【100 Profit Questions】02. Is Technical Analysis Useful? Why Do Some People Still Lose Money After Studying It for Seven or Eight Years?

Is technical analysis useful?

The development of technical analysis has now exceeded 100 years, but over the years, the debate on technical analysis has never stopped.

The question of whether technical analysis is effective has been a subject of debate for many years, with two factions firmly in place. One faction consists of staunch advocates of technical analysis, whose basic logic is "history predicts the future, and history will repeat itself".

For example, investment master William Gann once said:

Once you fully master the angle line, you can solve any problem and determine the trend of any stock.

On the other hand, some believe that technical analysis is useless and self-deceiving hindsight.

For example, Buffett once said that when he found that the information he got from the chart was the same whether he looked at it right side up or upside down, he knew that technical analysis was useless. Legendary fund manager Peter Lynch also mocked that technical analysis is very useful for predicting the past.

The two sides have been arguing for years, but neither can convince the other.

Today, I dare to challenge this controversial topic.

First, let me state my current conclusion

In fact, technology is a very simple thing. Before many new friends come into contact with it, they mistakenly think that technology is something mysterious and profound.

There are a lot of guidebooks on technical analysis in the market, and the learning cost is very low.

Technical analysis is useful, but not as useful as you imagine.

No matter how many people learn technology, the result of the trading market is still a few people making profits, while most people are losing money.

The usefulness of technical analysis

1. Technical Analysis is relatively easy to get started with

You don't need to have a lot of financial and accounting knowledge, or understand macroeconomics, or even know basic information. You only need a few weeks or months of study to make money through technical analysis. Technical analysis can provide relatively clear entry and exit points, which is tailor-made for new suckers in urgent need of clear guidance, as well as frequent traders.

2. Technical Analysis is Built on Human Nature

For example, a series of "technical levels" such as support level/resistance level/round number level, etc.

People who recognize technical analysis believe that the short-term price trend is the result of the market's battle between buyers and sellers, which is essentially a psychological battle between buyers and sellers. And human psychology has a certain degree of predictability, so price trends also have a certain degree of predictability.

For example, people like certain integers. The price of BTC at 70000, 60000, 50000 is a number that everyone pays attention to. When the price first breaks through the integer barrier, investors' psychology will undergo a huge change, and the price is likely to pump as a result of the psychological change of many investors.

For example, the familiar resistance level can actually be explained from a psychological perspective.

Some resistance points are when there are many people trapped at the same price during the pullback. Most people are reluctant to cut losses and leave when they are losing, hoping that the price will rise back. However, once they have been tied up for a long time, when the price does rise back to the trapped price, a large number of people will break even and sell, causing the price to once again decline. This forms a resistance point.

So, the "technical point" essentially predicts human psychology, finds predictable patterns in psychology, and then summarizes a set of methods based on experience.

Technical Analysis is not so useful

Technical Analysis is a tool used to interpret the market, and real profits require actual trading operations.

For example, many beginners, when they come into contact with technical analysis, some instructors will show many precise price tops and bottoms through technical points, accurately find examples of rebounds or declines, and then everyone is very excited, 'Ah, this is useful, ah, trading is so simple, ah, we can quickly learn and apply it', fantasizing that the next millionaire is oneself, and then they start trading and lose a mess.

One can see at a glance, but it is useless to do. It seems right afterwards, but it's wrong to act in the midst of it.

Many people even find that they can easily make money in the stage when they don't understand technical analysis, but they end up losing money when they study technical analysis later.

In the place where technical analysis is discussed, it is often seen that one sentence: 'The more you study technical analysis, the more you lose'.

Because of these people, they fall into the misconception of technical analysis, the logic of uncertainty.

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Mistake 1: Treating technology as a science and disregarding probability

Trading is essentially a game of probabilities. Technical analysis makes judgments about possible future trends by studying history. Its role is to increase the probability of making profits and reduce the probability of losses. If one is not aware of this, talking about technical analysis is just nonsense.

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Misunderstanding 2. Mistaking technical indicator analysis for technical analysis

When it comes to Technical Analysis, many people think of technical indicators such as MACD, KDJ, RSI, and so on.

If you are trading according to indicators, the most frustrating thing is that the signals issued by technical indicators often fail.

Golden cross buy, death cross sell, and then found that the golden cross buy turned into a death cross and fell.

Buy and then find out that you can go against the trend and go against it again...

Little do we know that there is no omnipotent indicator, and it is normal for indicators to fail continuously once they fail.

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Misconception 3. Carving the boat to find the sword, not respecting the current market "momentum"

For example, the most commonly used M-top and W-bottom pattern structures are useful in some market situations. They may fail in other market situations.

Will it definitely fall after the M top? Many markets will still break through the pump.

Will it definitely pump after the W bottom? Many markets still break through the decline.

If you blindly adhere to it, you are prone to the problem of clearly having signals but still suffering continuous losses.

In addition, take the classic wave theory as an example. A standard cycle is eight waves (five rises and three falls in a bull market),

But in practice, not every wave is equal. It can compress, extend, be simple or complex.

Waves can be extended (called extension waves), can fail (called failure waves), and can also mutate,

When you open the historical candlestick chart, all trends can be explained using wave theory.

But during trading, you don't know whether it will succeed or fail.

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Mistake 4. Recent preference and outcome preference

Recently, preference and outcome preference are emphasized in "Turtle Trading Rules".

