Are Stock Charts Useless?
When someone wants to make an entry into the stock market, they want to buy at the lowest point based on the history of business by stock charts.
- Some traders denounce technical analysis is the study of patterns and charts without profitable results.
- Some investors believe that if you can understand stock charts accurately, you can make sizeable profits.
So, these opposing opinions have led to a misconception about technical analysis. If a trader is trained in fundamentals, then he will not take an interest in technical analysis. It never means that if someone is an expert in the technical analysis, he can’t make profits.
Sometimes, technical indicators are not used accurately and result in losses, but we can’t say that the overall method is bad.
There is a possibility that we might not understand things right. If a person is in loss, they might need training and practice. Don’t rely on the ads that we see on the internet, and they claim 100% successful trade, and they are a scam.
Myths about Technical Analysis
These myths are prepared by marketing and promising overnight riches.
Myth 1: Technical analysis is only for day trading or short-term trading
It is the most common myth that you can use technical analysis for computer-driven trading and short-term trading such as high-frequency traders and day trading. When the computers were not very common, technical analysis existed and practiced. Long-term traders and investors have practiced technical analysis. Traders have used technical analysis for 1-minute charts to weekly and monthly charts. So, how it can be said that stock charts are useless.
Myth 2: Only individual traders use technical analysis
Without any doubt, individuals use technical analysis, but at the same time, investment banks and hedge funds also make use of technical analysis. High-frequency trading, which holds a significant amount of trading volume on stock exchanges, heavily depends on technical analysis.
Myth 3: Technical analysis has a low success rate
When we look at the list of successful traders with lots of trading experience, we have seen that they were successful because of technical analysis. So, we can’t say stock charts are useless.
Myth 4: Technical analysis is quick and easy
On the internet, you will find lots of trading courses that guarantee success in trading. Many individuals entered into the trading world and made their first trade by using simple technical indicators. However, for continued success, you need in-depth training, continuous practice, and discipline. For success, you need to be dedicated and pay attention to the market. So, technical analysis is quick and easy; if you can master that, you can become a successful trader.
Myth 5: Ready-made technical analysis software can help traders to make easy money
It is not true. You will find lots of ads on the internet, claiming that this software can help you to make quick money. When the traders are less experienced, they get trapped in the tools provided by the broker. Technical software only provides insights about patterns and trends, but it doesn’t guarantee profits. It mostly depends on the trader to interpret data and trends.
Myth 6: Technical indicators can be applied across all markets
This myth can be true in some cases, but can’t be true in all cases. Different assets, such as options, equities, commodities, and futures will have different requirements. There may be time dependencies in most assets such as expiry in options and seasonal patterns in commodities. You can’t apply the same technical indicator on all the classes.
Myth 7: Technical analysis can provide accurate predictions on price
Many novice traders expect technical analysis and software to make accurate price predictions. Experienced traders avoid quoting specific prices. Rather they tend to quote a range. So the traders betting on technical recommendations should be aware of the fact that such analysis only provides ranges, not the exact number. Technical indicators are about likelihood and probability, not about the guarantee. If someone is working continuously and using these indicators, then they can generate significant profits. So if you can use stock charts wisely, then charts are not useless.
Myth 8: Success rate in the technical analysis should be higher
This myth is common because for making profits high percentage of successful trades is needed. However, it is not always true. Let’s take an example; Johnson makes four winning trades out of five, and Smith only makes one out of five. So who is more successful? Most people would say, Johnson. But we don’t know this until we get more information. Proper trade structuring depends on lots of factors. Profitability is the combination of risk/reward and win-rate. If Johnson makes $20 on his each winning trade and $80 on a losing trade so he will be left with $0. If Smith makes $50 on his winning and loses $10 on lost trades, he is still in profit of $10.
Some Reasons Why People Consider Stock Charts Useless
As it is mentioned earlier, there are opposite opinions and views of people about stock charts. Some consider them useful, and some consider them useless. So let’s have a look at some of the reasons why traders feel stock charts are useless.
- Stock charts failed to reflect dividends and other distributions.
- Failure of stock charts in reflecting spin-offs.
- Failure to reflect inflation, deflation, and taxes.
- Failure to reflect costs.
- Rules of chart patterns don’t work in real-life situations.
- In trading chart patterns, there is no objectivity.
- Actual market evidence is against the trading chart patterns.
- If chart patterns work, you will still not be able to make profits.
So, these are some reasons why traders and investors feel that stock charts are useless.
Technical analysis provides lots of tools for trading. Some successful traders don’t use them, and some successful traders have used these concepts and tools. It depends on each trader how they use these tools for their success. You can’t expect 100% accuracy and profits by using these tools. When to continuously practice these tools, you will get a realistic possibility of success.
Sky Hoon. Read Full Bio
Website Owner, Twitter-er
He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.