Is technical analysis actually looked down on by Wall Street or traders, and if so why?

Posted By Scott Philips On Wednesday, December 21st, 2016 With 0 Comments

Most traders no matter how they trade are familiar with technical analysis principles. It’s not exactly rocket science, which is why beginner traders are so magnetically attracted to it.

Most PROFESSIONAL traders are very dismissive of anyone who trades any method without actually testing it. That especially goes for “I’ve been trading for 15 years and I’m sure this works.”

You hear people talking about for example “head and shoulders pattern”. Ask them what are the odds of that pattern working, what is the average move after successful continuation of that pattern, does the pattern work as well in decreasing and increasing volatility environment, does it work the same long and shortside, and could you please show me your results from the last 100 head and shoulders patterns… you get tumbleweeds.

Here’s an interesting fact: humans are programmed to seek patterns, even in things that are truly random. This is a survival skill: it’s far safer to assume that a slightly suspicious sight or sound is a danger, and flee unnecessarily, than to ignore that rustling as wind in the grass. So in tests people time and time again find patterns in randomness.

This is objectively retarded. If you trade any method without doing sufficient empirical testing on it to be absolutely sure it is an edge then you are a MORON.

You can probably make a sound investment method off technical analysis. However, you need to do a lot of work to make sure what you are using is a real edge. Many, many of the things people take as fact are simply made up garbage used to promote trading system sellers, indicator sellers and seminar salesmen.

Apophenia is well documented as a rationalization for gambling. Gamblers may imagine that they see patterns in the numbers which appear in lotteries, card games, or roulette wheels. One variation of this is known as the “gambler’s fallacy”. It’s also highly prevalent with traders, who imagine they’re seeing self-fulfilling prophetic fallacies using various indicators and pattern recognition tools on charts.

When that guru wants to sign you up to his $2000 seminar, the only response is “I’d love to attend your seminar. Please send me your trading statements for the last year so I can verify you are indeed a profitable trader, or alternatively your audited CTA or fund results if you are a professional manager.” A surprising amount of very famous traders on the internet don’t actually trade, or trade and lose money, year after year.

Moral of the story. Treat trading like a business. Don’t be lazy. Don’t be stupid, and you just might be fine.

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