Charting Path: Reasons Technical Analysis Doesn’t Work

Reasons why technical analysis doesn't work

For technical analysts in all markets.

I have been thinking about making this post for a long time, because it seems incredible to me that in the XXI century the so-called technical analysis is still used so frequently.

With this article I not only intend to provide arguments that support my thesis about its uselessness, but also to try to reflect on the reason for its wide use.

Let's go by parts…

Tabla de contenido

  • 4 Even the academics ...
  • Benjamin Graham andWarren Buffett(his best student) showed that there was another way, the value investing, which was really profitable in practice. This, together with the birth of the Internet and the democratization of information, allowed investors to have much more access to the financial information of companies.

    To date, in the majority of Anglo-Saxon countries (those with more financial literacy along with a great tradition with the stock markets) use fundamental analysis in the vast majority of cases, regardless of whether they aredeep value, macro, quality… If you watch interviews with managers, no longer famous but simply normal, you will see that they all say they make decisions based on (fundamental) data. On some occasions, some affirm that they use the technician as a “backup” or to know “when to enter”, being a very small minority.

    On the other hand, in Spain it seems the opposite. The technical analysis predominates and the fundamental one is quite relegated.

    At this point we can see that the birth of technical analysis at the time was something quite predictable.

    Think about the situation: a Minnesota investor wants to buy stocks, how do you know which ones to choose? There are almost no means of communication and the information given by the companies was very limited. What we have? The share price chart ... Well, let's see if we can get something out of it.

    Therefore, with time and the generalization of access to financial data, it began to be used less and less.

    Now, is there evidence that homeopathy… I mean… that technical analysis works?

    Studies on the usefulness of technical analysis

    A lot of universities around the world have done tests to see if there is empirical evidence that the analysis works.

    Well, according to a study by a New Zealand university: we can say that over 5,000 popular technical trading rules do not appear to add value  more real studies on the ruinous profitability of technical analysis and short-term speculation.

    Even the academics ...

    Those who know me know that I am quite… how to say, anti-academic. I hate everything that usually comes from that world full of unproven theories and lack of practicality. But in this case, it is that even many university professors claim that technical analysis does not work!

    He has been harshly criticized by teachers such as Influence, by Cialdini. In one part he tells how in a meeting on meditation (promising that it could be levitated) his companion refuted (in question time) all the points of the presenters:

    “Even more interesting to me was the effect of my friend's intervention on the audience. At the end of Question Time, the two speakers encountered a mass of conference attendees paying the $ 75 registration fee for the program.

    [….]

    Outside the conference room, we were approached by three attendees who had paid their registration immediately after the talk.

    [….]

    To my great surprise, I discovered that they had understood his comments (those of his companion) very well; too good even. It was precisely the logic of the argument that led them to enroll immediately in the program.

    The spokesperson put it perfectly: “I was not going to hand over any money tonight, because I am almost broke; she was going to wait for the next meeting. But when her friend started talking, I realized that if I didn't pay now, I would go home, start thinking about what she had said, and would never sign up. "

    Suddenly things were starting to make sense. I was faced with people with real problems, desperately looking for a way to solve them. In their search, according to the lecturers, they had found a possible solution in meditation. Driven by need, they wanted to believe that meditation was the answer. "

    This same reasoning can be applied to most "mystical arts" and "pseudosciences" such as astrology or tarot. As much as it is explained that it does not work or is of any use, people use them because they NEED to believe that it does, because for one reason or another they see no alternative.

    We are talking about biases such as cognitive dissonance coming into play. In this case, you are reading something that goes against how you operate. How is inconsistency resolved? Ignoring or belittling this writing.

    There is also the herd effect:

    “Everyone around me uses technical analysis. It has to work because a lot of people do it. "

    Common sense and good sense

    Pablo Fernández, considered one of the most respected academics in the world of business valuation, in his books often repeats an idea: no matter how many formulas and theories you use, the most important thing is to use good sense and our common sense. Peter Lynch.

    ¿Peter Lynch o David Lynch?

    ¿Peter Lynch o David Lynch?

    Sorry, David Lynch wanted to say.

    It is that after retiring from Fidelity, he changed his name and began to dedicate himself to his passion of making movies. It turned out that he was also very good and created the cult movie Twin Peaks.

    Which, by the way, is quite rare for any of them to raise a fund or hedge fund because they would show how little they know, although there are some honorable exceptions (which obviously go wrong).

    In addition, several of them are not only about stock market connoisseurs, but also about financial education and multiple subjects. At this point the technical analysis can become a bit like a self-help manual:

    "Believe in yourself"

    "The key is in the trader not in the method"

    "Persistence and tenacity is key"

    Another aspect is very dangerous, which I see more and more diffusion among these "analysts", and it is the use of complex products and assets such as binary options and CFDs (products prohibited in the USA). I also see that the topic of cryptocurrencies is very fashionable, that without going into depth, they seem to me to be high-risk assets and that at most they should represent a small part of the portfolio.

    The worst of all is that there are a large number of people (especially young) who fall into the hands of these people and exploit them, charging thousands of euros for courses (there are) and selling books that come to say: Cheer up crack, you can, and if you lose money, you need another course.

    Conclusion: Technical analysis does not work and will not work

    The entry was a bit long, but I think the topic deserved it. As a summary, I leave you the words of Emeritus Quintana, manager of Numantia and member of the Investors Club:

    "Neither economic theory, nor logic, nor empirical science, nor common sense, nor practical experience provide foundations in favor of technical analysis, but many against it."

    Say goodbye to me saying that I know that many of you will continue to believe in technical analysis despite everything, and you know what? Thank you very much. Thank you for providing liquidity, and thank you for transferring money from your account to mine.