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Debunking Technical Analysis Myths



It's critical to differentiate between myth and reality in technical analysis. Recognising its capabilities and limitations allows traders to integrate it effectively into their trading strategies, potentially leading to more consistent outcomes.

We have compiled an exhaustive list of the most common technical analysis myths.

The claim:
Technical analysis only works because everyone is looking at the same tools and charts. Simply the expectation of a trigger causes a price move.

The truth:
What a compliment! If that was true, wouldn't that be another reason to use technical analysis? This assumes that everyone is looking at one timeframe, with the same tools, makes the same interpretations, and has the same trading style. This is clearly not true. There are simply too many tools, timeframes and trading styles so that not a single unified view of the market could ever dominate for long.

Of course, there is some common levels that are observed by many traders. The most prominent levels are the 200 moving average, important peaks and troughs, Fibonacci levels, or round numbers. We can use these levels to our advantage. But any advantage that exists for long enough will be optimised away eventually.

So why wouldn’t you want to see what everyone else is seeing?

The claim:
Energy markets are moved by gas storage fullness, weather, pipeline throughput, maintenance and much, much more. Technical analysis does not apply here. It’s a very fundamentally driven market.

The truth:
Neither technicals nor fundamentals ‘move market’. Why would a type of analysis influence the market?

Instead, all energy markets are moving based on a perceived shift in the supply and demand balance. To identify this perceived shift, we have two methods available: technical and fundamental analysis.

With fundamental analysis, we try to establish the true value of a commodity by understanding all the factors that could shift the supply and demand balance.

With technical analysis, we only focus on price. Because price reflects the market’s broad consensus of how supply and demand are balanced.

Because let’s be honest – even if you would know what a commodity is truly worth, it would be irrelevant if nobody else agrees. That’s why it is so important to understand what everyone else is seeing.

There is often a misunderstanding of both, technical and fundamental analysis. Fundamental analysis tells us why the supply and demand balance is shifting. Technical analysis identifies those shifts on the price chart as a reflection of everyone’s analysis.

In short: only supply and demand move the markets. We then use technical or fundamental analysis to identify the shift.

The claim:
If technical analysis is so subjective in its application, why would I do it if the interpretation is all up to me and there is no ‘right’ answer?’

The truth:
First, we need to distinguish between subjectivity and variety. Hedge funds, utilities and procurement departments are all acting in the same market but apply the strategies that work best for them. That’s the variety of methods. Never confuse variety with subjectivity. Think of it as a game of chess – both players are looking at the same board but work with their own strategy.

Now, let’s address the subjectivity question – because there is a kernel of truth in it. Not all technical analysis is equal. Some technical analysis is objective (a reflection of the market’s condition), and some technical analysis is subjective (the analyst's opinion of the market). Objective technical analysis will always outperform any lucky streak derived from subjective analysis.

Objectivity is derived from the tools. Subjectivity is injected by their application (tool selection, parameters, pattern requirements, tool misinterpretation etc.).

For example, a horizontal support level tends to be more objective than an angled trendline. Another example is the selective application of a moving average crossover signal. If a trader takes only some but not all signals, that would be classified as subjective application of an objective tool.

The claim:
You can’t use past data to predict the future. What has happened, has happened. It has no impact on future price moves.

The truth:
What other data is there other than past data? For any type of analysis, we can only work with past data to make projections. Technical analysis is a time series analysis.

A person criticising technical analysis in this way would also have to disagree with weather reports, economic forecasts, fundamental analysis and much more.

Are you familiar with the phrase ‘past performance is no indication of future performance’? Well, past data is actually the only predictor of future performance!

The claim:
All information is reflected in the price. Deviation from fair value is random and short. The market is efficient and cannot be outperformed.

The truth:
Fair enough, technicians also believe that all information is reflected in the price. But studies have shown that anomalies do exist and can be exploited for prolonged periods. This is especially true for European energy markets where technical sophistication is relatively low.

The claim that ‘all information is reflected in the market’ is not a black-and-white statement. Rather, it is a question of degree. It is better to ask, ‘in how far is this event reflected in the market’?

Imagine this: Only one trader is aware of an event and adjusts their trading position accordingly. Is the information now reflected in the market? Technically, yes. Practically, no.

So, remember - not all market participants have the same information available, interpret it the same, and act the same.

The claim:
All public information (relevant and non-relevant) is reflected in the price. An edge is derived from non-public information only. If non-public information becomes public, it is immediately reflected in price.

So, nobody else can profit from it. No news can be predicted, so neither can the price. Hence, history is irrelevant. Trends don’t exist. All price moves are random.

The truth:
This is similar to the Random Walk Theory as it was first published in 1973 by Burton Malkiel in his book ‘A Random Walk Down Wall Street’.

His outdated claims have long been debunked by his academic peers. But his misguided thoughts are still prevalent in some trading circles.

The theory is criticising not only technical analysis, but all types of analysis – this includes fundamental analysis. Unfortunately, this is sometimes forgotten by fundamental traders who cite this theory.

Let’s see if this claim has any basis.
Agreed, insider information can provide an edge – but this is illegal and not discussed here.

Agreed, public information is reflected in the market. But information distribution is asymmetrical, as is its interpretation.
Technical analysis is not trying to predict the news, and neither is fundamental analysis. Technical analysis is simply assessing the market’s reaction to news.

Academic research shows that history repeats itself (patterns do exist). Statistical analysis also shows that price is not random, and trends do exist.

