Technical analysis—your navigation instrument for trading, but not a crystal ball!
Is technical analysis useful? It's always a controversial topic—technical indicators and K-line patterns often evoke mixed feelings, sometimes appearing extremely effective, while at other times seeming completely ineffective! Today, let's explore the value and limitations of technical analysis and see whether we should pay attention to it and learn it.
1. What can technical analysis do for us? (Advantages)
1. Provide entry/exit signals: This is its most direct function. Golden crosses, death crosses, breaking resistance, falling below support, specific candlestick combinations (like morning star, evening star)... these are all trying to tell you that it may "go up" or "go down" and provide specific reference points for operation.
2. Measure market sentiment and strength: Trading volume, RSI (Relative Strength Index), MACD histogram, etc., can help you sense whether the market is greedy or fearful, whether buyers are dominant or sellers are strong. This helps assess the "health" of the current trend.
3. Identify trends and patterns: Moving averages, trend lines, channels, various patterns (head and shoulders, triangles, etc.)—the core goal is to help you determine the current state of the market (upward, downward, consolidating) and the likelihood of that state continuing or reversing in the future.
4. Establish trading discipline and systems: One of the greatest values of technical analysis is that it helps you break free from purely feeling-based trading. It provides a (relatively) objective standard for establishing rules: When to buy? How much to buy? Where to set stop losses? Where to take profits? This greatly enhances the discipline and repeatability of trading.
5. Manage risk and position: By using support and resistance levels, volatility indicators (such as ATR), you can set stop-loss levels more scientifically, assess potential risk-reward ratios, and thus determine how much capital to invest, which is key to long-term survival.
2. Where are the limitations of technical analysis? (Disadvantages)
1. "Lagging" is an inherent flaw: Technical indicators are almost all based on past prices and trading volumes. They reflect what has "already happened" and speculate about the future based on that. When the market suddenly turns due to unexpected events (policies, black swans, large investors dumping), technical indicators often fail to respond in time.
2. The double-edged sword of "self-fulfilling prophecies": When enough people believe in the same technical signal (such as a key resistance level) and act on it, that signal may indeed work. Conversely, if large funds deliberately "draw lines" to create false breakouts/fake breakdowns to "harvest" retail investors who believe in technicals, it will fail and may even become a trap.
3. The norm of "sometimes it works, sometimes it doesn't": No technical pattern or indicator is 100% accurate. A success rate of 60%-70% is already considered quite good. Market noise, random fluctuations, and the previously mentioned "anti-technical actions" can all lead to signal failures. Just because you see a perfect historical chart does not mean it will replicate next time.
4. Unable to predict fundamental changes: Project collapses, sudden industry policy changes, macroeconomic crises, project teams running away... These fundamental driving factors are almost impossible to foresee with technical analysis. A perfect bullish pattern can be instantly destroyed by a piece of bad news.
5. Over-reliance leads to "missing the forest for the trees": Getting lost in complex indicator combinations and micro K-line formations may cause you to overlook larger trends, the overall market environment (bull or bear), and the truly important fundamental logic.
6. "History repeats itself, but does not repeat simply": The psychological patterns of market participants are similar, so certain patterns will repeatedly appear. However, the context for each occurrence (capital situation, policy environment, market structure) is different, and blindly seeking the same outcome can lead to losses.
3. So should we pay attention to and learn technical analysis or not?
The answer is: Absolutely important, worth learning, but must be positioned correctly!
1. Technical analysis is an important "tool", not a "holy grail": Treat it as a powerful tool in your trading toolbox, like a navigation instrument or weather forecast. It can provide valuable references, telling you about the "road conditions" and "weather trends", but it cannot guarantee you won't get lost or encounter sudden rain. Do not expect to get rich overnight or predict all fluctuations based on it.
2. Learning is essential: In a market full of competition, understanding the "language" and "weapons" used by mainstream participants (many retail investors and institutions also use technical analysis) is crucial. Not understanding technical analysis is like going to battle without knowing how to read a map and listen for gunfire.
3. The key is "how to use it":
Combine usage: Never rely solely on technical analysis! It must be combined with an understanding of fundamentals (value logic, industry prospects, project strengths and weaknesses) and market sentiment/capital (is the overall sentiment greedy or fearful? Where is the incremental capital?). The combination of the three leads to higher winning probabilities.
Probabilistic thinking: Accept that technical signals have a failure rate. Successful traders rely on consistently adhering to a system with positive expected value (making more when profit and losing less when in loss), rather than pursuing a guarantee of winning every trade.
Emphasize risk management: One of the most important applications of technical analysis is to help you set clear stop-loss points and manage position sizes. This is the foundation for your long-term survival in the market.
Simplify: There is no need to master all indicators. Mastering a few core ones (such as trend lines, key support and resistance, trading volume, 1-2 oscillators like RSI/MACD, and 1-2 candlestick patterns) and understanding the market psychology behind them is more effective than hastily swallowing a pile of indicators.
Focus on the "trend" rather than the "form": The direction of the larger trend is often more reliable than microscopic, short-term technical signals. Going with the trend is key.
To summarize:
Is technical analysis useful? Yes, it is! It can provide signals, identify trends, measure sentiment, establish rules, and manage risk; it is an essential skill set for traders.
Is technical analysis omnipotent? Absolutely not! It has lagging effects, can be manipulated, may become ineffective, and cannot predict fundamental changes. Relying solely on technicals is equivalent to gambling.
Should we learn it? Absolutely! It is the universal language of market competition and a key tool for building trading systems and managing risk.
How to use it? Use it rationally! Combine fundamentals with market sentiment, maintain probabilistic thinking, enforce strict risk management, simplify, and go with the trend. Treat it as navigation assistance; you still need to firmly grasp the steering wheel and brakes (capital management and strategies).
The value of technical analysis lies in that it provides a framework for observing the market, making plans, and executing discipline. It cannot guarantee you profits, but it can help disciplined traders who understand risk management to pursue the possibility of long-term profitability in a more systematic and rational manner. I hope this helps everyone see the technical side more clearly!
