Technical analysis of stocks often gets a bad rap in the world of investments. Traders and investors criticize technical analysis of stocks as an artificial study of charts and patterns that fails to breed profitable results. Others believe it is the Holy Grail of investments that will unleash sizable profits once someone masters it. Having professionals on the opposite ends of the spectrum has led to several misconceptions about technical analysis of stocks and how it’s used.
Some myths are based on education and training while others are based on experience. For example, a trader who has spent his years focused on fundamental analysis would not be inclined to trust Technical Analysis. Likewise, if someone has lost money using technical analysis of stocks in the past they might perceive the method as faulty. Let’s take a look at the most common myths and unlock the truth in these matters.
Technical Analysis of Stocks Myths Debunked
Here’s a look at the common technical analysis of stocks myths, and why they aren’t true.
1. Technical analysis is only for short-term or day trading.
Rumor has it that technical analysis is only made for short-term or computer-driven trading. The truth is that technical analysis was widely practiced before computers were even used. Additionally, many of the discoverers who used technical analysis of stocks were long-term investors and traders. From day trades to weekly and monthly charts, the truth is that technical analysis is used by traders on all frames.
2. Only individual traders use technical analysis of stocks.
Yes, individual investors do use technical analysis, but they aren’t the only ones. Hedge funds and investment banks make ample use of this method. In fact, some investment banks have dedicated trading teams that specifically use technical analysis of stocks. High-frequency trading is actually heavily dependent on technical concepts.
3. Technical analysis has a low rate of success.
Despite the fact that it’s been rumored that technical analysis has a low rate of success, some of the most successful market traders will tell you differently. There have been a significant number of traders who credit their success to technical analysis of stocks and technical patterns. Some successful traders have even profited solely from the use of technical analysis.
4. Technical analysis is fast and easy.
Despite the best marketing efforts of courses promising fast success, technical analysis of stocks is not a fast and easy solution to trading success. In order to actually achieve success in technical analysis, you need to participate in continued education, in-depth learning, long-term practice, and discipline. True success is not a quick fix. It requires time, knowledge, and work.
5. Ready-made technical analysis software is available to help traders make easy money.
While we wish this one was true, it’s not! You’ll see some online ads that claim there is software that’ll give you cheap and easy analysis and do all the work for you. While technical analysis of stock software does give you insight about trends and patterns, it doesn’t guarantee you will make a profit. And it certainly isn’t a quick fix. It’s up to the trader to put in the work, interpret the trends, and analyze the data to bring profitability. Unfortunately, software won’t do that for you!
6. Technical indicators can be applied across all markets.
While technical indicators can be used in some cases, they certainly can’t be used across all markets. Investors and traders should not make the mistake of applying technical indicators from one asset class to another. Because things like equities, futures, and bonds all have differences, this can be a huge mistake.
7. Technical analysis of stocks can provide accurate price predictions.
Investors and traders who are new to technical analysis expect the recommendations and software patterns to be 100% accurate. It’s certainly a mistake to think this way. While technical analysis does provide a predictive range, it is not an exact number. Technical analysis of stocks is about probability, not guarantees.
8. The winning rate in technical analysis should be higher.
Another common myth is that winning trades need to be at a high percentage for them to be profitable. This isn’t always the case. Even with a few winners, the right trade structure can be very profitable. That’s because technical analysis of stocks is profitable based on a combination of win-rate and risk and reward.
So what’s the bottom line when it comes to technical analysis of trade? Technical analysis is a tool, but it’s not the only piece to the puzzle. It provides a large resource of tools and concepts for effective trading. While it’s success rate depends on who you are talking to, successful technical analysis depends on the trader. There are successful traders who use it and there are those who don’t. It is not a quick fix or a guarantee of profit, but if you put in the time, work, and education, technical analysis of stocks does provide a realistic possibility of trading success.