Let's take a Deep Dive and Learn about the Subjectivity of Technical Analysis
Updated: Feb 13
SUBJECTIVITY IN TECHNICAL ANALYSIS:
Technical Analysis has both objective and subjective aspects according to application.
Analysing market actions consist of Three main activities.
1. Identifying price and indicator patterns
2. Interpreting the data
3. Inferring potential future price behaviour.
Indeed, analysing price and market action is ultimately subjective, which is why having a variety of analysts with different perspectives and experiences can be so beneficial. Each analyst brings their unique combination of psychological, emotional, and technical traits to the table, which can help to identify opportunities and make better decisions. Additionally, it’s important to consider the biases that each analyst may have and to recognize that no single analyst's view is completely objective. By making use of multiple perspectives, we can create a more balanced assessment of the market and its possible future behaviour.
Human bias can be a major obstacle when trying to interpret technical signals. Chartists may be tempted to ignore signals that contradict their expectations for the market, which can lead to faulty analysis and missed opportunities. However, it's important to remain open-minded and look at all available data objectively. By looking at the bigger picture and utilizing a variety of analytical tools, one can be better equipped to make informed decisions.
Point of Entry
Absolutely! Market entry and exit points are highly subjective, as they rely upon the individual trader's risk management strategies and goals. Even when traders use technical indicators and automated trading systems, they still subjectively determine the exact points at which they enter and exit the market. Furthermore, the interpretation of these technical indicators can also be subjective, as a trader may look at the same chart and draw different conclusions. Ultimately, the ability to objectively identify, interpret and infer market action is based largely on the individual trader's experience and expertise.
Let’s take an example of a chart to understand it more clearly.
Many popular forms of analysis can be applied to a basic chart of price action. As the charts you provided demonstrate, some of the most common forms of analysis include trendlines, chart patterns, fundamental analysis, and momentum indicators. Each of these types of analysis can provide valuable insights into the current and potential future direction of the market. It's important to remember, however, that these analyses should be used in combination with other forms of analysis to form a comprehensive view of the market.
The next couple of examples show the application of Basic Trendline analysis on the same chart to analyse the price behaviour which we call as Price Action.
Trend Line Analysis
Moving Average Analysis on the same Chart
Moving average analysis is a powerful tool that can be used to track the price action of an asset, identify potential entry points, and help traders to determine their risk levels. It works by taking the average of the closing prices over a specified period and then plotting that average on a chart. This average can be used to identify trends, gauge momentum, and forecast potential support and resistance levels. With the help of moving average analysis, traders can make informed decisions about when to enter and exit positions in the market.
Making decisions in the stock market can be intimidating and confusing. When trading, it is not important to use many indicators and analyses you have gathered to make informed decisions. It is best to use a combination of several rules and analyses to get the most accurate picture of the market. You can look at price movements and volume, identify chart patterns, and use technical analysis tools such as moving averages, Fibonacci retracement, and oscillators. Once you have gathered all your data, you can use your analysis to make the best decisions possible. This may involve setting a risk-reward ratio, determining entry and exit points, and analysing the market's overall trend. Ultimately, it is important to remember to be patient and disciplined in your approach to trading to maximize your profits.