Let's get right to the point...
The biggest and most serious problem with technical analysis is that after a while, it starts to show you exactly what YOU WANT TO SEE!
In quantitative studies, there is a thing called "Data Mining" that happens when your research starts to show you what you want to see instead of what is really going on. Most of the time, people use data mining when they have a lot to gain from the results being one way instead of another. In technical analysis, the same thing happens.
In technical analysis, charts start showing you what you want to see, especially if you made a mistake and need the stock to go one way instead of the other. Suddenly, the more you look into the many technical indicators, the more "evidence" you seem to find that supports your mistake. This gives you the strange feeling that your mistake will turn out just fine.
We all know what happened next, don't we?
Technical analysis is basically the study of the different ways to figure out what past price and volume changes mean in order to predict what will happen in the future. Because technical analysis methods have become so complicated over the years and literally THOUSANDS of technical indicators have been made, the average amateur investor can always find ways to make a chart look the way they want it to and point in a direction that doesn't exist.
Before anyone thinks I don't like technical analysis, let me say that I do. In fact, my main trading system, the Star Trading System, is based on technical analysis and is used to trade options. This system has made me money year after year. So, what's really going on? The problem is that people use technical analysis and technical indicators that don't work well together. You won't be able to use technical analysis to form an educated opinion until you really understand the formula and logic behind each technical indicator, what each indicator was made for, and how it works with other confirming indicators. You'll keep seeing only the things you want to see. Some people call it "Analysis Paralysis," but I think it's just plain ignorance.
Technical analysis is hard to get right because it takes years of research and a lot of money, and it will only get harder as more complex and new indicators are made every day. Amateur traders have always had trouble because they didn't know enough and didn't have enough time to learn. So, the best thing a beginner trader can do is follow a developed and tested trading system with a proven, proprietary mix of indicators.
So, the next time you look at a technical analysis chart, think about whether you're just trying to prove what you already know. Because if you are, you will probably find all the proof you need to back up your own ideas.
