Despite the fact it represents a true edge for the trader, technical analysis presents some disadvantages. Those who oppose technical analysis point out several problems related to the application of its methods.1. The failure to know the underlying fundamentals.
A common argument is that technical analysis is aimed at predicting a certain outcome for a chart pattern, ignoring the reasons of the movements which are due to fundamental factors. This is an obvious limitation of technical analysis and any trader feeling uncomfortable with this handicap should find support in the next chapter dedicated to fundamental analysis.
2. The lack of scientific objectivity.
Although some technical methods offer a certain objectivity to the chart analysis, other elements of technical analysis may not necessarily lead to an objective interpretation. That is why technical analysis is sometimes referred to as being more an art than a science. It is also where individual biases can come into play.
In the previous unit, we talked about the self-fulfilling prophecy referring to the fact that the more people approaching markets with technical analytical methods, the more likely the expected move in price occurs. It's another typical argument that points out the lack of a proven thesis. The fact that traders operate with different time horizons and with many different reasons besides making money makes it difficult to find a common approach to the self-fulfilling prophecy.
3. The uniqueness of the pattern occurrences.
Another legitimate argument in favor of the unreliability of technical analysis is based on the true observation that past price action upon which technical methods are based does not often repeat exactly the same way. This can lead to incongruities in the analysis and to inconsistency in the methods.
At this point, however, you should ask yourself whether these arguments can be dealt with in order to make money in the markets. Of course they can, and we are going to show you how!
It's true that traders will never be 100% correct when using any strategy based on technicals. However, more often than not technical studies do create a positive expectancy. You don't need much more than that.
A valuable lesson is undoubtedly that analysis doesn't make the whole trading plan. A proper money management and a trained attitude to stick to the rules are elements which offer additional edges to include in the trading plan. Therefore, don't worry excessively about the above mentioned drawbacks - technical traders have learned how to deal with them. 1, 2 next
