Being a technical analyst feels a lot like being a meteorologist tracking a storm or significant weather event. How many times has the local weather forecaster told you it was going to be a clear day and then a storm came barreling through later that afternoon?
Doing TA can be likened to watching wildlife or some rare Panda at the Zoo. Ever wonder how some people can sit around all day just watching an animal, waiting for it to do something?
The markets are an animal of their own. Its easy to think that TA is bogus because many times technical analysts predictions are “wrong.” This is not a fault of TA but merely a confirmation that random market activity, like the weather, is unpredictable.
Analysts can only try and make price predictions based on the current conditions of the ever changing market participants. Technical indicators are just based on mathematical models and many times we are simply watching and waiting for shapes to break out.
All we can do is take a look at the data and say: “based on the current conditions and indications, X has a higher probability of happening than Y,” while keeping in mind that both scenarios are possible.
The second factor to TA that doesn’t get discussed very often is the individual confirmation bias of the particular analyst. As humans, its hard to look at the charts objectively because most people don’t realize they are subconsciously trying “to be right.” These people typically make a prediction and anything that goes against that is ignored because being wrong hurts too bad.
Some of the best analyst make the worst traders in the world because they have a desire to be right. They pride themselves on their analytical decisions and don’t pay attention to indicators when they disagree. This usually results in over-trading (constantly flipping positions) or taking significant losses from not setting a stop because there was “no way they could be wrong.”
The truth is that market conditions change second by second and it only takes a single trader in the world (with a big enough bank roll) to change the current rhythm and flow. Emotions of greed and fear are what drive the market and stop loss orders have a domino or cascading effect – its mob mentality.
Make no mistake, trading is not much different than putting your money into a slot machine. TA just gives on an edge, meaning your tools and analysis increase the chances of a trade working out in your favor.
Nothing can predict random market activity, especially in modern times. When people first started trading centuries ago, it was done in person and the traders were crammed in a trading floor, all yelling at each other, sweaty, stinky…you get the point.
The markets moved slow in the very beginning, charting and analysis was done on paper at the close of the day, until people started realizing it had some merit, and eventually started doing it by the hour and minute. Technology has made major advances through the years and now we have computerized charting software that can handle hundreds of calculations every second combined with trading bots that can analyze and execute trades just as fast. There is now more noise than ever.
Many traders use TA but don’t get the results they want, in fact they are loosing money consistently by following “textbook” trading setups. You may have the right tools in front of you (indicators, chart patterns, etc.) but if you don’t understand them and know when you are wrong, then you will not have success in trading financial markets.
Our trading tools and indicators are designed to help you make better trading decisions, which will in theory increase the probability of trades working out in your favor. In the end, however, you are still trying to make logical sense of random market activity.