A Deep Dive into Technical Analysis

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Sometimes it sounds suspenseful and scary. There’s talk about a dead cat, a black swan, and a death cross.

At other times, it sounds Einsteinian. There are EMAs, SMAs, and RSIs. There are Fibonacci levels, Elliot waves, and don’t forget about the Moving Average Convergence-Divergence (MACD). Pretty heady stuff.

It can even sound poetic. “The trend is your friend. When in doubt, zoom out.”

The “IT” I refer to is Technical Analysis (or what is commonly called TA).

This tool in the toolbox of so many financial advisers is not without its detractors. “Some traders and investors denounce technical analysis as a superficial study of charts and patterns without any concrete, conclusive, or profitable results. They believe that it is overrated at best and a scam at worst. Others believe that technical analysis is a sort of Holy Grail that once mastered will unleash sizable profits. These opposing viewpoints have led to misconceptions about technical analysis and how it is used.”[i]

Team TA lives and dies by the charts.

Is TA just AT (ALL TALK) or is it a reliable science that can guarantee big returns? Is TA Prophetic or preposterous? Today, I want to offer some TA on TA.

I listen to an average of one hour each day of crypto content, and I hear the TA, the price predictions, and the guarantees. I listened faithfully to multiple YouTube channels all of 2021 as the YouTube Moon Boys hyped their pet projects with astronomical price targets. They made their predictions with great certainty and backed up their claims with Fibonacci extensions and loads of numerical data and talk of 4-year cycles and the like.

By the end of 2021, they predicted, using TA, that Bitcoin would moon to $100k. One of the leading YouTube Crypto Moon Boys on 2021 February 26 said that BTC would top $300k by September of that year. I thought to myself, “They had to be right…they had charts…they drew lines on the charts…it all looked so professional.”

Early in 2021, based on the advice of a friend and overwhelmingly positive online sentiment, I went all in on Cardano and its native token ADA. You can imagine my excitement when I watched a YouTube video on January 26 entitled “Cardano 60x Moonshot (Realistic Price Prediction).” In the first sentence of his broadcast, the immensely popular YouTuber boldly proclaimed, “Today I’ll give you my latest price prediction, as we discuss how Cardano will moon to $150.” When I heard that, I did a double-take and began to plan what I would do with all of my riches when ADA mooned to this astronomical price. I didn’t long for a Lambo like many under the sway of Cryptonite, but I could certainly put the millions of dollars I would soon have to good use.

With this road to riches now neatly paved by my bag of ADA, I listened to all of the Cardonoites faithfully every day as they used charts to give the price targets. According to their charts, ADA would hit $7 on the low end, $12 on the high end and a $10 ADA was very realistic by the end of 2021. Of course, these predictions were WAY off target. ADA hit an ATH of $3.10 on September 2, and it has been steadily dropping, barely holding above $1 at the moment.

But…but…but…..how could this happen? These guys had numbers, lines, and charts. They knew big words like Fibonacci. How could they be wrong if they were TA experts?

Just what exactly is technical analysis? TA describes analysing historic price and volume trends to predict the future price movements of assets. There are several core concepts behind technical analysis:

  1. What has happened in the past can give us an idea of what will happen in the future. It allows us to calculate odds.
  2. The next wave of investors will tend to follow the trends of the last wave.
  3. Human behaviour in markets is somewhat predictable.
  4. Studying factors like past volume and price trends alongside the current volume and price can tell us about the likelihood of future volume and price trends.
  5. Since the above is true, it can help to plot everything on a chart to get a quick and simple visual of potential paths the price might follow.

 

The bottom line is that technical analysis doesn’t take into account the fundamentals of an asset. TA, instead, is focused on charting and using technical indicators to better predict the likelihood of short-term, medium-term, and long-term trends based on historic and current price and volume data.

It is important to remember that technical analysis is not about certainty; it is about finding future likelihoods or probabilities based on past trends. Any analyst worth his salt never speaks about what will or must happen or make bold promises or guarantees. They simply plot out what could happen based on data and then consider the likelihood that each possible set of events has of occurring.

The problem is that so many watch a YouTube video, see these price charts and hear these predictions, and they make sometimes life-changing financial decisions based upon these charts and proclamations by the YouTube “experts.” Please remember that in investing there are no crystal balls, and no one can predict the short-term outcome of investments.

I agree with the assessment of Jonathan K. DeYoe, Founder and President of Mindful Money. The mantra of his organization is, “Past performance is no guarantee of future results.” He gave his assessment of TA:

With markets and economies, there are ALWAYS more questions than answers… always. There are always headlines that describe impending doom — be it inflation, or a bubble in XYZ, or a pandemic, or terrorism, or war… There are always reasons not to invest. There are always reasons to wonder if we are at the precipice looking over into oblivion. 

If we take our headline to heart — Past performance is no guarantee of future results — then we cannot trust ANYONE who is predicting an outcome in the short term. No one knows how stocks or bonds or commodities or crypto or real estate is going to perform in the next three years — because it is UNKNOWABLE.

If you meet someone who is offering you the short-term return outcome you want (be that higher returns or lower risk)… I would say that that person is either not entirely honest or potentially delusional.[ii]

I think of the example of sports betting. Professional gamblers are analytics fanatics. They devour information about past results, current trends, and the like before placing their bets. How do the best of the best perform?

