Misconceptions About Technical Analysis Demystified

1 year ago forexsimulation Comments Off on Misconceptions About Technical Analysis Demystified

Some traders criticize technical analysis as being a shallow study of patterns and charts without any solid, profitable, or definite outcomes. Others believe that technical analysis is the Holy Grail and, when understood, can bring in massive profits.

These contrasting perspectives have brought about misconceptions about technical analysis and how its deployed. Some of these myths are based on training. For instance, a trader who has been taught about essentials only, cannot rely on technical analysis at all.

However, this doesn’t mean that individuals who understand technical analysis cannot exploit it to their advantage. Other misconceptions are based on skills. For instance, misusing technical analysis can lead to sizeable losses.

This doesn’t mean that technical analysis is essentially flawed; it just means that the individual needs more studies and practice. Unfortunately, some even believe technical analysis can make them rich overnight. Let’s look at some of these misconceptions in detail.

Some of The Misconceptions About Technical Analysis Include:

Technical Analysis is Only Used by Singular Traders

Singular traders use technical analysis, but it’s also used by investment banks and hedge funds a lot. Investment banks dedicate entire teams to trading using technical analysis. For instance, they carry out high-frequency trading, which is massively reliant on technical concepts.

Technical Analysis Is Only Used in Day Trading

It’s a widespread misconception that technical analysis is only ideal for short-haul and computer-powered trading techniques such as day trading and high-rate trading.

Technical analysis was in use even before computers went public, and some of the creators of technical analysis were long-term traders and investors rather than day traders. Currently, technical analysis is used by investors for all periods, from 1-minute charts to monthly charts.

The Winning Rate in Technical Analysis Must Always Be High

It’s a widespread misconception that a massive portion of winning trades is needed to generate profits. But this is not the case. For instance, if you make three winning trades out of five while your colleague makes two winning trades out of five, who is more prosperous?

Most individuals will out rightly assume it’s you, but this is not definite until we can get more information. Structuring your trades properly generates profits even if you have fewer winning trades. After all, profitability is a blend between risk and reward.

So if you make 40 USD on your winning trades and the losing trades draw 60 USD, you’re at a disadvantage. On the other hand, if your colleague makes 50 USD on winning trades but the losing trades draw 10 USD, they are at an advantage because they walk away with something.

Technical Analysis Has a Stunted Success Rate

When you observe the most prosperous traders today, you might have a change of heart. Positive investor remarks have revealed that a massive number of prosperous investors today owe their success to technical analysis concepts.

Technical Analysis Can Generate Correct Cost Estimates

A majority of newbies expect references from technical experts to be 100% accurate. For instance, newbie investors may expect speculation to be precise in all details, such as “stock XYZ will climb to 75 USD in three months.”

However, expert technical analysts normally avoid giving precise estimates. Instead, they tend to provide predictions such as “stock XYZ could shift between 70 to 75 USD in the next two to three months.”

If you trade using technical concepts, you should know that analysts give you a predictive range instead of a precise figure. Technical analysis is about probability and not guarantees. If it works more times than it fails, it can still be very effective in making profits.

Technical Analysis Is Fast and Stress-Free

The world wide web is filled with technical analysis courses that promise absolute success. Many investors dive into trading by placing their initial trade based on modest technical pointers. To be successful on a constant basis, you need to be disciplined, do in-depth research, and hone your trading skills by practicing using demo accounts.

Final Thought

To sum it all up, technical analysis provides a wide range of concepts and tools for trading. Some prosperous traders don’t use it, but some do. Ultimately it’s up to you to evaluate technical analysis in detail and determine if it’s suited to your trading strategy.