Why Technical Analysis Won’t Work For You – You’re Doing It Wrong

Alex Yeo
Alex Yeo

So you think you can make money just by drawing some lines, recognising chart patterns and memorising candlestick patterns?

Or you may think that Fundamental Analysis is too difficult. Reading and evaluating financial statements are too mind-boggling. Reading price charts would be much easier, so it should be easier to make money.

You are in for a rude shock.

I first got interested in technical analysis in 2011. I would devour books on candlesticks and memorise them. I was extremely hardworking. I thought by doing so, I would be able to trade profitably.

I bet you knew what happened. I lost money.

If only it were that easy to make money by memorising these

But I never gave up. I sought to read more books. I guessed I have read more than a hundred books on trading and technical analysis. I lost count of the time I spend surfing websites and forums. You know, I gobbled up everything. I was a learning machine.

But I still cannot make money after trading for nearly 4 years.

I wanted to give up.

I followed what was being taught in the books. I thought those advanced trading books on the shelves were the real deal. I thought that if I followed the strategies and methods religiously, I would be profitable. So why is it that I am still not making money?

I know these: MACD, RSI, Stochastics, Bollinger Bands. Support & Resistance. Moving averages. Trend lines. Channels. Double top. Head & Shoulders. Symmetrical triangles. Elliot Waves. Fibonacci. Candlesticks patterns such as hammer, shooting star, harami, doji, spinning top. Pin bar. Inside bar. Engulfing. Divergence.

I know them inside out. In fact, I know much more. So why? What went wrong?

Then it dawned on me that I don’t have an edge.

What is an edge? We all know that the casino will always win in the long run. The odds are set so that the house always has an “edge”. It’s the same for trading. You may not be profitable for every trade. But over the long run, with hundreds of trades, you will come out profitable.

Without an edge, I can’t profit from the market. Then again, aren’t those trading knowledge that I have acquired from books over the years an edge for me? Sadly, the answer is no.

The truth is, I didn’t understand the nature of the markets, and I didn’t know how to play this trading game.

Think about it for a moment. If everybody is reading the same things and trading the same way, what makes you think you can win?

To put it another way, you can’t do the same things that other people are doing and expect to have an edge and be profitable.

The market is not so easy to manoeuvre around.

If it’s so easy, everybody would be able to make money from the market. Obviously, this is not the case. Ask anyone who has traded before, and he would tell you how difficult it is to make money from trading.

“It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger

Has it occurred to you that the smart monies, big players, institutions (whatever you call them) know exactly what the retail traders are thinking, where and when they are buying/selling and where they put their stop orders?

That’s because the big players know what are being taught in the books!

An amateur and a professional (or skilful) trader can look at the same price charts and yet see completely different things.

Most amateur traders focus on certain patterns, hoping that those patterns or setups will lead to the desired price movement which they have picked up from textbooks.

Don’t get me wrong. I am not saying those technical analysis or trading books in the stores are useless. In fact, you should read them and know them well! So you know what the amateur traders are thinking or doing.

To become a profitable trader, you need to have a deeper understanding. You need to play the game behind the game. What do I mean by that? Simply said, you need to anticipate what other people are anticipating. You need to do second-level thinking.

Quick example:

Amateur trader:

Price is at a support level and has formed a bullish hammer candlestick pattern. I should go long (buy). I will buy when price breaks above the high of the hammer and place my stop just below the low of it.

Pro trader:

Price is at a support level and has formed a bullish hammer candlestick pattern. This looks very obvious on the chart and is a classic textbook example. Most amateurs would go long when they see such price pattern. I need to be careful. I would wait and see how price moves. If the amateurs go long and price can’t seem to move up, I know they are trapped. I will then enter and trade against them.

I spot areas where traders are trapped

Can you see my thought process? It’s not just about seeing some patterns or entry signals and trade off them. I want to know when the amateurs traders are feeling greedy, fearful or hopeful. I want to know where they are trapped in their positions.

If you have been trading for a while and still haven’t got the results you wanted, perhaps it is time to take a step back and re-look at how you trade using technical analysis.

Also, if you are in the camp of dismissing technical analysis as witchcraft or nonsense, it means that you don’t get it or you are doing it wrong.

To end off, I would like to share a quote with you. Something for you to ponder over.

“The stock market is never obvious. It is designed to fool most of the people, most of the time.” – Jesse Livermore