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9 Technical Analysis Myths Debunked

Patrick Stockdale
Written by Patrick Stockdale | March 4, 2022

There are a number of myths about technical analysis that new traders sometimes believe to be true.

Some people believe technical analysis is worthless without providing concrete evidence as to why they believe it to be worthless.

The 9 most common myths about technical analysis are:

  1. Technical analysis does not work
  2. Technical analysis will make a trader rich quickly
  3. Only retail traders use technical analysis
  4. Technical analysis indicators only works on shorter timeframe charts
  5. Technical analysis is hard to learn
  6. Technical analysis software is too expensive
  7. Only day traders use technical analysis
  8. Technical analysis accurately predicts the future price of the market
  9. Only secret black box technical analysis trading strategies make money

These erroneous beliefs cause traders to discount technical analysis completely and miss out on the potential opportunities a technical analysis approach can bring.

Technical Analysis Does Not Work

The first myth about technical analysis is that some traders believe that technical analysis does not work. Evidence has proven this to be false.

The book “Market Wizards” by Jack Schwager offers interviews with top traders from around the world. The traders in the book had their trading accounts independently audited.

The traders interviewed for the book utilize a number of strategies, many of them using technical analysis based strategies to successfully and profitably trade the markets.

The evidence from the book suggests that technical analysis can be a profitable way to trade the market when done right as evident by some of these traders’ returns (1).

More evidence like the investing championship and trading championship, whereby the participants are all audited and have their accounts monitored, has proven the belief that technical analysis does not work to be false (2).

Many of the traders in these championships use technical analysis successfully, as evident by the winner’s returns.

Summary
The myth that technical analysis does not work is false as evident by the audited returns of top traders that use a technical analysis style to trade the markets.

Technical Analysis Will Make A Trader Rich Quickly

Some new traders believe that technical analysis will help them get rich quickly. This is a myth.

While a new trader can get lucky and have one or a few major winning trades, the reality is that the majority of new traders take years to make money consistently.

According to one study published in the Financial Analysts Journal which researched a large group of day traders trading history, most day traders lose 80% or more of the trading capital in a year with another 17% in year 2. Over 3 years. the study found that less than 1% of traders make money (3).

This evidence points to trading not being a get rich quick scheme and that no technical analysis system will bring riches quickly.

Summary
Technical analysis will help a trader get rich quickly is a myth. Evidence shows that on the contrary, most traders lose money.

Only Retail Traders Use Technical Analysis

Another myth that many new trader believe is that only retail traders use technical analysis. This is false.

Institutional traders and hedge funds also use technical analysis to trade. Some banks have even built algorithms based on technical analysis of the financial markets.

The Journal Of Banking & Finance surveyed 692 fund managers in five countries and found that the vast majority of them relied on technical analysis to help make trading decisions (4).

This data provides evidence and debunks the myth that only retail traders use technical analysis.

Summary
Only retail traders use technical analysis is a myth debunked by evidence provided by the Journal Of Banking & Finance.

Technical Analysis Indicators Only Works On Shorter Timeframe Charts

Another myth is that technical analysis only works on shorter timeframe charts. This is completely false and there is a lot of evidence and studies on the contrary.

In the book “Hedge Fund Market Wizards: How Winning Traders Win“, there are many successful hedge fund traders using a technical analysis approach to longer term trading.

As evident by the audited trading results in the book, a technical analysis style on longer term charts can work if used correctly.

A new trader should test using technical analysis on longer term charts by practicing on a demo account to see if a longer term technical analysis approach can work for them.

Summary
Technical analysis can work on longer term charts and be help guide a trader to profitability as evident by audited trading results of longer term traders in the book Hedge Fund Market Wizards.

Technical Analysis is Hard To Learn

Another myth is that technical analysis is hard to learn. This is not true.

Most traders can learn technical analysis by browsing YouTube videos and reading books on the subject.

Some of the most basic parts of technical analysis can be learned in a few days by browsing through price charts.

Summary
A common myth is that technical analysis is hard to learn. This is untrue as many new traders learn technical analysis in a few days.

Technical Analysis Software Is Too Expensive

Another common myth is that technical analysis software is too expensive.

This is not true and there are plenty of free and cheap technical analysis tools that offer all the technical analysis indicators a trader would need. Examples include tradingview and stockcharts.

While some traders choose to pay for expensive software, the free options are more than enough when getting started.

Many trading brokers also offer technical analysis software as part of their sign up.

Summary
A common myth is that technical analysis software is too expensive. There are plenty of free options offering technical analysis indicators including Tradingview & StockCharts.

Only Day Traders Use Technical Analysis

Another myth is that only day traders use technical analysis to help them trade the market. This is not true.

Swing traders and position traders also can opt to use technical analysis to help them with trading the markets and is in fact quite popular in swing and position trading.

In the book, Reminiscences of a Stock Operator, the author Edwin Lefèvre profiles famous trader Jesse Livermore who transitioned from day trading to swing trading in the markets using a technical analysis approach (6).

Other evidence debunking the myth comes from the book “How I Made $2,000,000 in the Stock Market” which explains swing trader Nicholas Darvas technical analysis trading style (7).

Summary
Only day traders use technical analysis is a myth as evident by the fact that famous swing traders like Jesse Livermore and Nicholas Darvas used technical analysis.

Technical Analysis Accurately Predicts The Future Price Of The Market

A common myth believed by some traders is that technical analysis accurately predicts the future price of the market all the time which is false.

Instead, technical analysis works on the probability of a future price move in one direction over another.

No technical analysis approach can accurately predict future price movements 100% of the time.

Summary
Technical analysis cannot accurately predict the future price movements in the markets always. Instead technical analysis works on the probability of a market moving in one direction over another.

Only Secret Black Box Technical Analysis Trading Strategies Make Money

One of the most popular myths about technical analysis is that only secret black box trading systems make money which is false.

Many very successful traders happily and openly share their trading strategies that helped them to make millions of dollars.

One example is audited investing champion Mark Minervini who details his trading strategy in his book “Trade Like A Stock Market Wizard“. In his book, there are no secret black box technical analysis systems used, but rather a simple technical analysis approach that any new trader can apply (8).

Summary
Only secret black box trading strategies make money is the most popular myth believed by some traders. This is not true as evident by the countless top traders that openly share their trading strategies.