Thursday, June 21, 2012

Technical analysis is not a surgical process

Again and again I see people confusing technical analysis with rocket science or a surgery. Technical analysis is not an exact science like mathematics. There are no right or wrong places on the chart where the chart will turn. The price isn't moving cause it is supposed to. The price is moved by a great number of investors and traders doing their daily business.

So why on earth do we see people analyzing the charts and saying things like "the price turned because it hit the 43 EMA (exponential moving average)" or whatever the number is? The idea behind technical analysis is to spot trends and possible support and resistance levels. Moving averages (MA) are and will be a tool to predict trends, they spot possible changes in momentum (when short term MA approaches long term MA then the price is slowing down (either selling or buying pressure is decreasing)).

Use common sense, don't overdo it, you will be trapped by the scientist's fallacy.

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