Original author unknown.
Bold emphasis, rightly or wrongly, done by myself .
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Technical Analysis VS Technical Indicators
There is a common misunderstanding about Technical Analysis, in which people has treated Technical indicators as Technical Analysis.
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Above is chart of National Distiller (USA) dated back 1926 -1934. As you can see, chart patterns existed as soon as the stock market price was plotted. It is because the rising and falling of stock prices was mainly caused by human's emotion of greed and fear, and these human emotion shall never change, and it's still happening to everyone of us now.
Over time, some may favor MACD to RSI, then later found out that the method is no longer working, and soon another technical indicator is used. However, all the while, analysis of chart patterns remained unchanged!
Therefore, instead of trying to fine-tune and search for the "perfect" indicator, it is much worth while to study chart patterns for it is ultimately the core in technical analysis.
Common Misunderstandings of Technical Analysis
Generally, most beginners had mistaken Technical Indicators as technical analysis, and as a result, they search for the sharpest indicators, the fastest indicators, and tune the indicators' parameters into their "perfect" indicator. Some works for a certain time, and does not work on the others, and they failed. We must understand and realized that technical indicators are always "secondary" product of stock prices, and quite often they produce wrong signals.
When price is trending, be it uptrend or downtrend, indicators signals are usually more accurate. However, when price is moving in an sideways, indecisive direction, indicators produce many whipsaws. It is quite reasonable for most beginners to pay more attention to indicators signals than anything else, for indicators signals are objectives and clear. As a result, most beginners had forgotten or had ignored the importance of trend, support and resistance.
Another common misunderstanding is that they believe in technical analysis can forecast the price movement in the future. This is, by far, the most serious misunderstanding. Technical analysis was never meant for forecast the price movement. Perhaps this is caused by some people who had, unfortunately, perceived a wrong context about technical analysis.
Technical analysis is a form of statistic "poll-taking" of the price movement. It uses the past historical data to judge whether the current market condition is still favorable, thus outline the risk and potential of the current price level. Thus, reducing the unwanted risk in the uncertain market. And most of all, technical analysis help users to understand trends, and trade with the direction of the trend.
Although technical analysis does not forecast the price movement of tomorrow, it helps investors, if being used properly, by preparing them for any possible changes, thus extremely helpful in planning every trades. For example, when price formed a head-and-shoulder top patterns, chart readers will know the importance of the support at the neck line of the head-and-shoulder top. If the support is taken out, chart readers will reduce their position thus reducing the risk of holding losing position.
