Let’s Get Technical

Technical analysis has a special place in the hearts of many a trader. Over time this tool has been used as a way to predict trends, reinforce trading strategies and earn significant returns. But what was once a skilled and revered area of the industry, has become of late, a bit of a joke.

Whether it’s a misplaced understanding of technical analysis, or a new found ability to broadcast ones learning curve, Twitter and Instagram accounts are going bananas for TA. The visual nature of the two networks mean that anyone can get attention, and gain and audience. But that’s not necessarily a good thing…

Nowadays, technicians employ many methods, tools and techniques, one of which is the use of charts. Using these visual representations of the market, technical analysts seek out patterns as way of predicting their next move from the market’s last few moves.

Technical analysis has a special place in the hearts of many a trader. Over time this tool has been used as a way to predict trends, reinforce trading strategies and earn significant returns. But what was once a skilled and revered area of the industry, has become of late, a bit of a joke.

WHAT IS SO FUNNY?

Technical analysis dates back to the beginning of the financial markets, but often Robert D. Edwards and John Magee’s 1948 book Technical Analysis of Stock Trends, is widely viewed as the starting point of the discipline. This seminal text outlined many techniques for extrapolating and quantifying data, and by doing this it allowed traders and analysts to predict the future movements in the markets with a high level of success.

Nowadays, technicians employ many methods, tools and techniques, one of which is the use of charts. Using these visual representations of the market, technical analysts seek out patterns as way of predicting their next move from the market’s last few moves. Over time however technicians have come up with various points to mark, as well as trends to look out for. Archetypal price chart patterns include the well-known double top/bottom reversal patterns, moving averages and more obscure formations such as flags, pennants, candlesticks and the up-down-up-down-left-right-left-right-B-A-start (although I might be confusing that with something else).

Sometimes, however, over analysing the data can be seen as a way of confirming patterns that aren’t there. And in the gaps between lines creeps in the doubt over whether this is just a pseudo-science after all…

CURRENT ANALYST

Although there is value in true technical analysis, the rise of Instagram and Twitter have no doubt fuelled the increase in Worrisome Technical Fails or WTF for short.

Nowadays, every low level forex trader with access to Microsoft Paint thinks he knows the market. Lines are drawn over averages, peaks are connected, drawdowns are highlighted, and anything that looks a bit like it could be a pattern without actually following any of the mathematical reasoning also gets a squiggle – confusion abounds. What has happened is that a once proud profession, that actually gave value to the market, has been replaced with self-professed experts inventing any formation that proves their hokum. Now a quick search on Google Images can bring up example charts which, at best are ridiculous confusing, and at worse (like the Godzilla-example below) are hilarious.

Whether it’s a misplaced understanding of technical analysis, or a new found ability to broadcast ones learning curve, Twitter and Instagram accounts are going bananas for TA. The visual nature of the two networks mean that anyone can get attention, and gain and audience. But that’s not necessarily a good thing…

ANALYSIS PARALYSIS

We aren’t setting out to belittle true technical analysis, it’s a great tool and can be an asset and another string to every trader’s bow, but it can be difficult to find in amongst all the noise.

Analysis Paralysis is a term given to the situation many traders will find themselves in – when you just don’t know your next move because there is just too much information out there. There is an easy cure, but fear of missing out means that many a trader won’t heed the advice…

And the advice is simple – trust your instinct as well as a few, well respected and consistent analysts. That’s it.

By doing that it means that you aren’t going to Twitter at 3am to get some Joe’s opinion on your next move in a currency pairing; you’re not being lured to an Instagram account which promises visually appealing charts but no consistency in their strategy; you aren’t being persuaded to make a trade you’d otherwise not consider. What you will end up doing, however, is making informed and conscious decisions, based on your intended strategy.

Although it’s tempting to do otherwise, pick your line through the chaos and noise of the markets, and most importantly stick to it.

Technically analysis, done properly, can enhance your trading strategy. But, as with everything, hunt down the experts and trust your gut.

Our alerts are used by banks, fund managers and traders all over the world.

Copyright © 2020 fractalerts. All Rights Reserved. fractalerts is a division of fractal, SA