Is Technical Analysis a Hoax and a Myth? Or Is It Legit?


Technical analysis is one of the most popular methods of predicting future market movement. Traders use specialized tools and charts as a guide to what is likely to happen in the future. But is it legit?

Technical analysis is not a hoax or a myth. It is one of the most trusted means of predicting the market, with millions of traders worldwide finding success with it to varying degrees. The legitimacy (or lack thereof) of technical analysis is a function of the trader’s technical abilities.

In this article, we will take a closer look at why technical analysis is not a myth and what you may be doing wrong if it is not working for you.

IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!

Is Technical Analysis Fake? 

Forex technical analysis is not fake or a myth, and millions of traders rely on it. Communities like Forex Factory are built almost entirely around it. If it were fake, there would be far fewer retail traders with each passing year (many of them rely on charts and indicators). Instead, we have new brokerages opening up, with many of them attracting thousands of new clients.

Is Technical Analysis a Myth?

The forex trading world is as challenging to succeed in as many other fields—including those that don’t offer anywhere near the same level of potential for success. With 70-90% of traders failing, it’s natural to find some unsuccessful ones claiming that technical analysis (and indeed other types of analysis) is a myth.

However, in many cases, the lack of success boils down to inexperience and impatience. For many traders who have used technical analysis unsuccessfully, the journey is often as follows:

Phase 1

They scour the web for a trading strategy based on technical analysis, which offers many promises. Some go as far as paying for methods after seeing a few screenshots as “proof” that the system works. They pick the strategy, note all the rules, and jump straight to their trading account without proper due diligence.

Phase 2

They start trading with the technical strategy, often making money the first few days. However, eventually, the losing trades happen. Instead of closing out the trades and taking the loss, the trader will double down or hold on, hoping that the trade will come back in their favor. The trade may continue going away from them, leading to a margin call. Even when they avoid a margin call and take a series of losses, many traders jump straight to the next phase.

Phase 3

The trader throws out all the technical strategy rules they’ve learned and starts to jump in and out of trades with little to no planning. Others may start looking for new ways to tweak the strategy by introducing new technical indicators to use as “filters.” This invariably leads to more confusion and uncertainty in the mind of the trader. So, they mostly ditch the strategy and go back to phase one or jump straight to the next phase.

Phase 4

This is when the trader starts pushing the opinion that technical analysis is a hoax, a myth, or fake. They reason that if they can’t succeed with it, it can’t be real. Additionally, they also can’t point to any other type of analysis as the one that isn’t a myth. Most traders who fail with technical analysis usually can’t succeed with any other kind of analysis, such as fundamental analysis.

Is Technical Analysis Legit?

Technical analysis is legit. However, the legitimacy of it all comes down to a few factors, including the following:

The Quality of the Strategy

If you choose a technical analysis strategy that is poorly thought out and with weak foundations, you will probably fail over time. The best technical analysis strategies have accuracy rates of at least 65% and will often have a favorable risk to reward ratio of 1:2 or more. 

The strategy won’t just focus on entries and exits; it will also properly account for variables like market volatility, trading costs, and money management. The combination of these moving parts makes up a sound technical analysis strategy. Additionally, you should backtest the strategy across a decade (at minimum) to be sure it works consistently.

When you pick a technical analysis strategy on the internet without knowing how it fared in backtests and all the other important details, you are very likely to fail even when you stick to the rules judiciously. You have no way of knowing when you have entered a market phase that is detrimental to the strategy or if it was specifically designed to work in certain conditions.

Low volatility scalping strategies that thrive on looking for opportunities in a sleepy market environment can ruin your trading account if you maintain the same rules in a highly volatile market like during the peak of the pandemic-induced lockdowns of March-July 2020 or during the 2008 financial crisis. 

Proper backtesting would have encountered all kinds of market conditions leading to devising rules and tweaks that will allow the strategy to navigate the environment better.

The Trader’s Discipline

If you have a strategy that’s been backtested properly and proven to generate consistent results, your success with technical analysis will come down to your discipline.

  • Will you wait for entries and exits as recommended by the strategy, or will you act on your Fear of Missing Out (FOMO) and jump in and out of trades arbitrarily?
  • Will you stick to the recommended money management methods, or will you put too much money at risk to make larger profits?
  • Will you take losing trades when they come instead of displaying descending into loss aversion behaviors?
  • Will you stick to the strategy completely instead of looking for phantom ways to improve it and avoid losing trades?

When a trader fails with technical analysis, they have likely failed to stay disciplined as many traders find it difficult to take a loss. If they have a losing week, they forget the previous 12 winning weeks. Instead of accepting the effects of probability on trading, they will start looking for ways to avoid a repeat of that one losing week.

Others give in to greed by opening trade sizes larger than usual or holding onto a trade well past the recommended exit. Over time, such traders will wonder if technical analysis is legit or fake instead of looking inwards to correct character flaws that may hinder their success.

How to Succeed with Technical Analysis?

If you have stayed disciplined with a properly backtested strategy and are still struggling with technical analysis, there are two things you can do:

  • Review the backtest. This will help you see if the behavior of the strategy is in line with expectations. If it is, you can ride out the period of negative results by continuing to trade with sound money management and wait for better times.
  • Look for ways to improve the strategy. If your backtest doesn’t show any periods of similar poor returns, your strategy may be struggling under a market condition that the backtest didn’t capture. Look for ways to improve it, but don’t forget to run a fresh backtest with the new changes.

Author’s Recommendations: Top Trading and Investment Resources To Consider

Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.

Conclusion

Technical analysis isn’t a myth. It has been proven legit by the millions of forex, stocks, and cryptocurrency traders relying on it for trading decisions. There are dozens of hedge funds managing billions of dollars in which some form of technical analysis is in use. The bulk of algorithmic trading companies in existence today also won’t be in business without technical analysis.

BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!

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    Navdeep Singh

    Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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