How is technical analysis commonly misused?

Investing with moomoo joined discussion · Jul 16, 2021 10:19

How is technical analysis commonly misused?

Technical analysis is just like any other money-making occupation - it takes time and energy and it involves risk. Anybody who says otherwise shouldn't be trusted. Here are ways technical analysis has been misused in the past:

No perfect system

One of the most common misconceptions about technical analysis is that a trading system (a set of buy and sell rules) can be devised that provides consistent profits with little to no risk.

There are several reasons that a 「perfect system」 cannot be sustained.

Firstly, the market is made up of people with free will and guided by fear and greed. A perfect system requires prices to consistently move in predictable patterns. This will never be possible when people are involved.

Secondly, many financial institutions monitor the market for patterns of systematic trading. Once detected, the financial institution can take advantage of the system (investing with or against it) which eventually compromises and defeats the 「perfect system」.

And finally, what motivation could someone have to share a 「perfect system」 at any price? Such a system would be invaluable to one person but worthless (for the second reason) if too many people or even one institution discovered it.

Gurus can only provide guidance

Investment charlatans and gurus have always been offering advice on how to profit in the market. These are the people who take financial advantage of new and uninformed investors by promising quick and profitable investment success.

Today's TV media and the Internet enthrone new market gurus on a regular basis. There are precious few true market gurus like Warren Buffet who have proven their market savvy over decades.

Most market gurus can only provide profitable guidance as long as the market is favoring their investment philosophy. As the market changes, new market gurus will emerge as their philosophies' agree with the new market dynamics.

Technical analysis cannot make you control the market

While few people consciously believe that they can control a stock's price directly, subconsciously, chart analysis can give new investors a false sense of control, which will cause them to lose objectivity: 「My stock just broke below my trend line today, but it will come back tomorrow since that is a really good trend line!」

The opposite response is just as damaging: 「My stock broke my trend line! Technical analysis is worthless!」 Both responses are driven by emotion, something that technical analysis strives to eliminate.

It is important to understand that technical analysis can only be used to determine the likely direction of future prices. It cannot anticipate news events or how investors will respond to them.

Source: stockcharts