Technical Analysis is one of the key analysis concept that is used in financial market all over the world. Most of the traders use TA to determining of future price movement of stock, future, option, currency pairs and some other trading instruments.  It is the concept that is widely used partially or wrongly or unconsciously or misleading way which reflect adversity situation over the traders trading life. As a result most of the traders are losers (95%).  So before the use of TA concepts in your trading, you should know worthy or ghastly pits of it.

According to Wikipedia In finance, “Technical analysis is a security analysis discipline used for forecasting the direction of prices through the study of past market data, primarily price and volume” There are 3  key point here that is Technical Analysis is the study of determination of future stock price on the basis of past market data (historic support & resistance), primarily price and volume.

We found another extensive definition of Technical Analysis in Investopedia “Technical Analysis really just studies supply and demand (historic support & resistance),  in a market in an attempt to determine what direction, or trend, (determine the future market movement ) will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components.

Investopedia definition added an addition of TA that is Technical Analysis try to understand the emotion of market. If you study price action or Elliot wave you can understand its closely related to market emotions.

The objective of my article is to investigate Technical Analysis tribulations and limitation; how does TA work, in which condition its doest work. Furthermore we will be known the key points of TA that fail in identification of price movement and its Characteristics.

Most importantly TA is the method of earning profits from investment in financial market for many traders. But many traders do not know its tribulations and limitations. At first paragraph of my article I discussed a little about Technical Analysis concept is used wrongly or partially or unconsciously, misleadingly that is mainly the evils of Technical analysis.  In the below I will discuss the 5 evils of Technical Analysis with examples which will help you to understand tribulations and limitations of TA.

1.       Misleading Concept of Technical Analysis: The first thing we are misguided by the Technical Analysis is the core principal of Technical Analysis which define history repeat its self. History often repeats its self but not all the time. Some time we see it never repeat or sometime it takes long time to be repeated. So investors or traders should take a look of this misleading concept before use of Technical Analysis.

 2.       Partial use Of Technical Analysis:  If you are familiar with phrase of A little knowledge is a dangerous thing” This is the most appropriate phrase for investors and traders in financial market. We see investor and trader learn a little part of technical analysis and use it and at the end result the partial uses of technical analysis fail most of the case of financial market.  Never try to use your partial knowledge of Technical Analysis cause its drop down you most of times of your investment life cycle.

3.       Misunderstand of Technical Indicators Direction:  Many investors and traders are trapped by the direction of technical indicators. As many of the technical indicators doest work in most of the case its give false buy or sell signal. The technical indicators have been created on the basic concept of market movement and mathematical calculation. So investor or trader who wants to use this sort of indicators they should have the core concept and calculation of that indicator and use it after analysis of present market movement.

4.       Unconsciously uses of Technical Analysis without a System: Technical Analysis is a broad concept and a systematic approach of determining the future price movement.  Any investors or traders cannot use in unconsciously. He may have good knowledge on technical analysis but if they do not use it in appropriate way it may be bring a dangerous situation. Technical Analysis can only work with long term value of your investment when you use it in a systematic way. The systematic way refers to control emotions or psychological development and an idea of your portfolio management.

5.       Certain Powerful Control Fail the Technical Analysis: we are very much familiar with market maker who can manipulates market any time during trading session. Market makers are the powerful market controllers who always trade against most of the traders with huge volume of trade. Technical Analysis doest work in case of market makers handling as market doest moves in a certain level when they enter into the market. So when we will use technical analysis we should keep it mind of their powerful control of Market maker.

 

With the finding of problems and limitations of Technical Analysis we should also find out its Characteristics that will help us to understand how it actually works.

  • Technical Analysis is a concept which closely work with price and volume transformations which we can see with various Technical Indicators i.e. movie average, money flow index, relative strength index etc.
  • Technical Analysis is direct contradicts with Fundamental Analysis.  When any currency, commodities or stock markets fundamental approach suggest the price value should increase high at the same time Technical analysis suggest with wrong direction.
  • Technical Analysis actively used in short time basis i.e it is most popular for day trader.
  • When the number of tools of Technical Analysis is used collectively then it’s give better result.
  • Technical Analysis is science of probabilities, it does not ensure 100% successful price prediction

 

Basically everything is in the world has good or bad side. Something that works on favor of us that may not work after sometime. We should then investigate the actual reason and limitations of it and then go and find the best way of use of it. Exactly TA is the concept or study we should find its characteristics or limitations. When we can able to understand its problems & limitations and characteristics it can give us good result how we can use it more accurately and best way. And finally it will enable us to be a better trader or investor.

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