Does Technical Analysis Work?
The title of this post looks weird. I am not trying to say that Technical Analysis doesn&8217;t work, or those who say they make money through technical analysis are false. I know so many traders who make money through technical analysis. I have a different goal for posting this article.
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Life Doesn&8217;t Have to Be Too Complicated, Does It?
Sometimes, you really have to work hard to make money. There is no other options for you at least for that special period of time. Therefore, you have to be patient and happy with the situation you have until you find a chance to make a change in your job and income. But sometimes there are more options that some of them look better. For example some jobs make more money with less effort. Or, they make the same amount of money as the others, but they are easier. So which one do you choose? One of the jobs that make more or the same amount of money easier, or the ones that are harder and need more effort? You will choose the first option definitely.
It is the same with trading. There are tons of trading strategies that all of them make money. However, some of them need more time, energy, knowledge and experience, but the others are easier and need less time and energy.
Technical Analysis is the foundation of trading. However, it is not easy to make money through technical analysis. It needs time, energy, knowledge, experience, patience, and&8230; to analyze the charts through technical analysis. I am good in technical analysis, but I believe there are easier ways too. Trading doesn&8217;t have to be that complicated. In the last two articles I&8217;ve published on this site, it is explained how I trade. I think you admit that my method is easier than technical analysis: I Trade the Daily Chart, But I Am a Day Trader
Here is the reasons I don&8217;t use technical analysis to trade:
1. It Is Time Consuming
You have to spend a lot of time to analyze each chart, plot the support and resistance lines and then come to a conclusion. Sometimes you have to check several time frames for each currency pair. I know some people that spend several hours per day analyzing the charts to find a formed or forming trade setup.
It is not only the matter of the time and energy that you have to spend. There is something even more important. When you sit at the computer analyzing the charts for several hours, there is a higher probability of making mistakes, because you get tired or you ignore some rules by mistake, or your emotions take the control and decide. You will find out only after taking a wrong position.
2. It Is Not Always White or Black
There are some clear technical analysis rules, but when you refer to the charts to apply these rules, you will be faced with too many questions and doubts. You don&8217;t know whether the lines that you have plotted are accurate and valid or not. You don&8217;t know if the market will pay any attention to your lines or not. Sometimes you are 100% sure that you have plotted an accurate line, but later the market proves you were wrong.
Sometimes you get tired of not finding a good setup, and so you bear with a weak setup, because you think that taking a weak position is better than doing nothing. So you lose money because there is a higher chance of losing money when the setup is weak and is not strong enough.
In general, it is not that easy to locate an absolute white or black setup. Many of them are gray which makes it hard to decide. We set a stop loss, but that is also another important issue in technical analysis: Where to set the stop loss exactly?
There is no exact and precise rule for it. If you set a reasonable stop loss, then a long shadow can hit it easily while your position is correct. If you set a wider stop loss, then it can get hit and you lose too much (unless you calculate your positions size based on the stop loss size and the percentage of the risk you want to take) because your position was wrong and you had to be out sooner. They say that you should set the stop loss at the level that it gets triggered only when your position is completely wrong. Now the question is where that level is exactly. It is a little hard to answer this question based on the technical analysis. That is why different technical analysis traders have different answers for this question.
There are similar questions about the target or take profit level. There are several questions that none of the technical analysis experts can answer clearly because markets don&8217;t move logically and mathematically. They do not follow some clear, precise and exact formulas. Therefore, it is not possible to give an exact and precise answer to those questions. The price movements is not logical. It is psychological.
3. You Can Lose Anyway
Let&8217;s say you are experienced and knowledgeable enough to plot the lines exactly where they have to be. I mean the support and resistance lines you plot on the charts are accurate and valid and they are the &8220;real&8221; support and resistance lines. Still there are several different scenarios that can make some big differences:
When the price reaches a resistance line, it can reverse and go down or it can break above the line. If it goes down, it is possible that it turns around soon and try to test the resistance again. When will it turn around and how many times it will try to test the line? Nobody knows.
If it breaks above the line, the broken resistance should work as a support. Will it work as a strong support or it will be broken when the price retests? Will the price go up strongly after the resistance breakout, or it will retest the broken resistance line first and it will go up only when the line works as a strong support? What will happen if it breaks below the broken resistance line that was supposed to work as a support, and what should we do with the line if this happens?
These are the questions with no clear answer.
Once again, I emphasize that I am not trying to say that it is impossible to make money through technical analysis. What I am trying to say is that even if it is possible, it is literally too hard for most traders. I am really good in technical analysis, maybe even better than many of those who are making money through technical analysis. But I don&8217;t like to choose the hard way to make money, because there are some much easier ways to do that.
4. Technical Analysis Is Not Mechanical
In technical analysis, you have to &8220;analyze&8221;, interpret and predict. This is not only time consuming, but it can cause you to make mistakes and choose the wrong way. Finally it is the market which is always right, not your analysis. A mechanical technique that shows the way clearly and without having to analyze and interpret too much is much better. Our stop loss can be triggered sometimes even with a mechanical trading strategy, but it is better than losing after spending too much time on analyzing each chart based on a too hard and complicated system.
What Is the Solution?
I prefer a trading strategy that is much easier, needs less time, and is either white or black. Does such a system exit?
There is no &8220;white or black&8221; system, but with the system that I use at least it is easy to distinguish and ignore the &8220;gray&8221; conditions, whereas with technical analysis it is almost impossible to do that. Sometimes you will get caught even when you are 100% sure that you are right.
I use candlesticks and Bollinger Band, and I have a few rules and conditions to take positions or set the pending orders. When they are met, I am in. Otherwise I stay out.
I see the setups (if any) as soon as I look at the daily charts. I do not have to plot any lines, and I do not have to analyze and interpret. I do not have to wait for something to form. I check the daily charts every day when the daily candlestick is closed. If there is a setup already, I take it. If not, I go and come back the next day. It takes me less than 30 minutes every day to check 15-25 daily charts. My success rate is better than those who sit at the computer and analyze the charts for several hours per day. Not only my success rate is better, but I locate more trade setups every week, because my system is simpler.
Now tell me which one you prefer to choose? A trading strategy that needs too much time and energy and is technically hard and complicated, or a trading strategy which is much easier, needs only 30 minutes per day and it makes even more profit?