What is Real and What is Not in Technical Analysis

[MightyMouse 12]

Interesting thread but I see a lot of references to insights, beliefs and opinions about TA. What about actual testing? It seems to me that if you discover a valid technical pattern (one that repeats and is predictive) than it MUST work, by definition. If things are not working out for you, perhaps you are relying on false, untested patterns.

 

A valid technical pattern that you might identify that backtests to have a positive expectancy is a chart formation or data formation that occurs when certain traders take positions and leave themselves vulnerable to loss. For a certain reason, when you actually trade the pattern you end up losing. As such the best trade, then, is to find those patterns and trade against those traders who are trying to take advantage of those patterns and absorb, as profit, the loss they are willing to take.

[fxdummie 10]

First of all, my definition of a trader using TA is a trader that opens a chart and then makes a trade decision based upon any information they get from that chart. Thus, if there's no indicators on that chart but the trader is still using the chart...its still technical analysis.

 

With that said, a trader does not need for their TA to detect every high/low to prove its valid. You just need to show that when you use TA...it helps you to be profitable in comparison to when you don't use TA. That's something profitable traders understand because TA is just one chapter in their book called trading plan that contains many chapters.

 

Simply, TA does not work alone nor is it a surrogate mother for other things a trader lacks in his/her trading plan. Therefore, if those other key variables (arguably more important) like money management, discipline, trading experience, proper capitalization, proper trading environment are not in place...most likely your TA will not succeed.

 

By the way, I've never met a profitable trader that "only" uses TA and nothing else. Yet, folks get bent out of shape when a profitable trader uses TA as part of their trading plan. The same folks demands proof that TA works "every time" from those profitable traders that uses TA while ignoring the rest of the trader's trading plan.

 

The main problem that I see is that too many traders only talk about their TA and provide very little information or no information about the other components of their trading plan. This gives the impression that they are using nothing else which is far from the truth.

 

Just take a look at every trader forum you're a member of. You'll see the most popular threads are about technical analysis, indicators, chart analysis or similar. Yet, threads like discipline, money management, proper capitalization, position size management, proper trading environment and so on seem almost "not important" or barely manage to get a few replies.

 

TA works and you don't need it to work every time. You just need it to work in your trading plan if you're going to use it. Therefore, if the overall trading plan sucks...TA nor anything else in the trading plan will help someone to be a profitable trader.

 

My rant for the day.

 

Just re-posting this one because from my experience TA has limited importance. TA is the rational (the visual and quantifiable) justification for when and where I enter and exit the market - the HUUUGE rest is my money and trade management, psychology, experience, intuition-gut feeling, being nimble and what all this means for me - it all translates to developing my ever changing trade plan ... Again, this post says it all for everyone dumb blinded by the wonders of any type of TA.