Disadvantages of Technical Analysis |
Hundreds of strategies and expert advisors are built on technical indicators, ignoring graphical and fundamental analyzes. Professional trainers recommend moving averages, Bollinger bands, oscillators, forgetting that only a combination of all analysis methods can bring a positive result. The disadvantages of technical analysis must be leveled, but in order to exclude them, one must understand its weaknesses.
Weaknesses of technical analysis
Technical indicators are just mathematical formulas that are built on the basis of historical patterns. Despite the cyclical nature of the economy, even in the long run, they can fail. Disadvantages of technical analysis in the short term:
- price noise (small fluctuations due to various local factors – transactions, failures in the delivery of quotations, etc.);
- redrawing of indicators (arise due to problems on the side of the broker, Internet provider, or failures in the platform);
- problem with market makers. They see the Depth of Market and do everything so that traders’ safety orders are hooked, and the price does not reach the take profit. Their liquidity volumes leave little traders a chance.
2. Different readings of indicators
One and the same indicator signal can have different interpretations. In practice, accurate signals are rare, and therefore are perceived ambiguously. Anything can play a role: different angles of intersection of indicator lines, controversial confirmation of signals, different signals of the same indicators on different platforms. The same graphical situation can lead to both profit and loss.
3. Delays and the influence of secondary factors
The disadvantage of technical analysis is that it is influenced by fundamental factors and investor expectations. The indicator signal turns out to be less strong than the fundamental news. Therefore, trading only on a technical signal is obviously unprofitable. An investor should always have a news feed and an economic calendar at his fingertips. And also the readiness for force majeure.
Theory is often different from practice. Each tool has its own characteristics and does not work in every situation. Put risks and gain experience in using tools on a demo account.