Technical analysis is a very divisive topic and there are many technical analysis myth. You have people thinking it is the magical holy grail that give massive profits to those who uses it. This often happens because of false and misleading advertising by dishonest marketers.

On the other side you have critics saying it is a half baked and meaningless analysis. This usually coming from fundamental or value investing traders. Some critics are traders who incorrectly use technical analysis and gave up half way.

Unfortunately these viewpoints have created many technical analysis myths. These myths are either from difference in trading philosophy or lack of training in properly using technical analysis. These myths often then cause massive losses to traders.

Today we are going to destroy the myths of technical analysis, so that traders who planning to use technical analysis can use them correctly.

Technical Analysis Myth #1: Technical analysis is for day trading or high frequency trading only.

It is a widely circulated myth that only day traders use technical analysis. Besides that, many believe high frequency traders input technical analysis into their high frequency trading algorithm. To a certain extend this is partially true because 1) there are charting software that offers tick by tick chart, 1 minute chart and even second chart. 2) Some high frequency traders use technical analysis as basis for their trading decision.

However, technical analysis is not only for day trading. In fact, an early form of technical analysis existed as early as the 18th century in Japan. Munehisa Homma, a Japanese rice trader, developed the candlestick technical analysis to predict the likelihood of future price movements. Technical analysis also analyze the long term potential price movement of an instrument as well.

Technical Analysis Myth #2: Only retail traders use technical analysis.

There are institutional traders and fund managers made trading decisions based on technical analysis. Besides that there are also highly successful hedge funds and institutional traders used fundamental analysis to identify fundamentally good companies. Then they use technical analysis to find price points for entries, cut loss and take profit.

In fact, many hedge funds, financial institutions, pension and sovereign wealth funds do hire dedicated technical analysts for trade ideas.

Technical Analysis Myth #3: Nobody makes money trading technical analysis.

There are many successful traders and fund managers made money trading technical analysis. Take for example: Marty Schwartz turned $40,000 into $20 million trading on moving averages. Ed Seykota, Richard Dennis, William Echkhardt and etc successfully earn a fortune using trend following system. Moving averages and Trend Following are taught in our Intensive Futures Program syllabus.

That being said, technical analysis strategies do have low success rate in some instances. This is either because traders did not truly understand how these technical analysis works or trading without cut loss or stop loss orders.

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Technical Analysis Myth #4 Technical analysis' winning rate should be higher for net profit.

Many traders misunderstood that technical analysis need to have high winning rate to achieve a net profit. But that is not always true. Worst, many dishonest marketers selling technical analysis continue to hyped up this myth.

Let's debunk this myth. Over 10 trades, Mr A had successfully made 8 winning trades, thus his winning rate is 80%. On the other hand, Mrs Z only made 3 winning trades out of 10, thus her winning rate is a mere 30%.

Many people would assumed Mr A is a good trader. But what if each of his winning trade is only RM10 per trade while is losses are RM50 per trade? And Mrs B. actually lost RM10 per trade and earned RM30 per trade. Thus Mrs B actually achieve a net profit.

Is winning 3 trades much easier than winning 8 trades? Of cos achieving a high winning rate is desirable but when it comes to trading we have to "plan" for the worst scenario. Thus speaking from trading experience, combining an effective technical analysis strategy with good risk reward can achieve a good net profit without the absolute necessary to hitting a high winning rate.

Technical Analysis Myth #5 Technical analysis gives extremely accurate forecasts.

This myth are in the minds of many new traders. However nothing could be further from the truth. This is because there is not a single analysis, be it technical or fundamental can give a 100% accurate forecast. Trading is all about probability.

Alphabet to hit $400 in 3 months. FKLI to reach 1,800 in 3 weeks. EURUSD to reach $1.10 by end of 2018. These predictions are merely...predictions.

An experienced technical analyst would say Alphabet is more likely to trend higher in the coming weeks due to higher market structures. There is a high possibility that FKLI may have an uptrend. 7 out of 10 times when prices below this moving average for the past 2 years, EURUSD likely to trend lower.

Technical analysis is a tool for traders to study previous price action to find out what is the most likely scenario going to happen. Not the next guaranteed scenario.

Many new traders are not aware of this fact and as a result suffer unnecessary losses. Technical analysis is all about likelihoods, not guarantees. If a technical analysis strategy works most of the time, even it does not work all the time, it still can generate good profits.

Summary

Technical analysis is valuable in helping us to arrive to a trading decision. There are successful traders that use it and there are also successful traders who did not use it. In the end is up to the trader to decide whether it suits their preference.

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