The Flaw in The Critique of Technical Analysis

For a while now, I’ve listened to many arguments against “Technical Analysis” and I’m gonna debunk those arguments in this article. From what I’ve noticed, most of the arguments presented shows clearly that the person doing the criticizing usually aren’t sure what they’re criticizing. Stated another way — they don’t have a clear understanding of what they are arguing against. Any student of logic knows that it is impossible to argue against a thing without being able to properly recite the opponent’s point. Which leads me to this…….

I hear many people use the word “predict” when they attempt to debunk the use of technical analysis. They say that “you can’t use technical analysis to predict the direction of a market.” That in itself tells me that these people are oblivious to the use of technical analysis. T/A isn’t used to “predict” markets, the correct word would be: anticipate. The fact that many would-be traders are looking for predictive tools explains a lot about those traders. Usually, the technician understands that trading is a probabilities game and doesn’t seek to predict the direction of a market. Instead, we seek to anticipate the probable direction based on the market’s own action. In other words, the trader is betting that there’s a good chance of one thing happening over another.

Let me also point out that there are two different types of “technical traders.” One is a price action trader, which I consider myself to be and the other employs what is popularly referred to as technical analysis. The price action trader differs from the technical analyst in that the P/A Trader isn’t concerned about “patterns” or anything of the sort. The P/A Trader is focused solely on supply/demand and support/resistance a.k.a the true inner workings of the market. The T/A Trader on the other hand seeks to find patterns in prices and employs complicated, lagging indicators. True enough, patterns do inadvertently form but pattern-seeking doesn’t tell the trader much about the true driver of prices, that being supply and demand. That being said, if one were to critique T/A, I would actually agree to some extent.

The second criticism I usually hear are those who claim that trading by price is based only on hindsight. I will admit that their claim in this instance isn’t completely without merit. If you have explored any of the trading circles on the internet, what you’ve more than likely found are people posting pics of fictitious trades. Stated another way — a “trader” may post a pic of a huge spike in prices (up or down) and will claimed to have called that movement. You never see these guys make any market calls in advance. Unfortunately, those guys make up the majority of traders that you see on the internet. However, actual traders can anticipate market moves when they’re actually shaping up. You probably won’t find too many of these traders but they/we exist.

That now brings me to this point concerning fundamental trading. Fundamentals may do a good job of explaining WHY a market should rise or fall but is extremely poor at telling you when that price movement is likely coming into fruition. It’s not unusual for a fundamental trader to hold on to a losing position for a really long period of time before their views are confirmed. In all truth, I don’t bother with fundamental analysis because information always show up in prices before the public hears anything. How many times have you attempted to trade a market based on information you just obtained only for the market to do the complete opposite of what you thought it was supposed to do based on that information? That is because the more informed traders acted on that information long before you or anyone else knew about it. Personally, I’ve traded many markets and correctly anticipated major moves using price action without having a clue as to the underlying reason(s). Then, come to find out, there was some important fundamental development which caused that major movement.

Conclusion: Attempting to predict ANYTHING in the world is a futile task, markets included. The best one can do is anticipate and play the probability game. There is no method that can predict a market. People have been speculating for centuries and not single person has come up with any predictive tools for the market(s) in which they speculate and they never will. The sooner traders understand this, the sooner they’ll stop with their half-assed attacks against speculators who seek to anticipate instead of predict.

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