HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
NordFX information and reviews
NordFX
86%

Forex Market: Is Technical Analysis Dead?


Stephane Dubois   Written by Stephane Dubois

Every year the confidence of many traders is growing that classical technical analysis in its pure form does not work anymore. Think for yourself, all the main books on the technical analysis of the financial market were written in the 90s and early 00s. Then it was quite understandable and interesting, because the access of a wide range of investors and traders to computer analysis programs was limited, and studying technical analysis had a clear advantage, seeing pivot points and levels on the charts.

Now the question is: how can it work now, when using a free trading terminal, every schoolchild can put on the chart all possible figures and indicators of technical analysis? What is the logic? Coloring no longer works, and HFT traders delivered a decisive blow to technical analysts in the mid-00s, which Michael Lewis told us in detail in the “Flash Boys”.

Robots demolish stops that are tied to levels based on technical analysis, and only unique strategies created based on traders’ own observations and trial and error approach have a chance to avoid this.

In the passage below you will find a story about how technical analysts began to lose confidence when scientists began to check the results of their work. Interestingly, it was along with the creation of the MetaTrader trading terminal, that technical analysis spread around the world, outside Western countries, and thousands of forums started looking for grails in crocodiles, golden sections, Gann fans, etc.

In the West, interest in this has long disappeared, and now you rarely find charts with the classic technical analysis ruler from famous traders. Statistical calculations and all sorts of correlations - yes, and coloring with levels is no longer interesting to anyone. Nevertheless, many dealing centers and brokers continue to regale their clients with daily mailings with similar garbage, and the comments of the “analysts” in them differ little from the example below.

Neither the level of income, nor the size of dividends, nor the degree of risk, nor bank interest rates can divert technical analysts from their main job – studying the dynamics of price movement. Such a commitment to numbers has led to many jokes and anecdotes in financial circles, which have become a kind of folklore on Wall Street.

Students sometimes ask university professors the question: “If you are so clever, then why are these poor?” This question does not give rest to the professors themselves, who feel that, having devoted themselves to science, they have missed the earthly riches. The same question can also be addressed to technical analysts. After all, in the end, the main goal of technical analysis is to make money. It is quite logical to assume that the one who preaches the methods of technical analysis must himself successfully apply them in practice.

On closer examination, it turns out that these analysts often have leaky shoes and worn collar shirts. Few people personally know the technical analyst who would achieve wealth, but many have seen a lot of losers among them. Oddly enough, none of them admits their mistakes. If you find yourself so tactless that you ask him what the cause of such a plight is, he will not blink his eye to tell you the story of how he made an ordinary human error and did not believe his own diagrams.

The appearance of computers temporarily facilitated the work of the “technicians”, but sometimes this innovation turns against them. The fact is that just like technical analysts make charts, trying to guess the dynamics of the market, academics draw up their own graphs and charts, demonstrating how effective these methods are. Computer verification of the predictions made on the basis of technical analysis has become a favorite activity of scientists.

Does market inertia exist?

Fans of technical analysis are convinced that knowledge of the past of a particular action can help predict its future fate. In other words, the sequence of price changes in the past can help predict the price on any particular future day. This theory is sometimes called the "wallpaper principle". According to her, a technical analyst predicts future currency prices just as you can predict a pattern behind a mirror based only on how it looks around the mirror.

The basic assumption is that combinations and sequence of prices are repeated in space and time. Technical analysts believe the market has inertia. It is assumed that the currency, the value of which is on the rise, will continue to grow, and vice versa, if its price decreases, this decline will continue in the future. Therefore, investors are encouraged to buy and hold rising currencies. As soon as the stock price begins to fall or behave unusually, the analyst advises to sell it immediately.

If we take stock market as an example, we will see that these technical rules are checked for archival data of the two largest stock exchanges, which have been conducted since the beginning of the twentieth century. The results show that the past dynamics of stock prices can not reliably predict their future value.

The stock market has a very short memory, if it exists at all. If the market shows some inertia from time to time, then there is no regularity in this, and the strength, such inertia is not enough to overcome the negative influences of investors' actions. The easiest way to verify the truth of this statement is by comparing changes in the value of a stock in different periods of time. "Techniques" claim that if the stock price rose yesterday, then it will most likely continue to grow today. The audit shows that some coincidence of price movements in the past and present is still observed, but the percentage of matches is very close to zero.

