Does Technical Analysis Work – You Bet It Does
I am living proof of that fact.
Now, the real question is why are you even asking that question. Well, in this article we are going to first uncover why there is doubt in the financial world and then we will touch on proof that it works.
So Why Even Ask the Question?
First off, technical analysis goes all the way back to the 1700s – yes these early speculators were way ahead of their time. The concepts of charting stocks did not gain any steam in the US until the early 20th century with the Dow Theory.
It wasn’t until the 1980s and really the 1990s until technical analysis became more mainstream knowledge. A lot of this had to do with the improved processing speed of computers and the ability to crunch lots of data and display it in a visual format.
Remember, the technicians of the old days had to do all of this by hand.
At the end of the day, again guys and gals running around with hand made graphs were thought of as pikers.
Well, this stigma still exists in some fashion in today’s investment community, hence the question does technical analysis really work?
Does Technical Analysis Work.?
First, how do you define whether Technical Analysis works, or not?
- I’ll backtest a trading strategy using Technical Analysis
- Benchmark the results against a buy and hold approach on the S&P 500
If the trading strategy can beat a buy and hold approach, then we can conclude that Technical Analysis work (but more on that later).
So what’s the benchmark to beat?
If you look back historically, a buy and hold approach on the S&P 500 has a return of about 10% a year with a maximum draw down of 56%.
Why Do People Think Technical Analysis Fails?
Trading the markets laborious – extremely hard. Individuals love throwing out the stat that over 90% of traders fail. This can be true; however it’s a touch dishonorable.
The reason individuals lose is that they don’t place stop loss within the work.
Well, it’s an equivalent with technical analysis. For instance, I studied jailbreak charts to without stopping; however the market shifted and creating a dollar was like pull teeth.
Then i noticed the difficulty was the chart pattern. The market was stepping into a cycle of gap powerfully, solely to roll over by 10:30 am.
This market behavior created pullback long setups within the morning.
So, after I was combating the breakouts, did that mean technical analysis was a lost cause? Nope, it simply suggests that I didn’t interpret the market atmosphere properly.
Is Technical Analysis Accurate?
The accuracy of the analysis is going to come down to the individual trader. I can provide two traders with the same day trading tools, yet one of them may have an accuracy rate multiples of the other trader.
How can this be? How can two traders both have the same information yet one yields better results?
This comes down to sheer skill and experience. It has taken me four years to get to the point where it goes beyond just knowing technical analysis.
Where is Technical Analysis Prone to Failure?
The one area I have seen technicals struggle is in extremely volatile markets. These are securities like penny stocks that can move 20% or more in a matter of minutes.
Now, you, of course, can still master this market with other analysis tools, but oscillators and other technical indicators have a tough time forecasting future price action based on past performance.
Other than this, the failure is within us, not the indicators.
For example, traders may rely on a technical indicator or system like Elliott Wave to forecast price targets. Well what happens if the price never reaches the target?
Is the system somehow flawed?
Possibly, but it is more likely that you need to take the generic strategies 10 levels deeper to uncover what works in today’s trading environment.
It’s never the charts, it’s always you the trader.
How We Can Help
The Fortunate Trade will allow you to practice trading 24/7. Why is this important?
I don’t care how many books or courses you take on trading – you have to put on trades. The spoils of the game go to those with the most experience.
So, if you treat trading like a hobby and read one or two books on technical analysis, then you are likely to develop an opinion that technical analysis does not work.
However, if you are willing to put in the hard work of refining your strategies, you will come to a more positive conclusion about technical analysis.
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