Is Technical Analysis BS? Is It Total Nonsense?


If you look around online, you’re sure to find many people dismissing technical analysis for various reasons. Though some praise it, many claim it is nonsense that doesn’t work for anyone. But which is true?

Technical analysis is not BS or total nonsense. It is one of the approaches you can adopt to find market direction in forex, stocks, or cryptocurrency trading. Like all other types of analysis, it is not foolproof, but there are many documented cases of successful trading using technical analysis.

This article will look a bit more closely at why technical analysis shouldn’t be regarded as BS or nonsense. You’ll also learn how you can make it work 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 Nonsense? 

As we’ve mentioned briefly above, technical analysis is not nonsense. In many cases, the people claiming that it is BS are those that have done some trading “research” on various markets and didn’t find success with it—but therein lies the problem.

It’s impossible to run proper research in the highly subjective trading world. There are far too many variables for any controlled experiment to work. Even when you hand over a strategy that has made millions for trader A to trader B, there is no guarantee that the latter will make money for several reasons.

The stock market has made many people rich, but there are still people who believe it is no different from gambling and doesn’t work. It’s more of a refusal to accept failure for those that can’t figure out how something works to dismiss it as BS or nonsense.

It takes thousands of hours for many successful technical analysts to come up with a strategy that works. Ignoring the tried and tested approach trusted by millions of people worldwide is naivety.

Railing against technical analysis is similar to talking against literally any other method of making money that hasn’t worked for everyone in the past. Many people make money as footballers, but thousands failed in their quest to become professionals.

In the same vein, more than 85% of people that set out to become doctors won’t even be accepted to medical school in the first place. They fail before they can even begin. Of the few that get accepted, a sizable number will drop out. The numbers are worse for engineering. Does that make these courses BS?

The Argument Against Technical Analysis

The bulk of the arguments against technical analysis often refer to: 

  • How it is very simplistic
  • How it is not accurate
  • How it means different things to different people (subjective) 

However, any top technical analyst will shoot down these arguments quickly.

Accuracy

The whole idea of technical analysis is not to give anyone a crystal ball that’s never wrong. The goal is to be right as many times as possible, making money when you’re right and not losing your shirt on the occasions when you’re wrong. In fact, many technical analysts are only right 40-70% of the time, and they still end most years in profit.

Posting charts where technical analysts got their entry wrong to prove that “technical analysis is BS” is misleading. It only demonstrates a thorough lack of understanding of what technical analysis is about. Of course, the easiest way to shoot down this argument is to ask the naysayers to pinpoint another method of analysis that is always right on the money every time. (Spoiler alert: it doesn’t exist).

Simplistic Approach

Many people expect everything within the trading world to be complicated—where only sophisticated algorithms and computers with incredible processing power can make money. They simply can’t wrap their head around the fact that people can indeed trade from their kitchen counter on a laptop and make decent returns from the market.

However, that’s the beauty of technical analysis. A properly developed trading system based on technical analysis can indeed be simplistic and still deliver excellent results. The final result is all that matters in trading. As long as you’re getting results with a sustainable and well-researched technical analysis strategy, it doesn’t matter if it is as simple as waiting for two lines to cross on a chart.

Subjectivity

Many technical analysts rarely agree on the market’s directi, even when looking at the same charts. For some people, this is a negative. However, the liquidity of the market is highly reliant on subjectivity. If all market participants see the same thing and take the same actions, the market would no longer exist. Again, there’s no other form of analysis where all market participants agree on a direction.

As we’ve seen above, all of these arguments are weak and fall apart under any bit of scrutiny. 

Does Technical Analysis Work?

Yes, technical analysis works. However, you need to first keep in mind that it encapsulates a lot of things. If you fail to get one aspect of it right, it could undo everything else. Think of technical analysis as a tree that makes up the trading system forest.

The best technical analysis approaches will cover the following:

  • Time frame of analysis
  • Entry and exit parameters
  • Risk and position sizing (money management)

With all of these sorted, the next step is to backtest the system, looking back as far as possible to see how the system holds up in different market environments.

Remember, the entire focus of technical analysis is developing a positive expectancy model—a system that will help you find repeating patterns and take advantage of them. You don’t have to be right every time. You just need to be right one more time. The positive expectancy and random distribution of trades will give you an edge over time.

However, you need to ensure you are applying your trading system consistently without allowing emotions to get in the way. So many of the failures associated with technical analysis can be traced to ill-discipline. Some traders think they don’t need to follow a strict plan, while others go against the plan when things aren’t working out and choose to trust their gut instead.

It’s very difficult to trade the markets without a detailed and proven attack plan. If you expose your money to the market without a carefully created plan, the ebbs and flows will gradually chip away at your account balance until you have nothing left. You may get lucky from time to time, but it always ends in the same way: a margin call.

Examples of People That Have Succeeded With Technical Analysis

There are thousands of regular people that have succeeded in trading with technical analysis. However, we’ll only focus on some of the most popular names with verifiable achievements for this article. They include the following:

  • Paul Tudor Jones (known to use Elliott Wave technical analysis)
  • Marty Schwartz
  • Dan Zanger
  • William J. O’Neill
  • Nicolas Darvas

Dan Zanger turned approximately $11,000 to $18M in two years. Marty Schwartz has been quoted saying that he used fundamental analysis for nine years but only got rich when he started using technical analysis. He took a $40,000 account to over $20M.

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

As is the case with most things in life, your success or failure with technical analysis comes down to just how much work you put into it and your overall trading approach. If you are already biased against the process, it most likely won’t work for you.

The antagonists of the technical-analyst school of thought often try to undermine the success of traders that have used the approach by calling them the lucky few. However, nobody can build a trading career (and perhaps even a hedge fund) on luck alone.

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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