Deflating major myths about technical analysis

Stock traders around the globe rely upon two types of analysis to make to make trading decisions. 1) Fundamental analysis and 2) Technical analysis. Large section of the stock traders believe that technical analysis is useful to take trading calls and to make money in stock market. There are also some who use fundamental analysis and believe that technical analysis is a total waste.  There is a lot of misconception with regards to technical analysis which keeps many people away from technical analysis. This blog ‘Deflating major myths of technical analysis’ is written with an aim to clear the major misconceptions about technical analysis.

1. Technical analysis is only for intraday traders.

Many people who are involved in stock trading believe that technical analysis is only for the intraday traders and using technical analysis helps them to make money and it is of no use for the long term investors. This is true in no sense and traders around the globe use technical indicators like 20-day moving average or 50-day moving average for long-term investing and by using this many traders have made huge money in stock market.

2. Only smaller stock traders use technical analysis.

It is believed that beginners or the smaller stock traders only use technical analysis for trading and no large investor use it. This is also not true, technical analysis is for everyone and the larger investors make use of technical analysis of stocks as much as individual traders. Institutions like banks, FIIs, Insurance companies, mutual funds etc. use technical analysis for better trading. Large institutions like these have dedicated teams of technical analysts to deal with high frequency trading which is dependent on technical trends.

3. Trading software can help traders to make easy money.

Presently there is hundreds of ready-made software which are available in the market and many beginners totally depend on this software to take a trading decision. These costly technical analysis tools might give you some insights about markets trends and some indicators. It depends on the trader to interpret these signals and to trade. Some of the software are even automated which buy and sell shares automatically and guarantee you profits. A chance of such profits is minimal, any successful trader would agree upon this.

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4. Technical analysis provides accurate price predictions.

This myth is in the minds of beginner in stock trading or novice to stock trading. They assume that the price predicted after analysis is 100% accurate and they tend to trade keeping exact prices and duration. For eg. They predict that stock “XYZ will reach 98Rs. In 2 months”. Experienced technical analysts would not quote exact amounts rather they might predict in ranges for eg. “XYZ can move to 92-98 Rs. in the next 2-3 months.” You should always remember that technical analysis provides predictive range and not exact number to trade.

5. Technical analysis can predict the future stock trend.

Using technical analysis doesn’t assure the predicted movement to be successful, but the probability is very high. Using technical analysis we can know the previous trends and patterns but we cannot predict the future trends as stock markets are so volatile in nature, no one can predict the market movement.

It helps us to understand the current market trend, rather forecast the future.

Finally before ending this post I would like to add that technical analysis is one of the powerful tools to trade in share market. The main reason why majority of so called ‘technical analyst’ fail is due to lack of knowledge and experience, trading with knowledge and discipline is utmost important.  We at EQSIS provide you professional training in stock trading and analysis which would help you to earn money in the stock market.

Is there anything you want to share regarding technical analysis? Please feel free to share your views and thoughts in the comments section below.