Does Technical Analysis Actually Work?

Does Technical Analysis Actually Work?

Market Analysis technical analysis Tips and Tricks Trading
August 10, 2018 by Ramaa Mohan
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Cryptocurrency Technical Analysis

“Technical Analysis” is a term that is very generously used in the cryptocurrency and stock market and their corresponding industries. But whether it can be defined in words and whether or not it is actually of any use in its translation into profits is something that is heavily debated.

Technical analysis, for the cryptocurrency industry in particular, in the most reductive terms is the identifying of patterns and trends in the given overall trend of a coin in a given time period. Using the patterns that are identified from the analysis process, a prediction is made on how the asset will perform under similar circumstances on the basis of which decisions of whether to buy or sell a certain commodity, or in this case coin, is made.

Technical analysis involves the use of a lot of charts, trend lines, general information about the industry and takes into account both internal and external issues before coming to a conclusion on whether or not a coin or asset is going to appreciate or depreciate.

What is Technical Analysis?

There are two types of analyses; fundamental analysis and technical analysis. Fundamental analysis is the studying and use of privileged information pertaining details of a company’s financial records, bank statements, etc, before making a decision from the available options.

Technical analysis, on the other hand, assumes that the trend information that is publicly available is a direct representation of how the company issuing the commodity works and sticks to studying statistical changes in the prices in order to draw the conclusion of whether or not a trade should go through or not.

On the surface, technical analysis comes off as complicated and highly mathematical, however in reality, it boils down to trend identification and pattern uncovering to understand which way the trend is headed, up or down, and why. The process of trend identification and study invalidates the effect of the fundamental attributes of the commodity, like how well the company issuing it is doing and only bothers itself with the market’s sentiments and the trend line’s characteristics.

Disadvantages

Now that we have a brief idea about what technical analysis is, let’s talk about whether or not it actually ‘works’. We say a particular analytical report that was produced by an organisation or an individual ‘worked’ when somebody made a profit and that it ‘failed’ when there is a loss. But how do you make sure that the assumptions made on the basis of technical analysis is correct? What makes them “work”, what makes them “fail”?

Before getting into answering that question let us look at the problems that most technical analytics skeptics have with the whole process.

1. Bias Over Trend

Technical analysis is done over the trends that are already available which depict the historical data of a commodity or coin. Just as there are indicators that can be used and cited to prove that the coin will embark on an upward trend, there are indicators that can be used to prove the reverse too.

So when the technical analyst has a vested interest in the commodity or coin, there is a huge bias that comes into play over choosing which trend indicators to take into account, analyse and report.

2. Subjective Interpretation

Technical analysis of a coin or commodity is done using empirical data, ie, historical data. The future that the technical analysis will be used to predict will be heavily based on the past of the commodity or coin. Which means, a coin that has been doing badly for a long time will have very little chance of doing well in the future if viewed from a purely analytical point of view.

That essentially means, all predictions of a coin are made on the basis of its past shortcomings or successes which further goes to prove that technical analysis cannot be done without the measure of a previously taken trend.

3. Interchanged with Research

When making a decision in the cryptocurrency or even the stock market for that matter, a lot of thought needs to be put in before making the final call. This thought is called research, which is done by reading up and keeping informed about the internal and external factors that could affect it.

This reading up or research is NOT technical analysis. A common mistake everyone does in the industry and community is that they use technical analysis and research interchangeably. Which is where the confusion creeps in because research is essential, technical analysis however, is not. Research is important, correct even, technical analysis on the other hand, may not be.

4. Improper Science

Technical Analysis is an improper science. Because a method that worked with proving one coin’s trend may not work with another. And the same data and trend line that is used to predict an upward trend can be used to assure a downward fall.

Technical Analysis has a 50:50 chance of being correct or wrong, which in the cases of some commodities and coins, swings the odds of making a profit in your favour. The outcome of a technical analysis or a prediction made based on one is not absolute. There isn’t one correct answer, which makes it an improper science.

Advantages

As with any subject, there are always two sides to the coin. Many people believe in technical analysis and base their decisions on its outcome and seven out of ten times it has produced favourable results. The advantages of technical analysis in general is that it increases your odds of making a profit in a volatile environment such as the cryptocurrency market and makes it easier to prepare for the eventuality of a major slump.

Here are the advantages of technical analysis the process.  

1. Brings Out a Pattern

Everything in this world works on and has an underlying pattern. An amount of uniformity in all its uniformity, an amount of order in all its chaos. The cryptocurrency market is no different. All coins on the market has a trend line and on the basis of the time period being taken into account, patterns can be uncovered.

Uncovering this pattern is what the process of technical analysis enables market participants and investors to do.

2. Purely Factual

While the outcome at the end of a technical analysis cannot be banked on 100% because it is, at the end of the day, a prediction, the prediction is well substantiated with statistical calculation. No prediction or conclusion is made that cannot be backed up with numerical proof that is collected from publicly available sources of information. Which essentially means that conclusions that are drawn are not mere guess work, they are rather highly studied and calculated outcomes that are taken from a range of possibilities.

3. Sense of Predictability

As investors or potential investors, we always ask for empirical data, proof of whether an asset has actually done well at all in the first place and what are the chances of its decline. We always want fact over word of mouth and community grapevine and this is where technical analysis helps.

It helps uncover patterns in the trends of commodities and coins, which further help predict whether or not a profit is in store, which further instills a sense of predictability in the investors.

Does Technical Analysis Actually Work?

Now that we have seen the problems and advantages that technical analysis has, we can come back to the main question proposed in the introduction, which is; whether technical analysis actually works or not.

The answer to this question is variable depending on its use. If technical analysis is being done to understand the way the factors of a market can affect the trends of a coin, then yes technical analysis does work. If technical analysis is being done to simulate one of the possible ways the market can react to a certain situation, then yes technical analysis does work.

However, if technical analysis is being done for day to day trades, the balance can tip both ways because technical analysis can only aide you in making a decision and should not be used to base an entire trade on. Technical analysis only takes into consideration the hard, cold facts of a coin or commodity and with the cryptocurrency industry being a very community driven space, it invalidates the existence of a large influencer because it cannot be quantified.

To conclude, yes technical analysis as a whole does “work” but its applications are different and may not include the act of trading in the market on a daily basis.  

Learn More About Technical Analysis

Technical analysis is a vast field of never ending possibilities. It is highly mathematical and intuitive at the same time. It is a field that is ever growing and the predictions and results that come out of them are becoming increasingly reliable.

To learn more about the field and understand how things work, try these learning aids;

Also, read: Top 6 Crypto Trading Strategies

1 Comment

  • Jagdeep

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    Coindelta

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