“The Fallacy of Traditional Technical Analysis…”, July 22 2014

“The Fallacy of Traditional Technical Analysis will make you Unsuccessful in the Markets…”

“… what you need to know and to do, in order to avoid failure and generate a positive experience and outcome in trading, right from the get-go!”

We all know and see that way market price action has been “engineered” in the years in the concepts of Traditional Trading Analysis is varied and imaginative.

From the “fathers” of technical analysis like Charles Dow to the concepts introduced by Gann, Elliot and more recently by Wilders, who is the responsible of the majority of the “art” still used today by professionals and retail traders alike.

Are the methods and concepts of Traditional Technical Analysis successful?

Unfortunately, the answer is a resounding “no”! The proof? Is in the statistics: 90% to 95% of traders lose consistently or breakeven.

If they the method of Traditional Technical Analysis successful and the simple concepts of trendline, price patterns, indicators, average crossovers, etc. would be enough to consistently earn money in the markets, which is clearly not the case.

Some people want you to believe that you can be successful with those methods, but you need discipline, which the majority of people do not have. You need to be a “yoga master”, otherwise you cannot trade successful. My advice: when you see them do not walk, run!

How far from the truth? People still do a lot of things they do not love doing, but have the discipline to do it.

An example?

Think of how many people hate their daily job and trading their time for dollars.

Discipline is a byproduct of confidence, which does not come by acting like a machine or being a superhero with plenty of willpower. Confidence comes when there is comprehension and confirmation.

Comprehension about the way you analyze price and take positions in the markets with low risk idea that almost immediately generate risk-free trade and how and when you take profits.

Confirmation comes from seeing the same setup working again and again, following a well-defined, clear procedure.

But the method of Traditional Technical Analysis tend to do exactly the opposite, they generate confusion and lack of confirmation. Why?

Newbies and experienced traders – using several technique and indicators – think they see exactly the same patterns over and over. The reality is that  in the analysis process they need to use a lot of discretion”, in order to reconcile the indications that come from the different studies and  patterns they use.

And then of course there are the charting specialists who have introduced many ways to help see patterns in price, like linear charts, HiLoClose Bar Charts, Japanese candlestick charts, Point & Figure, pivots, fractals, market profile, etc.

Hundreds of techniques, and today you can find lots of originally mutated techniques and methodologies available to the traders, the analysis and the ch”artist”.

What many fail to realize, is that all the studies of traditional technical analysis, are no more than statistical tables plotted in graphic form to present a “picture” to assist traders in their decision process.

These statistical tables are tools that are built on historical and lagging databases. Moreover the rigidity of the parameters used in the studies imposes rigid responses to changing market conditions.

Have you forgotten that the market is a live beast that learns and adapts to trader behaviours?

Mark Douglas, author of the great  book ‘Trading in the Zone’, reminds us that the markets can do anything. Do you really believe you can cope with this principle and trade the markets with the aid of lagging derivatives of historical databases of price?

I surely cannot, and believe me, I have studied and tried hard and I am actively involved in rigorous trading research with national and international bodies (IFTA/SIAT). But again, if the answer to successful trading was in Traditional Technical Analysis, why not having a higher number of successful traders?

Many have forgotten that the market is the sum total of the behavior of its participants. An most do not know that the composition of participants has greatly changed in the years. In fact, in some markets computer-based algorithms exchange more than 80% of the overall volume.

Indicators, patterns and the technique of technical analysis are used for measuring the markets health, not so unlike the way a doctor measure the temperature of a patient with his thermometer, or the measuring tape to a carpenter. They are just tools.

If you comprehend this concept, you also understand that you need to start to looking at the market differently!

And if you are just starting, I advice you to not learn technical analysis at all! If this statement may see extreme and controversial, just think of a big work that will need to be done to “unlearn” certain concepts and believe.

That work is just “massive”, and some people seem not able to get over and “set aside” all the “art” and methods – that do not work.

Why I say that? It has been hard for me to “let go” to the method and concepts and techniques I have learned during the years to embrace different ways of looking at the markets.

In the end, I was successful, and looking back I was able to accept that some knowledge can ‘hurt’ and ‘damage’ me more than make me successful.

This may well be one those rare cases where ‘ignorance’ is actually and advantage.

So my suggestion is for you to look where other do not look. To ways of looking at the market that are more aligned and in-gear with the modern markets work.

And there is a lot going on in modern markets that is not explained at all by the methods and techniques of Technical Analysis.

If you want to learn more on different ways of looking at modern markets, have a look at the Education section of my blog.

 

Please let me know what you think about the content of this article. Go ahead, leave a reply in the form below.

 

In my research and practical trading I study the effects on price of classes of algorithms in high volume markets. If you are interested in a new and effective trading edge, check my work at www.fibstalker.com.

Happy Trading

~FibStalker

WHO IS GIUSEPPE BASILE?

Giuseppe Basile
Giuseppe is a Certified Market Technician and swing trader, IFTA and SIAT associate. Holds a B.Sc. in Computer Engineering and a MA in Finance. In the markets since 2001, became trader and mentor in 2007. Studied with several traders in UK, Europe and US, adding over 7,000 hours of screen time between 2009 and 2013 alone. In 2012 launched FibStalker, a blog specializing in forex, futures and stocks trading, where he also runs a free newsletter and publishes daily videos with actual setups and complete trading plans.

Giuseppe’s unique method attempts to spotting footprints of Program Trading, a powerful class of algos that governs the markets. Giuseppe is a rigorous researcher with several published papers about money management, automated trading, HFT and innovative timing and trading methods.

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