When Technical Analysis Fails?

When technical Analysis fails

Almost every new trader use technical analysis for trading purposes. There are hundreds of websites providing charting tools for free.

You can learn basics of technical analysis on YouTube for free. Though a lot of misleading videos are uploaded on YouTube by beginners who don’t have even basic knowledge of Fianance. They just do it to make some money from YouTube ads.

Learning a technical analysis from just any trader or YouTuber may lead to disaster. You may also end up losing your entire capital.

Efficient Market Hypothesis and Technical Analysis ?

EMH or Efficient market hypothesis is a theory which considers that technical analysis may give you good results in semi strong efficient market.

In a semi strong form of efficiency, Price of any company reflects all the historical information and Public information but not the private information.

That’s why because of private information not reflecting on price charts, there are possibilities that price may not reflect true value of the shares.

Market Making by FII/DII and Promoters.

It’s quite possible that market maker may exploit the price of any company. They know that all buyers will enter at one support level or exit at one resistance level.

This happens because all the technical analyst use the same theory and the same chart.

That’s why they can give directions to price according to their wish and can manipulate the price.

Long term investment using technical analysis can’t be done.

Normally technical traders do not trade on intrinsic value of any share, they simply try to measure the sentiments of traders in the market.

They may also consider long-term trends for long-term buying but it’s a misconception that share rising for too long may continue to rise further.

It’s quite possible that prices may have become overvalued but there are hardly any tool to find out any overvalued stock using technical analysis.

Tools like RSI and stochastic may tell you about overbought and oversold stocks but they can’t tell you about an overvalued stock.

Price making all time high!

When price of one stock makes all-time high it’s hard for a technical analyst to forecast the price. The technical analyst can only speculate on where the price will go. And you can’t trust a speculator.

Using Elliot wave and Fibonacci extension you can speculate further rise of price but again it would be a speculation.

It’s an art not a science.

Technical analysis must be practised a lot before making trades with real money.

As result may vary every time you analyse the same stock. Two technical analyst may have different view on the same situation on one chart.

It’s like shooting practice, you can’t hit the target in the first shot. You need to practice and practice a lot.

Timing is very important when you are practising technical analysis as you may overshoot or undershoot the timing.

Technical analysis is not based on profitability, Financial health or growth of the company.

It’s based on a assumption that history will repeat itself and price discounts every good or bad news.


I am not advocating fundamental analysis or degrading technical analysis. I am just trying to convey that technical analysis can also failed in certain situations. Fundamental analysis to have some constraints just like technical analysis. We have to be very careful before depending on just one type of analysis. Be aware of whatever is happening in the market and invest carefully.