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What are the limitations of technical analysis?

Sarah Parker


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Hello, thank you for asking! 

Despite being the most popular mean of analysis used in trading society, technical analysis suffers from certain drawbacks and other deficiencies. The first and most common criticism of technical analysis is the broad input of data, without thorough data research and relying only on two aspects to provide correct input which will be used for prediction of price and volume of a certain stock.

The second criticism of technical analysis is a heavy reliance on historical patterns, and expectation that these patterns will repeat every time, in case of non-repetition, predictions fail and may incur heavy losses upon investors.

The third criticism is derived from the second one, where many traders will place stop-loss orders according to these historical patterns, and when the stock reaches limits that trigger it, there will be a high selling pressure which will further push the stock down and lower its value.

So, these orders and traders’ movements may bear a negative effect on stock value in the short and long term. If the trend is downwards facing, it will further devalue the stock and cause huge losses.

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