Updated: Jun 1, 2020
This debate is probably as old as trading itself.
“I always laugh at people who say
“I, have never met a rich technician” I love that!
Its such an arrogant nonsensical response. I used
Fundamentals for nine years and got rich as a
- Marty Schwartz
This statement from one of successful trader Marty Schwartz proves the kind of hot debate raging between two school of trading community.
Technical analysis is study of historical price and volume behaviors in order to understand where the market had been and where it is likely to go from here. We traders use variety of technical tools from Japanese candle sticks to moving averages, market profile and more. However, we have seen these indicators more often than not fail to forecast random moves of market.
Does it mean we need to conclude that technical analysis is useless? If so, why then, most of the seasoned traders use one or two indicators in their trading methodology.
“Why do you think unsuccessful traders are obsessed
with market analysis? They crave the sense of certainty
that analysis appears to give them. Although few would
admit it, the truth is that the typical trader wants to be right
on every single trade. He is disparately trying to create certainty
where it just doesn’t exit”
- Mark Douglas
The above view of one of the trading great explains why there are so many technical indicators out there and why most newbie traders go on a never-ending hunt for a “Holy Grail” indicator.
I for some reason started off as an anti-TA trader. I never believed that technical indicator will ever work. But my assumption, like any other newbie trader was that purpose of TA is to forecast future and predict next move that market is going to make. That’s where I was wrong. This is where most of the newbie traders are wrong as well. The fault lies in what a trader expects from a technical indicator or analysis.
“There is no single market secret to discover, no single
correct way to trade the markets. Those seeking the one
true answer to the markets haven’t even gotten as far as
asking the right question, let alone getting the right answer”
That’s right. Newbie traders haven’t been asking right question to their technical indicators. I have a feeling that those great traders who invented many different technical indicators knew very well that it can’t predict future. But that does not matter because they wanted it to do something else. i.e. they wanted it to show where the most favorable risk- reward lies? Where should they exit the trade in order to protect their capital? The fundamental use of technical analysis is to manage the trade and risk. A seasoned traders knows that trading is not about predicting future.
Peter Brandt in one of his blog posts says: -
- Charts are not predictive. They are a map of where markets have been, not a map of where
they are going.
- Charts are a trading tool – and when used as a trading tool charts serve a wonderful purpose.
Once a trader is clear in his mind about the purpose and limitations of technical analysis, they immediately become great risk management and trade management tools. To use an analogy, technical analysis is like spanner and other tool kit of a mechanic. A seasoned mechanic will know that tool kit cannot find out the problem in a car but if tool kit is used properly, he can not only find but also solve that problem and In the process he will make lot of money.
That’s how I started loving my technical indicators.