Advantages and disadvantages of technical analysis
Strengths
Easy to Understand
Technical analysis has clear rules, so it is used by many traders.
For example, when the market rises after breaking above the 10-day moving average, you buy.
By looking at the chart, you can clearly define trading strategies for where to buy and where to sell.
Clear Entry Signals
Technical analysis clearly shows where to buy and where to sell in numerical terms.
Good technical analysis presents relatively simple rules that capture recurring market patterns.
Bad technical analysis produces complex and hard-to-understand buy and sell signals.
Applicable to Many Markets
A strategy that works in one market can be easily tested in other markets as long as price data is available.
Testing a successful strategy in other markets is a major advantage for risk diversification and for increasing profit opportunities.
Quick Execution
Compared with fundamental analysis, which requires reading news and reports slowly, technical analysis can be executed very quickly and can be automated depending on the situation.
Because the analysis time is short, you can trade in other markets as well, and you can devote more time to risk management and mental control.
Discovering Optimal Strategies
Technical analysis focuses on price movement patterns, so you can easily test the effectiveness of strategies using historical data.
Also, since you can test in a short time, you can try many different strategies to find which one offers the best opportunities.
And by varying and testing parameters, you can improve the profitability of strategies.
Limitations
The Belief That the Future Is an Extension of the Past
Because you can test many strategies using past data, you can identify strategies that were most profitable in the past.
For example, if you test a hundred strategies, you might find two or three.
However, those results come from past data and do not guarantee future success.
If you blindly assume that it will work well in the future and neglect risk management, you can suffer serious losses.
Ever-Changing Chart Patterns
Markets repeat patterns, but those patterns constantly change, making long-term profits from trading difficult.
For example, a simple moving average may have yielded great profits in a strong trend, but if the market enters a range, using the same simple moving average strategy can lead to large losses.
Different Indicators That Produce Opposite Signals
Traders believe there must be complex, correct combinations of indicators that yield long-term profits.
If you could understand difficult mathematical theories, you might feel you could become a consistently winning trader.
But a complexly constructed strategy does not always work well.
Displaying many indicators on the same chart makes it hard to know which to look at for trading.
For example, if moving averages give a sell signal and RSI indicates a buy, you may not know what to do, leading to losses.
The Myth of the Magic Indicator
Traders who are losing often believe that once they find the right indicator, profits will come and all problems will be solved.
However, most losses stem from lax risk management and trading-related stress leading to mist trading.
There is no perfect indicator that always yields profits on every market.
What matters is to master two or three market patterns and to develop the ability to judge when to use them while looking at the chart.
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