Overall, with technical analysis we try to establish the trend direction, plan trades, and manage risk. We don’t try to predict the price – we only measure the price reaction to an event. And that seems quite uncontroversial, right?

The claim:
Technical analysis is only for high frequency intra-day trading. It doesn’t work in medium-term or longer-term markets.

The truth:
Technical analysis is fractal and works in all timeframes, markets and contracts. The same rules apply to all timeframes; from tick-to-tick trading to decade-long trends.

If that surprises you, then please remember what technical analysis is for: trend identification, trade planning and risk management. All three aspects are needed for any trade on any timeframe.

The claim:
Technical analysis doesn’t work with my markets/ timeframes/ contracts/ trading strategies.

The truth:
Technical analysis is fractal. It means that the same rules apply to all timeframes and all markets. But there are some criteria that must be met.

The market must be openly traded, it must be liquid, it must work with standardised units, and the market must move on a shift in supply and demand factors.

Remember what technical analysis is for: trend identification, trade planning and risk management. Why shouldn’t that be relevant for your trading activity?

The claim:
There are fundamental traders and there are technical traders. You have to choose what you want to do.

The truth:
It is a common statement made by fundamental traders who don’t know what technical analysis is. Because most of the time, even the most hardcore fundamental trader is relying on technical analysis a lot.

For example:
Have you ever looked at a price chart with candlesticks?
Have you ever identified a trend by its swings?
Have you ever looked at a historic level for support and resistance?
Have you ever placed a stop near an old peak or trough?
Have you ever drawn in a trendline?

If you answered any of these questions with ‘yes’, then you are already implementing technical analysis. This is called chart reading and probably the most important aspect of technical analysis.

The best traders make use of all tools available to them. Superior trading results are achieved with combining technical and fundamental analysis.

The claim:
With the help of technical analysis, we can predict what the market is going to do next.

The truth:
If only! In reality, technical analysis helps to identify trends that exist long enough to profit from them. Technical analysis shows us the most likely path of price action but does not predict.

Good technical analysis always tells you when the initial assumptions are wrong and must be revised.

Technical analysis gives targets, identifies trend strength, helps with trade planning and risk management. It is not a crystal ball that predicts the future.

The claim:
Technical analysis is easy. It is very beginner friendly – just read the tools!

The truth:
The danger of technical analysis is that it can look deceivingly easy, especially for beginners. First concepts are easily understood, and tools are seemingly giving clear signals.

But this can be deceptive. In reality, technical analysis works best if different tools are combined into a coherent system.

So even if separate tools are well understood, the danger is in the wrong combination or application at the wrong time.

The claim:
I just need to find the right tool that works best for my markets. I just need to find the perfect strategy.

The truth:
Some gurus and charlatans will have you believe that there is a perfect tool or system out there that will be profitable at all times. Some people are even overly confident in their proprietary systems that generate target after target.

Unfortunately, that is not true. Everything works sometimes but nothing works all the time. People and companies claiming otherwise are probably after your money.

It is important to be aware of the advantages and shortcomings of technical analysis to make the best use of it.

The claim:
Technical analysis is only applicable to stock and forex markets, not commodities or other asset classes.

The truth:
Technical analysis is a universal discipline that applies to any market where prices are determined by supply and demand. This includes commodities, cryptocurrencies, and even fixed income markets.

Technical analysis is used to identify trends, plan trades and manage risk. And these factors are beneficial for all traders in all markets.

Due to high leverage trades in commodities markets, even a small move can wipe out a position. That is why technical analysis is especially useful during volatile periods in commodity markets.

The claim:
Using more technical indicators will lead to better and more accurate trading decisions.

The truth:
Often, less is more. Using too many indicators can lead to analysis paralysis, where conflicting signals create confusion.

Successful technical analysis typically involves a few well-chosen tools that complement each other, not a plethora of overlapping indicators.

Also make sure that the chosen tools are not all showing the same thing. We don’t want to work with three momentum tools.

Better pick around three to five tools from the five categories of trend, momentum, volume, volatility and oscillator tools.

The claim:
Chart patterns in technical analysis are fool proof indicators of future price movements.

The truth:
Unfortunately, this is not true. While chart patterns can indicate probable market directions, they don't guarantee results. This false assumption is often combined with the myth that technical analysis is easy to master. This is especially propagated by gurus. If only it was so easy!

Chart patterns are a useful tool to assess the probability of an upcoming price move but these patterns don’t exist in isolation. Adjacent support and resistance levels, tool confirmation, volume distribution, and pattern confirmation are all needed to increase the likelihood of a pattern playing out.

The claim:
Using technical analysis, one can predict the exact future price of an asset.

The truth:
Technical analysis can provide potential target zones or trading ranges based on historical price behaviour and probability, but it cannot predict exact prices.

Targets are often derived from Fibonacci extensions and corrections, patters, and key levels. They offer useful anchor points but are rarely 100% precise.

At Clever Markets, we also work with targets and are always cross referencing the likelihood of a target being met within the broader market context. This includes checking mathematical tools.

The claim:
To be a successful trader, you should rely exclusively on technical analysis.

The truth:
Although Clever Markets exclusively focuses on technical analysis for energy commodities, we can’t claim that technical analysis is the only way to navigate the markets.

While some traders may only use technical analysis, many find success in combining it with other methods, like fundamental analysis, quantitative models, or sentiment analysis.

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