Once these cognitive biases are in place, they can easily lead to significant losses.

1. Result preference

“Outcome bias” is the tendency for people to judge a decision as good or bad based on a short-term outcome.

But in fact, this result may not be very objective, it is just a short-term benefit and does not represent the overall situation.

2. Recent preferences

"Recent preferences" are actually closely related to "outcome preferences", and many people attach great importance to the data of recent transactions,

To guide the next trading behavior. But in fact, this recent trading cognition may be wrong,

It may lead to deeper and deeper mistakes on this wrong path.

Let's take a simple example.

For example, if you come across a decent trading system online, you might decide to use it directly,

Discovering that you've been losing money for three months straight can make you very irritable, feeling like this trading system is just garbage, you decide to give up.

But another person may start using this trading system in the fourth month,

A wave of unprecedented trend market is about to come, and his principal suddenly multiplied several times,

At this time, he will feel that the trading system is invincible again.

Soon after adding a large amount of funds, it encountered a period of more than a year of pullback.

If you extend the timeline to one year or even longer, you will find that,

This system performed well for a period of time, and performed poorly for a period of time.

So short-sighted, like to use the recent trading results to judge the next market trend,

This is the most undesirable in trading, which may lead to significant errors in guidance and result in severe losses.

There is no technical method that can be applicable to all market conditions.

The essence of trading is a game of probability. Simply put, it is actively participating in high-probability events while striving to prevent the occurrence of low-probability events.

The more you use technical analysis without realizing this problem, the more likely you are to lose money.

Why do many people lose money after studying technical analysis for many years?

After many people have been frustrated with technical analysis for a long time, they will say, "Trading has no technical skills, it's just gambling."

I personally don't think so.

But why do I often emphasize that technology is not so important? There are two reasons.

1. I know people who are better than me in skills, but still often make big profits and losses, without stable profits.

2. My own experience and insight on this journey.

The essence of trading is to cut losses and let profits run. (Many people know this but fail to implement it)

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When I first started learning about trading, I also started by studying various indicators, such as the Fibonacci sequence, MACD, various channel lines, and moving averages,

I also paid to buy mysterious indicators with buy and sell signals along the way, etc.

After finding several indicators that resonated as a trading system, I thought I had found the holy grail of long-term profitability.

And also keep practicing and training trading discipline, saying that you should strictly follow the operation of the operating system...

I thought as long as the discipline is well done, there will be no shortage of villa models...

What is the final result?

Of course, it was a fierce operation, but the result is as disappointing as a dog.

Agree.

If only by these indicators and support pressure can make a profit, there should be no poor people in the financial market,

Everyone should be able to achieve financial freedom.

But many people have been stuck at this stage after seven or eight years of study.

Mistakenly thought it was because of poor technical skills or inadequate learning.

Lost myself in the continuous search for the Holy Grail year after year.

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After going through this initial stage, I gradually gave up on indicators and also studied systematic trading theories such as "Gann" and "Tape Reading"...

In the previous bull market, the weekly uptrend, which once reached the buying point of the entanglement theory, gained considerable profits.

At that time, I felt that labor and capital were invincible, and I realized.

Single-mindedly thinking about increasing the amount of capital, ruthlessly getting rich, and not listening to anyone's words.

It wasn't until later, after a series of continuous losses, that I finally woke up.

It's not that I'm awesome, but it was the market situation at that time. When the market situation is not favorable, there will be some losses.

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Have you realized it when it comes to this?

In other words, the technology remains the same but entering different market conditions may lead to vastly different outcomes.

Recognizing the attributes of market trends and their momentum is the most important!

Different people using the same technology can have different trading results.

The most fundamental reason is that everyone has different views on the market trend!

Technology is useful, but it depends on who is using it.

Think deeper, and I suddenly had a moment of enlightenment.

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In other words, it is easier to make money when technology and market trends converge!

Improve the probability of technology, combine with the trend of the market, and further improve the probability!

I also understand why the technical expert I know always makes big profits and losses.

Because of his eager desire to get rich quick, he acted before he had the chance to seize the right market opportunity that truly belonged to him!

He is too focused on opportunities and does not study the 'trend' in the market.

If he could increase more patience to wait for the market, he would have become a star in the crypto world with his skill long ago.

Underlying logic + practical results + example reference,

The deeper you think, the more enlightening it becomes all at once.

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Why didn't the previous indicators work?

It's because there are too many indicator signals. I want to enter the market when I see the signals, I want to enter the market when I see the signals, I want to enter the market when I see the signals.

Instead of identifying whether this signal conforms to the current market trend.

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All technical analysis can be summarized as follows:

Do the trend breakthrough, do the trend pullback, touch the top and bottom of the trend, do the high sell and buy low of the oscillation, that's it.

But in fact, no matter how they change, their essence will not change:

It is only a probability, and there is absolutely no mystical technique that can determine future trends with certainty and always be right.

Does that technology have a distinction between good and bad?

Actually, there is no such thing. Under certain conditions, each technology will have times when the probability or risk-reward ratio is high.

Technology is definitely useful.

But learning technology is to constantly chase the market with technology, or predict the trend of tomorrow's death.

On the contrary, limit your own behavior with technical analysis, without predicting the future,

Being able to deliberately give up some (incomprehensible) opportunities that are not so suitable for oneself.

Follow the current market conditions and find the "key point" position for your technology to strike, then there is a possibility of success.