Is Technical Analysis consistently reliable in all situations?

12 Mar 2024

Technical analysis is a trading discipline that scrutinizes the ways supply and demand for security will affect changes in price, volume, and implied volatility. Technical analysis is often used to generate short-term trading signals from various charting tools and can also help improve the evaluation of a security's strength or weakness relative to the broader market or one of its sectors. Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security's fundamental attributes.

1. Is Technical analysis 100% reliable all the time?

Of course not! The common misconception I see among investors about Technical analysis is that they think Technical analysis can predict market prices. Yes, you read that right. However, Technical analysis cannot predict prices; Technical analysis can just tell you what is likely to happen over the other. Although chart patterns and Elliott wave theory can give you price forecasts, they are quite subjective. Trading is the game of probability and you do those actions which have higher probabilities of occurring. Market practitioners and researchers have demonstrated that the market does not follow a random walk and is not always fully efficient. In other words, you can exploit the trend of the market and make money out of it. When an experienced Technical analyst gives an opinion on the market, he/she talks about the most probable outcome and warns you where to exit your position when you are wrong. But the market takes the analyst’s opinion as a sure-shot prediction and the worst is they are ignorant to use stop-loss mentioned by the analyst. Moreover, they even conclude that Technical analysis is useless.

Besides, there are so many “so-called Technical analysts” in the market. Some take Technical analysis classes for a few weeks and begin posting technical analyses claiming 100% certainty which is unlikely to happen.

The problem arises when investors expect 100% accuracy out of any analysis (fundamental or technical). Uncertainty is the fundamental feature of the market and how can one think of any method that will precisely forecast the future? Since the public expects Technical analysis to be perfectly accurate all the time, it is the sole reason why they are disappointed with it very soon.

2. Yeah, whatever, but Technical analysis Does Not Work in all Markets, isn't it?

This is the most absurd statement one can make regarding Technical analysis in the market. It is absurd because the logic that backs up this argument is baseless. One of the hilarious logic is- it does not work because only a few people use Technical analysis. If so many people had to use it to work, then imagine how Technical analysis must have begun. Do you think a large number of people gathered and created an imaginary line and promised to follow it to manipulate the market? No, the market does not work like that. If the majority of the investors use the same strategy it will be useless because everyone tries to be ahead of the game.

Another premise investors have to support their conclusion is, that the market is sentiment and news-driven; so, fundamental, technical nothing works here. If one says so then one must be assuming either we have a highly efficient market or a very inefficient market. The subject of behavioral finance has already demonstrated that a perfectly efficient market does not exist at all, efficient and inefficient markets rather coexist. Even the best stocks from most developed economies have crashed regardless of the company’s breathtaking fundamentals. So, when no market is perfectly efficient at all times how can you expect Technical analysis to be so efficient? If inefficiencies exist in the market, Fundamental and Technical analysis can make money from the market.

Even if the uninformed investors drive the price away from its fair value, the informed investors bring it to the normal value. However, it may take a bit of time to come to a fair value in a market. This rather means if you discover any mispricing of stocks, it’s a very good opportunity for you. Moreover, Fundamental and Technical analysis can exploit the mispricing caused by overreaction and underreaction of the crowd and can take advantage of it. An inefficient market is a gift, not a bane.

Another logic investors use to argue against Technical analysis is that Technical analysts are bullish when the market is up and bearish when it is down. Ok, this is called trend following. Unless a Trend Reversal is signaled, a price going up is likely to go up, Technical analysts are not that mindboggling!

3. Criticizing Technical analysis without statistical evidence is useless.

If someone thinks Technical analysis is useless, one should backtest and forward test the technical indicators and patterns and prove it. Any technical indicator can be considered useless if it does not generate consistent results and profitability. Cursing Technical analysis without actually understanding it and testing it in the market data weakens the argument. It was found that even a 20-day simple moving average could largely outperform the buy-and-hold strategy in some Markets.

Today we can see professionals with both CFA (chartered financial analyst ) and CMT(Chartered Market Technician) designation and they admit that Technical analysis helped their decision-making process. A popular one is- “CFA helped me to get the job and CMT helped me to keep the job.” And for those people, who do not believe in Technical analysis, it is okay you do not have to believe it, focus on what you believe in. But before criticizing the discipline, study it in-depth so that you can give valid opinions against it. Try to find scientific and statistical evidence defying the Technical analysis, not some cheap irrational arguments.


To sum it all up, no investment philosophy is without drawbacks and limitations. If one method worked so well, there would be no need to search for another method, but still today people are looking for innovative ways to trade in the market. Before judging Technical analysis based on some analysis on Social media and three lines of definition on #Investopedia, please do some study and research.

Happy Investing!

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