One of the most uttered criticism of technical analysis is the use of past price movements to predict future price movements. Critics claim that they have nothing in common, and that therefore the entire premise of technical analysis is wrong. They say that technical patterns like trends are mere coincidences and that there is no reason to believe they will continue in the future.
Opinions like these confuse many new traders of binary options and lead to bad decisions. This article will address the criticisms and show why the past can indeed predict the future.
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The past is the only way to predict the future
First of all, let us think about the outrageousness of the accusation at hand: Except from some instances in natural sciences such as physics, using the past is the only way to predict the future. Why do doctors know that cancer will be deadly in a certain percentage of all cases? Because they use past experiences to predict the future of the case at hand. The weather report, any form of political or social prediction, and even global warming – they all predict the future based on the past.
No form of analysis can live without using past experiences to create assumptions about the future. In fact, fundamental analysis does exactly the same to an even bigger extend. Not only does fundamental analysis use the past to predict the future of a company, a country, or an economy, it also assumes that some of the measurable consequences of their prediction will influence the price of an asset in the same way they have in the past.
Compared to the premise of technical analysis the assumptions of fundamental analysis are far more wild. They only benefit from the fact that they have been repeated so relentlessly that most people have stopped to question them. It is therefore hard to understand why especially the advocates of fundamental analysis critique technical analysis for using the past to predict the future while they are doing the exact same thing to an even greater extend.
How the past can predict the future
Statistic experts distinguish between descriptive statistics and inductive statistics. Descriptive statistics refers to the presentation of data, while inductive statistics refers to the deductions and predictions drawn from this data. The population data of wild living tigers in Africa are an example for descriptive statistics. If the number decline continually, making the prediction that tigers soon will be extinct is inductive statistics.
Technical analysts do exactly the same thing as scientist predicting the population numbers of tigers: They take the past and try to figure out what is going on. Then they predict what will happen if nothing changes, and what would have to happen to make their prediction invalid. This, in fact, is not a point other traders should critique; it is a proven scientific method that is sure to generate valid results.
Fundamental analysts, on the other hand, assume a connection between fundamental indicators such as company reports or economical data and the price of an asset. Such a connection has never been proven and does not allow for any definite prediction about the future. Using unproven methods that cannot create predictions is the exact definition of a highly unscientific approach. Therefore, traders should not be surprised if the market does not reflect what fundamental analysis has vaguely promised them.