Professional gambler J.V. Miller remarked, “Professional sports bettors rarely sustain a long-term winning percentage higher than 55 percent, and it’s often as low as 53 or 54 percent. If someone tells you they win 70 percent…or even 65 percent of their picks (at 11-to-win-10), you are talking to either a liar or a bad record-keeper.”[iii]

With the pros barely getting above half of their picks correct, you could flip a coin and almost do as well. This exercise, of course, would allow you to be right 50% of the time. The implication is not that TA is akin to flipping a coin, but it is vital to remember that technical analysis is far from a scientific endeavour.

Seven veteran crypto traders were asked about the efficacy of TA. Their responses were mixed, but overall, their technical analysis on technical analysis received low marks. Dan Matuszewski, former Circle trader and now a partner at CMS Holdings, pulled no punches, “I tend to be of the mindset that it’s mostly hocus pocus.” Nicholas Merten, DataDash trader, was a little kinder but his remarks still cast doubt on its effectiveness, “In the short term I believe that technical analysis is completely irrelevant.”[iv]

Am I totally against TA? Do I think that all of the charts and research is a waste of time? Not at all. In the crypto arena, I do not offer nearly as harsh an assessment as others.

With retail investors still dominant in the crypto space, it seems as if the majority are looking at chart patterns. If an investor can discover what everyone else is doing, this does seem to be a huge advantage. Once an investor figures out where does everybody think there’s support and where everybody thinks there’s resistance, trades can be executed based on how everyone else is reading the market. With crypto still being in its infancy and with less of an emphasis at the moment on fundamentals, mass reading of the charts sometimes leads to self-fulfilling prophecies. 

I am not against TA that is framed properly by the online influencers. How many have gambled rent and grocery money, taken out cash advances on credit cards, and invested their life savings into cryptos based on TA from social media “experts”? My problem is not with TA in and of itself; it is when technical analysis is given a godlike status and framed as being infallible and inerrant.

Proper TA should always emphasize its mathematical nature and its susceptibility to errors. Numbers DO sometimes lie, especially when we try to force the data from the past to line up with the ever-changing present and an unknown future. A proper analysis should also always include other aspects of research such as being aware of trends on social media, being aware of the global news, and being aware of trends in the market as a whole. If a new regulation comes out, if Elon Musk decides to tweet about a doggie coin, or if Bitcoin enters a correction, this could override any expected short-term trends to which a chart may be pointing.

It has been said that “being a good analyst (or following one online) is a bit like having superpowers. It can be the difference between flying blind and seeing the matrix on a good day.” It is essential to keep in mind, however, that trends only tell us about probabilities (not certainties) and crypto doesn’t always follow the trends that the charts suggest.

Chris Mark, the author of The Trading Manifesto, was spot on with his summary of TA: 

I’ve always loved brain teasers, I guess that’s one of the reasons why I’ve been hooked with trading. Trading is the greatest brain teaser. It will have you believe that you have the answer, then in a blink of an eye, it will prove you wrong mercilessly. It will have you believe in pattern formations, just like looking at clouds and seeing an elephant shape, telling you to buy/sell now.

It will prove you wrong again and again. And every time it proves you wrong, you go and try a more complex approach, thinking that the puzzle is complicated. And that is what Trading or any good brain teasers do: it makes you look the other way when the answers are right in front of you. It fools you deceptively; the illusion of delusion. You are deluded into thinking the opposite. Heck, it is one of the greatest illusion/magic shows on earth.

The general premise of TA is that all information is contained in the chart. This is of course technically true, but the unspoken secret is that it only tells you what has already happened. The coin toss experiment and a real market chart look identical, because, for the purposes of technical analysis, they are.” [v]

Is TA simply a flip of a coin? I think not. But it’s far from a sure thing as well.


Be sure to always frame your financial advice properly lest you influence someone to take a deep dive financially, and they never come up.
[i] Seth, Shobhit. “Debunking 8 Myths about Technical Analysis.” Investopedia, Investopedia, 21 Jan. 2022, https://www.investopedia.com/articles/active-trading/062215/debunking-8-myths-about-technical-analysis.asp.
[ii] Sponsor, Local. “Past Performance Is No Guarantee of Future Results.” Berkeleyside, 1 July 2021, https://www.berkeleyside.org/2021/06/30/sponsored-past-performance-is-no-guarantee-of-future-results.
[iii] Miller, J.V. “Expert Daily Picks and Tips from Professional Sports Bettors and Handicappers.” Expert Picks and Predictions for Sports Investors, Traders and Bettors, https://professionalgambler.org/winning-percentages.
[iv] Keoun, Bradley. “Is Technical Analysis Prophetic or Preposterous? We Asked 7 Crypto Traders.” CoinDesk Latest Headlines RSS, CoinDesk, 2 Dec. 2019, https://www.coindesk.com/markets/2019/12/02/is-technical-analysis-prophetic-or-preposterous-we-asked-7-crypto-traders/.
[v] Mark, Chris. “Technical Analysis Fallacy.” Medium, The Capital, 16 Mar. 2020, https://medium.com/the-capital/analysis-fallacy-18e38830d619.

 

Articles reflect the author's own opinion.

In any circumstances can CCG be responsible for potential losses regarding investments or services, either referenced by the author in the article itself or by any links provided.

This platform is intended to share educational knowledge, open for several external author's and in no way represents any financial advisement.

Editor Note

2 Responses

    1. Thanks for taking time to read it. I really feel a sense of responsibility when I post an article or YouTube video, knowing that my words may influence someone to invest. TA AND fundamental analysis are both needed, along with an understanding of the inherent risks of investing in any assets, especially volatile assets like cryptos.

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