As a superficial review of charts and trends, some traders and investors denounce technical analysis (TA) without any clear, definitive or profitable tests. It creates common myths which sometimes are nonsense. Here are 5 common myths about technical analysis. Learn alternative views on why 5 common myths about technical analysis are not valid.
1. Technical Analysis is Only for Short-term Trading or Day Trading
It is a common myth that technical analysis is only suitable for short-term and computer-driven business such as day trading and high-frequency trading. In fact, it existed before computers were common and practiced and some of the pioneers in technical analysis were long-term investors and traders, not day traders. Traders make use of technical analysis on all time frames, from 1-minute charts to weekly and monthly charts.
2. Only Individual Traders Use Technical Analysis
Even while individuals use technical analysis, hedge funds and investment banks also make heavy use of technical analysis. Investment banks have trading departments dedicated to the use of technical analysis. In fact, high frequency trading, which covers a large amount of the stock exchange trading volume, is highly based on technological principles.
3. Technical Analysis has a Low Success Rate
Successful trader interviews cited large numbers of traders who owe technical analysis and trends to their success. For instance, Jack D. Schwager’s “Market Wizards: Interviews with Top Traders” cites several traders benefiting exclusively from technical analysis.
4. Technical Analysis is Quick and Easy
The internet is full of courses of technical study that guarantee success in the trade. While many individuals enter the world of trading by putting their first trade on the basis of simple technical indicators, continued trading performance takes in-depth learning, practice, good money management and discipline. It needs committed time, understanding and focus. Overall, technical analysis is just a device, just a piece of the puzzle.
5. Ready-made Technical Analysis Software can Help Traders Make Easy Money
This is sadly not true. There are many online advertisements for cheap and expensive software which claim to do all of your analysis for you. In addition, less-experienced traders often mistake technical analysis tools for trading models in broker-provided trading software which will guarantee income.
While software for technical analysis offers insights into trends and patterns, it doesn’t automatically guarantee income. Therefore, it is for the trader to interpret trends and data correctly.