Are all forms of technical analysis fallacies or do some stand up up scrutiny?

Jul 24 • Forex Trading Articles, Market Commentaries • 1977 Views • Comments Off on Are all forms of technical analysis fallacies or do some stand up up scrutiny?

After several decades of intense and heated discussion, the jury is still out and unable to reach a verdict in relation to the efficiency and effectiveness of technical analysis (TA). The opinions are generally binary and polar opposites; some FX analysts and traders swear by the proficiency of TA, others dismiss technical analysis as tea-leaf reading hogwash and voodoo, which is destined and designed to fool the gullible. There’s also a select centre-ground of opinion who recognise the value of certain types of TA, but who also acknowledge its limitations. It’s this centre-ground of opinion that arguably has the most credibility when discussing the value of TA.

When many traders discuss TA they’ll automatically visualise technical indicators such as: MACD, RSI, PASR, DMI, etc. It’s these indicators that cause the most discussion amongst traders as many dismiss them as patently useless. The main criticism is that all the indicators lag they never lead and they’ll always be behind the curve of what price is actually doing at any given time in the market place. Another criticism is that they’re self-fulfilling, in as much as with a cluster of various indicators on your chart, you could (in theory) always get the curve-fit result and answer you require. If you add several indicators to a chart and scale up and down the various time-frames, you’ll discover a pattern that will fit your pre-conceptions and encourage you to take a trade with absolute confidence and conviction that you’ve got the direction right.

Many novice traders will experience an important baptism of fire when they first discover technical indicator based trading. They’ll experiment with just about every possible indicator they come across, both in clusters and singularly on various time frames. This period can be excruciatingly painful both emotionally and financially. They might discover the supposed magic properties of the MACD combined with the stochastic lines and become excited that they’ve discovered a fail-safe method and strategy, which they can apply to the market in perpetuity to bank gains at will.

Unfortunately, novice traders quickly discover that what they think is their proprietary method of technical indicator based trading, has been tried, tested and dismissed many times before. Their strategy is not necessarily unworkable, but it’s no more reliable than any other methods of analysis you could choose. The MACD/stochastic convergence may work for a session and then fail in others. That disappointment can be crushing for traders’ confidence and belief as they get back to the drawing-board after what they thought was a 100% working strategy has failed to deliver. In their contemplation period they may begin to strip back their charts and it’s during this window of time when traders may experience a eureka moment as they realise that not all forms of TA are fallacies.

Technical analysis should not be focused on technical indicators alone, TA can and does take many forms and many of these alternative forms of TA are when and were both the believers and sceptics of TA witness their opinions merge. Candlestick formations are TA, using moving averages and judging price-action is also TA. Using the various pivot-point levels to make a judgement as to where price is headed during a session on any given day is also a form of TA.

Combining all three of the aforementioned processes, in order to establish the direction of price, is also a form of overall analysis that can be classed as TA. If traders and analysts combine such a process with basic fundamental analysis they’re approaching their market decision making in a fashion that the vast majority of experienced and by proxy successful traders, would agree is the right approach.

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