Last week's price change has nothing to do with changes this week. If any patterns are noted, they are very weak and have no economic value. Positive or negative price changes over a period of time do not occur more often than with experience with a coin.

In the same way, constantly repeating patterns of diagrams are found no more often than a certain sequence of cards in card games. It is this circumstance that economists mean when they say that the behavior of stocks very much resembles a “random walk”.


RELATED

Which indicator is best for forex trading

Success is what everybody wants when first enter the forex market. Just for success they do learn how to trade themselves, hire brokers and cooperate with each other...

Technical Analysis: Directional Movement Index

Get ready for another instalment in our technical analysis educational series. After a multi-week hiatus, we’re back and ready to share even more knowledge

Three technical indicators you should know about

Seeing a list of indicators, you might easily get lost. This article will help you learn about 3 essential indicators that will help you define your trading strategy for any time period...

Types of analysis when trading in financial markets

It is well known that trading in the financial markets is one of the most dynamic and effective ways to make a profit, even in the absence of significant initial capital...

Strategy session: Why momentum is a short-term traders best weapon

We can approach trading in a very similar vein as many do in Blackjack or how a casino operates, in that we can think in probabilities and potentially forge, and exploit an edge...

Assessing the US 100 Index: Dead Cat Bounce or True Bullish Turnaround?

The US 100 stock index (cash) has garnered significant attention in recent trading sessions. Notably, this past Wednesday, the index showcased an upward momentum...

Three types of Forex analysis

Getting your head wrapped around Forex analysis isn't easy. Especially if you're a novice trader. That is why it is so vital to learn Forex step by step and understand...

Ascending Triangle Pattern in Trading

Investors tend to use different tools to define market direction - technical indicators, candlestick, and chart patterns are all key to successful trading. There is a wide...

How to Calculate the Value of One Point in Forex

A point is a very important concept for calculating possible profit or loss in financial markets. When conducting transactions, you need to clearly understand how much...

How to Use the US Dollar Index (DXY) in Trading

The US Dollar is the most traded currency in the world. It is used as a currency of the majority of international transactions while also being part of the most popular currency pairs on the Forex market...

Technical Analysis Tools

Read on to find out about some of the most popular technical analysis tools that traders can use, such as Bollinger Bands, MACD, and RSI...

The Ascending Triangle Pattern in Trading

Investors tend to use different tools to define the market direction. Technical indicators, candlesticks and chart patterns are all key to successful trading...

Trading Chart Patterns: The how-to guide

One helpful skill for traders is learning how to trade chart patterns. But what is chart pattern analysis and how reliable is it? Let’s explore the most common patterns recognized...

Currency Strength Meter: Complete Guide

Any trader needs to define the direction of the currency pair. It is also important to remember that the market movement is defined by the strength and weakness...

What Are Order Blocks In Forex? Unraveling the Impact of Big Market Players

In the vast and intricate world of Forex trading, the presence of order blocks plays a crucial role in shaping market dynamics. Introduced by large financial institutions and central banks...

Bullish vs. Bearish Market: How to Distinguish

In trading, you should focus not only on learning new strategies and indicators but also on discovering the terms that are widely used within the trading community. This will help...

What Is MACD Indicator and How It Works?

The Moving Average Convergence Divergence (MACD) is a technical indicator that measures a relationship between two exponential moving averages...

Support and resistance indicators: how to trade S&R in Forex

Support and resistance levels are one of the most important concepts in Forex trading. Many technical tools rely on support and resistance lines to find or to confirm trade setups...

Support and Resistance Levels: Comprehensive Overview and Practical Approaches

Support and resistance levels are paramount concepts, pivotal in navigating Forex and various financial markets. These levels underpin myriad trading strategies and form the foundational framework...

The Double Top Pattern: An In-Depth Guide to Mastering a Timeless Reversal Signal

While it's often claimed that markets are unpredictable, there's a method to the madness. Certain price chart patterns like the double top pattern offer a systematic way to read market movements, acting as historical footprints that signal future trends...

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.