Most new traders have been told for all their life that an asset’s price is influenced by fundamental reasons like economical factors, earning, etc. Telling them about the disadvantages of technical analysis and to forget about these theories and to start evaluating assets exclusively by information derived from the price chart goes against anything most people have ever heard about investing and often leads to two points of criticism:
- Chart patterns are a self-fulfilling prophecy.
- Recognizing chart patterns is too subjective to generate valid prediction.
This article will address them both.
Continue reading below the table about the disadvantages of technical analysis…..
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Are these disadvantages of technical analysis real?
Binary options do not effect to price of an asset. Critics claim, however, that because many regular traders of stocks, commodities, and currencies use technical analysis as well, their concerted actions will cause the pattern to be created in the first place. They say technical analysis is nothing but a self-fulfilling prophecy that distorts the market.
Weirdly enough, they also claim that technical patterns only exist in the eye of the beholder and are not real. Therefore, say the critics, they cannot create valid predictions. The critics fail to realize, however, that both points effectively cancel each other out.
If chart analysis is too subjective to generate valid projections, how can it possibly be a self-fulfilling prophecy in which all traders arrive at the same conclusion at the same time? Let’s address these points in order.
Firstly, technical analysis can work successfully over a long period of time, as many traders have shown with spectacular results. Therefore, the argument that technical analysis cannot produce valid predictions is falsified.
Secondly, critics of technical analysis are right with the first part of this argument: Technical analysis is highly subjective. It is an art and a skill, not a strict science. Even the most experienced technical analysts will disagree about many chart patterns; and even if they agree on the pattern, they will probably disagree about the perfect time to enter the market. Some would enter a continuation pattern early and trade it with no touch options to the near side of the formation, others will wait for the pattern to be completed and trade the breakout with a High / Low option. There are as many approaches to technical analysis as there are technical analysts.
Nonetheless, it is hard to see why this should be an argument against technical analysis, as the same applies to any form of market analysis. It is just as hard to find two fundamental analysts that agree on which asset to buy right now as it is to find two technical analysts. More significantly, this plurality of opinions is what keeps the market alive and stops the much-accused self-fulfilling prophecy from happening. Because all technical analysts think differently about the market, they will act differently.
There you have it: As a trader of binary options there is no reason to use anything else than technical analysis to create your trading strategy.
What you can learn from the claims against technical analysis
For a technical analyst, the important thing to take away from the criticisms is that technical analysis is indeed highly subjective. Therefore, learning rules by heart will not help a trader be successful. Success or failure is determined by each trader’s individual ability to understand the market as a whole. As any craft, this skill has to be mastered through long, intensive training.
Therefore, choosing a trading strategy should not stop you from broadening your horizon beyond what your strategy requires. Looking at different techniques and theories will benefit your trading by creating a better feeling for the market, by building a deeper connection with price movements. While these factors are hard to measure directly, you will never find a successful trader without a broad understanding of the market far beyond what his strategy requires.