Securities Research Services
Five Reasons Traditional Technical Analysis does not Work Anymore 1. Traditional stop loss strategies don't work. For example, if you buy a stock that breaks through resistance, traditional methodology would be to place a stop just under the stock breakout point, which now serves as support.
As you can see, buying the stock breakout and placing a traditional stop loss would have not only caused you to lose money, but to miss the big post stock breakout move higher. 2. Chart patterns usually fail when the market is not trending. The market is not trending 70% of the time. Traders following traditional technical analysis strategies get traded by smart money all the time. Below is an example of a stock that produced a false breakdown. The breakdown would surely have triggered technical analysis adherents to sell or sell short.
Traditional technical analysis adherents would have been hurt badly as the price gapped up the following day. 3. Japanese candlesticks are poor chart indicators. Japanese candlestick chart theory dictates that intraday selling produces a strong sell signal. The chart below shows two such sell signals that failed miserably as the price continued higher.
This is typical behavior in today's program-traded market where smart money fades the chart readers. 4. The 50-day average is one of the most important indicators. Institutional money acts at the 50-day average. In the stock below, which is in a downtrend, it is possible to see clearly where the selling opportunities existed.
5. Overbought or oversold sometimes just confirms the trend. In the chart below, the overbought stochastic indicator proved to be a very poor sell indicator. Sellers would have paid a heavy price. When a stock is trending up, stock indicators can sometimes bounce in the overbought area through the duration of the trend.
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