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Sound Advice: October 26, 2022

Why Technical Analysis Is Useless

(Excerpted from Seeking Alpha)

  • Pure technical trading strategy is fruitless.

“Fidelity recently conducted a study to identify their best performing clients.

They neatly fell into two groups: people who forgot they had an account at Fidelity, and dead people.

It all underlines the futility of trading the markets without true professional guidance, something many aspire to, but few actually accomplish.

This is an industry filled with professional marketers, charlatans, and con men.

Let me point out a few harsh lessons learned from a recent (2017) meltdown, and the rip-your-face-off rally that followed.

We are now transitioning from a “Sell in May” to a “Buy in November” posture.

The period from October to March is one of historical seasonal market strength (click here for the misty origins of this trend at “If You Sell in May, What To Do in April?”)

The big lesson learned was the utter uselessness of technical analyses.  Usually, these guys are right only 50% of the time. That year, they missed the boat entirely.

When the S&P 500 (SPY) was meandering in a narrow nine-point range, and the Volatility Index (VIX) hugged the $9-$12 neighborhood, they said this would continue for the rest of the year.


It didn’t.  The biggest losers?  Algorithms, which used the decisive break of the (SPY) $245 level in August, 2017 to go heavily short.

If you did, you lost your shirt. The market just shed a couple more points, reversed, and then kept going, and going, and going.

And if you tried to go long the contango stunted VIX Short Term Futures ETN (VXX), then every trader would of gotten crushed from mid-August on.


This is why technical analysis is utterly useless as an investment strategy.  How many hedge funds use a pure technical strategy on a standalone basis?

Absolutely none, as it doesn’t make any money.

At best, it is just one of 100 tools you need to trade the market effectively. The shorter the time frame, the more accurate it becomes.

On an intraday basis, technical analysis is actually quite useful. But I doubt few of you engage in this hopeless persuasion.

Leave it for the kids.

This is why I advise portfolio managers and financial advisors to use technical analysis as a means of timing order executions, and nothing more.

Most professionals agree with me.

Technical analysis derives from humans’ preference for looking at pictures instead of engaging in abstract mental processes. A picture is worth 1,000 words, and probably a lot more.

This is why technical analysis appeals to so many young people entering the market for the first time.”

N. Russell Wayne, CFP®

www.soundasset.com

www.soundasset.blogspot.com

Any questions? Please contact me at nrwayne@soundasset.com


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