Is technical analysis bullshit? or is it bullseye?
Is Technical Analysis bullshit? A lot of people seem to have an opinion that technical analysis is bullshit or useless. But do they know what even technical analysis is. Technical Analysis is a statistical representation of data, and nothing else.
Ultimately it falls on you on how you use it. A lot of people attribute their failure to the uselessness of technical analysis and call it bullshit. But seriously the fault lies with you if you started thinking of technical analysis as some form of a astrological prediction for stock price movement.
Personally I am not big into Technical Analysis and have this habit of calling analysts as analyeasts but personal vendetta with analysts aside. Let us look at what technical analysis is.
What is technical analysis?
Technical Analysis is mathematically calculated data that tells us where and in what state the market is right now. There are two kinds of technical indicators primarily, lagging and leading indicators. What do they tell us.
- Leading Indicators: They tell you the status of the market. They define overbought or oversold condition of the market. The fact if market is over bought or oversold id ultimately a traders assumption. The indicator actually just gives us mathematically calculated value. eg. in RSI different people might consider different values to come to conclusion of overbought or oversold. For some it might be 70, for some 80 or for some 90.
- Lagging Indicators: They tell us what the market has what the market has been lately doing in the past. Simple example is SMA, or EMA indicators.
Momentum Indicators also exist. But we do not need to get int their details for the scope of this post.
What are they actually telling us?
So these indicators or any form of indicator just gives you a mathematically calculated fact. A fact that is easy for you to analyse. For example a 200 day moving average tells you the average of closing price for last 200 days. Now this is a fact. There is no two way about it. If 200 day moving average tells you this is average, its is the average. But ultimately its in a traders hand, how do they want to use that data.
Do they want to enter the market when price crosses the other side or do they want to use it as a stop loss for existing positions. You cannot blame technical analysis for your own failure to use this data. Remember 200 day moving average does not scream, that trend will change after the price crosses it. That is purely a traders assumption, and something that the trader feels he can trade with. If anything is bullshit here its the traders assumption.
What is TA for?
So Technical Analysis is for knowing what is the state of the market, which is one the tools that helps us in trading. But you can not just trade only with technical analysis right. Lets take an example of a doctor doing operation. Scalpel is one the tools that the doctor might use while doing his operation, but he needs other things right? The patient might need anaesthesia. The doctor needs the tools to stitch back the patient after the operation.
Similarly in trading also a lot of other stuff apart from technical analysis is needed, like proper risk management, proper exits. The simple art of letting profits run and running away from loses goes a long way in making technical analysis a powerful tool.
Unfortunately in medicine a doctor spends years to learn get a certificate and then do the operation. But in trading a trader is exposed initially only to Technical Analysis.
We can say there is a bit of problem with all the hype created around technical analysis and people selling technical analysis systems. But blame the player not the game.
The vast amount of technical analysis patterns that exists can make the game very easy for people who know how to use it properly. But in terms of importance it ranks below other factors like trader psychology, risk management . If a trader focuses on the other aspects related to risk and psychology properly then technical analysis can make trading very easy for them.
So yes Technical Analysis is definitely not bulls eye, but is it bullshit? No way. Technical analysis does what it is supposed to do. Its the trader who fails at using it properly.