Technical analysis does not work

by sabitha 2010-12-01 12:11:36

Many options traders use technical analysis to try to predict price movements, but if there were any value in the chart "patterns" of TA, they would by now be rigorously (operationally) defined so people could agree on the definitions, and there would be numerous studies showing that it works.

When an invention of this type enters the marketplace of ideas and shows legitimate promise, it gets examined by the academic community rapidly, thoroughly, and in detail. After all, these types of discoveries can win Nobel prizes and/or billions of dollars. Charting would not still be a "black art" at this late date if it had any validity.

Studying my Edwards and Magee "technical analysis bible" did not help my trading.

Fundamental analysis, on the other hand, might not be worthless in principle, but it's not much use in option trading because its outlook is long term, and the maximum life of an option is only 9 months.

So what type of analysis does help in option trading? Nothing helps.
But why do some people appear to succeed?

a) If 100 people predict a series of 100 coin tosses, a few of those people's guesses will happen to coincide better than others with the actual results, making them look like geniuses for a while. Whenever a person (or money fund) "excels" in this manner, they make a big deal about it, while noting in the fine print, "Past performance is no guarantee of future results." Nice understatement. Past performance is not even an indicator of future results, much less a guarantee.

b) "Success" depends on the time period chosen for reporting. The most informative time period (rarely reported) is "from the day you began trading right up until today", no omissions allowed.

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