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Chapter 9 Limitations of Technical Analysis

Limitations of Technical Analysis

Technical Indicators tend to give mixed signals in some cases if they are used in isolation. In such a scenario, one indicator could show a buy signal, while the other could show a sell signal. This could confuse traders. To overcome such issues, traders generally use a combination of indicators, patterns, volume signals and moving averages to determine entry and exit signals.

Technical Analysis is all about probability. For instance, when a possible entry or exit is determined for a scrip, the signal does not guarantee a successful trade. The trade could end up in a loss even after thorough analysis.

Biased view: Two technical analysts may have contradicting views regarding the same stock; the technical methods used for analysis could vary from one analyst to another.

Many times, the technical signals generated tend to have a lag, and by the time a clear signal is generated the price action could already be over.

As more and more people employ technical analysis and end up having a similar view, the value of such analysis tends to decline.

Random walk hypothesis casts its shadow over the validity of Technical Analysis.

A single trading strategy may not work in all scenarios as markets tend to be extremely dynamic.

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