Nigel has been in the regulated financial services industry for nearly a decade, has previously owned a financial brokerage and has written many times for sites relating to personal finance and trading.
The conversations surrounding the use of technical analysis vary across the board of traders. While some think the short-term analysis of charting and patterns is inefficient, others believe it can prove to be successful when implemented in trading strategies. As a result, many myths have been formed regarding this method of market analysis. The secrets of technical analysis lie largely in extensive training and understanding, which allows the trader to make use of factors like indicators in a way that produces profits. Here is a look at eight misconceptions surrounding technical analysis and why they are false.
Because technical analysis monitors trends over a shorter period of time than fundamental analysis does, it is often believed it is only applicable to short-term trading, high-frequency trading (HFTs) and day trading. The idea that it is limited to these forms of trading is not true as the time periods used can cover a variety of lengths, from minutes to months.
It is true that individual traders make use of technical analysis, but it is by no means only aimed at these traders. Large firms like hedge funds and investment banks also use this method in their personal strategies and techniques. Whole teams are often dedicated to technical analysis, and these firms use technical analysis to assist trading options such as HFTs.
There are multitudes of traders who achieve success through the use of technical analysis. The resulting patterns and data found through technical analysis have led to success when used with other methods or on their own.
A common misunderstanding among those looking to learn how to trade CFDs, Forex or any other market is that there are certain quick and easy options to succeed. This is entirely a myth for any form of analysis, including technical analysis. Technical analysis may be simple, but it requires a vast understanding and education in order to apply it successfully. Like any method, traders need to dedicate fair time and effort when using this method.
Many cheap ready-made software options do exist, but there is no guarantee that these will deliver the profits they promise. New traders often fall prey to this misconception, but technical analysis requires more than pre-produced data. While this software is beneficial to access performance data, each trader needs to use their knowledge and understanding before applying these results in their trading.
This belief may be true in select cases, but it does not always apply to all indicators. Every asset class requires its own set of indicators. For example, futures, commodities and bonds all require different indicators. The applicable indicators are determined by factors like volatility, expiration dates and the patterns unique to each season. Technical indicators should never be blindly used across asset classes.
Those who are less experienced might expect the results of technical analysis to be entirely accurate. The truth is that these price predictions should be taken as a rough estimate rather than a fact. The results are more of a prediction of a fluctuating price range, as it is only a probability and not a guarantee of future results. Having these estimates in mind can still produce significant profits when considered in trading.
Many skeptical traders assume that an analysis method is only viable if there is a high rate of winning trades. Fewer wins do not necessarily mean less success, as the wins are determined by value rather than volume. By implementing the analysis information correctly, traders can make gains even if a limited number of others do. As with all aspects of trading analysis, each situation is unique and depends on skill, understanding and wise implementation.