempt to forecast their future movement by analyzing their past price movement and in some case volume. TA focuses on past chart patterns and various analytical tools and its underlying assumptions are that price at any given point in time accurately reflects all available information, and therefore represents the true fair value of the traded asset. This assumption is based on the idea that the market price always reflects the sum total knowledge of all market participants.
Today, we find a lot of mutated techniques and methodologies available to the Technicians. What many fail to realize, is that all these studies are basically statistical tables plotted in graphic form to present a ”picture” to assist traders in their decision process, the key word here being ”assist”! The problem with some people, especially novice retail traders today is that they use the Technical studies as if, it were some kind of crystal ball, the ”Holy Grail” of trading & their pathway to the riches.
Remember that saying from Abraham Lincoln: ”You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time”?
Well, what everyone needs to realize is that Technical Analysis studies, similarly can work in some market conditions all the time, all market conditions some of the time, but not all market conditions all of the time!
TA is built on historical and lagging databases which mean it uses rigid parameters, which in turn produces rigid responses to the always changing market conditions.
It is understandable, TA is easy to learn compared to years of studying global markets, mechanics, participants, macro economy, trade flows, geopolitics etc., something a professional trader should study. Why would anyone put their money into something they have no, sometimes even basic understanding of? There is certainly a big trend in doing so in the retail trading.
Don’t get me wrong, TA is a great tool BUT you need to understand what it can do and most importantly what it can not! My point is simply that I find rather disturbing that some traders overcrowd their minds with too much indicator reads, and their overdependence on them creates a very dangerous mindset for prudent trading.