Technical Analysis: Three of the Most Foolish Myths to Avoid
Far too often, technical analysis is dismissed as hogwash.
It’s nothing more than a guessing game using lines and charts without any concrete or profitable results to show for it. However, as we’ve proven that’s just not true.
And as any technician will tell you, it works very well with understanding.
However, doubters must first get beyond the myths of technical analysis.
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Myth No. 1 – Past Prices Aren’t Useful in Predicting the Future
One of the biggest critiques of technical analysis is that it can’t predict future prices.
However, when it comes to predicting future movements in stocks, the more a pattern – such as a double or triple top – repeats itself the more reliable it becomes as a predictor for future price movements. It allows us to identify important levels of charts and react to them.
For example, if we look at a one-year chart of Bitcoin (BTC), support continues to emerge around the same spot. In fact, each time it falls to support, we typically see a bounce. We can also tell with good certainty when we should consider trimming our position when the coin reaches and fails at resistance. For example, investors knew to be cautious when BTC began to fail at double top in late February 2019.
Myth No. 2 – Technical Analysis is only good for Short-Term Trading
Nice try, but no. Analysts can plot charts for days, weeks, months and years to spot strong trends, for example. Even today, traders used the 50-day and 200-day moving averages as support lines to argue for sustainable long-term trends.
Myth No. 3 – Technical Analysis has a Low Success Rate
A look at long lists of successful traders debunks that immediately.Countless books would have never been published, such a Technical Analysis A to Z, if it didn’t work. Nothing has 100% accuracy. If it did, we’d all be rich. Fundamental analysis isn’t perfect either.
Plus, as we’ve shown you, success can run as high as 80% with a combination of technical indicators, including Bollinger Bands (2,20), relative strength (RSI), and Fast Stochastics.
For example, as we noted on March 25, 2019 with Binance Coin (BNB).
Notice that in early February 2019, the coin began to pull back to its lower Bollinger Band (2,20), which we consider an oversold extension. At the same time, relative strength (RSI) was beginning to bottom out just under its 50-line – another oversold indication.
In addition, Full Stochastics were aggressively oversold at its 20-line. You’ll notice that each time Full STO hits that line, as the coin challenges its lower Band, it bounces. That has happened about 80% of the time.
Since spotting that pivot in February 2019, investors watched the coin explode to nearly $18.
If you’re in the crowd that doesn’t think technical analysis has value, you may miss opportunity.
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