The Flaws of Technical Analysis

When it comes to trading, truth be told it doesn’t matter which strategy you use for trading. It will eventually yield money be it fundamental, technical or any kind of analysis. In context the way you define entries and signals are important though it is a really bold statement. But it’s on my personal experience of trading because the market index will always grow unless there are serious risks. Technical analysis basically means to read through the charts. Further take decisions based on various models and patterns, the profitability totally depends on the way you decipher the charts and they quality of the system you use.

The main focus of this article is that Technical analysis has a few flaws. But that doesn’t mean it doesn’t work since the models sometimes help in determining the future trends to a good numbers. It is based on the volumes traded and price movement analysis.

There are a few flaws when reading charts based on the technicians mindset which are as followed:

Emotions:

Every person or in a more narrow way a trader has varied emotions. Hence they do effect the way one trades and therefore the judgment gets in between. While reading the patterns resulting in a difference in judgment. Therefore the technician should not let his emotions cloud his judgments while evaluating.

 Executing orders:

Defining an entry that is where to put stop loss is important. Therefore there will be at times when the investor will sell too early for profits or sell late for booking a loss. So defining a best entry can’t be accurate.

Managing the Risks:

The technical analyst needs to adhere to all the future possible risks like act of god etc in order to come to a conclusion and therefore it is a tough job to foresee everything based on only graphs and therefore risk management is necessary while coming to a conclusion.

Foreseeing is unpredictable:

Even after knowing what kind of a pattern the stock has shown over a particular period, it is difficult if the pattern will repeat or will show its reversal pattern therefore foreseeing is still unpredictable and only the experienced technicians will be able to predict it based on years of experience on the stocks and their patterns.

Tips for proper technical analysis:

Technical analysts need to create fixed rules for the charts and then differentiate between a good pattern and a bad pattern, analyze the patterns when trading and use appropriate tools and software’s and run through them rather than jumping to conclusions and avoid subjectivity while making decisions.

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