Technical analysis not working? Let me think…

Technical analysis does not work! A quite controversial view, but recently more and more frequently appearing in discussions on forums or thematic groups on Facebook. It sounds a bit like the lamentation of people who had certain expectations and were eventually deceived. And maybe it was so? Or maybe the problem lies somewhere deeper? Let's take a closer look at it.

What is technical analysis

AT itself has many branches. We can deal with technical analysis in the classic version, candlestick and price formations, technical indicators, harmonic formations, Elliot's waves, Gann's tools ... It could be exchanged for a long time. However, we are able to provide a general definition of this concept very quickly and concisely.

Technical analysis is an analysis of price behavior in the past, usually on the basis of a chart, in order to forecast future exchange rate changes.

The technique we use and what we paint on the chart depends on us. But if our main interest is the price, then we are in fact dealing with technical analysis. Let's assume, however, that AT will only name clearly-defined techniques that have already been described in the books.

READ: AT and its predictions. The concept of convergence of candlestick chart signals.

Chart analysis was never intended to be 100% effective. It was only supposed to weigh the odds in favor of the trader when making investment decisions. It could be more like meteorology. Based on the observation of what has happened or what we are just seeing, we determine what weather we can expect in a given time period. Are weather forecasts always 100% correct?

The key is ... Thinking

Let's leave the obvious definitions and fancy comparisons behind. Let us consider more deeply - what is AT? Why would something we draw on the chart, which we read in the price behavior, show us a possible future?

Assigning magical power to indicators, formations, charts or entire strategies is a big mistake. An equally big mistake is the expectation that the technical analysis itself is for us "something" promises. "Something", i.e. certain verifiability, a positive result resulting from its use, and preferably an additional zero on the account.

Many famous traders never spend much time searching for ever more sophisticated indicators or price patterns. Whether we use the X technique or the Y technique doesn't really matter that much, because it all comes down to the same thing - understanding the market and what is actually going on in it.

It is an analysis of the balance of power between supply and demand. It is they who create exchange rate fluctuations. They make something grow, fall, or stand still. Therefore, our task is not to develop an effective strategy that uses the best elements in the field of AT. Candle formation is not a supernatural phenomenon. It is a pictorial representation of the distribution of forces over time between supply and demand. The price change is not caused by the formation on the chart, but the decision to buy / sell a given item. On top of all this, there are emotional / psychological factors, fundamental factors, and actions taken by big players (who like to play "manipulation").

Your task is to decipher the market, preserving supply and demand. And with the key to the door with the inscription "PROFIT”Will always be the same… Thinking.

So AT works or does not work?

The sentence itself "Technical analysis (not) works" is a trap. It assumes zero-one and only two possible options - that it may or may not work. It can't "work" a little, right?

AT is only one of the elements of the whole puzzle. One would be tempted to say that it is not even an element, and at most an optional tool for its arrangement.

It is impossible to estimate even the approximate AT validity. In the end, with almost every analysis, the subjectivity of the analyzer sneaks in. There are also variable parameters of indicator settings, mixing of various techniques, and even the way they are interpreted. All the time traders argue over whether trend lines draw on candle wicks, or at closing prices, and where one trader sees resistance testing, another trader interprets it as his puncture. Waves of Elliot? Three analysts will give us at least three different schemes.

READ ALSO: Goodman's Wave Theory as an alternative to Elliot's Wave Theory | Jim Poniat

And yet there are still different markets with different specifics and cyclicality. It is a huge maze of variables that do not give us a chance to estimate to what extent AT works. Even if we assume a certain framework of the environment and the period in which we test a given technique, will, for example, a result of 38% in 2 years mean that we will also receive the same effectiveness for the next 2 years? That would be forecasting the future based on the past ... So the main assumption of AT.

In that case, is it worth using AT, if you do not know anything?

Using AT techniques is easy to fall into madness. Start analyzing the formations, without understanding what they are actually presenting. Do not go into the details of market events, hoping that it will always behave in a book. Look blindly at the intersection of prices with averages, forgetting why we added them to our chart.

Slying in this madness, there are failures, frustration, disappointment, and finally searching for more magical techniques that drive us to the vicious circle, where we hope that we will finally find the right recipe for regular earning money on the stock exchange.

So, does technical analysis work? Think for yourself.