Technical Analysis Difficulties: Hope vs Reality

Exploring The Various Psychological Reasons Behind Technical Analysis Difficulties

One Reason Why Technical Analysis Is So Difficult

When you show a stock chart to 10 different analysts you are more than likely to see 10 different conclusions about where it is going. Yes, technical analysis is difficult not only because of the mountain of tools and indicators involved but to make things even harder, the psychology of the person performing the technical analysis makes a huge difference as well! In fact, two persons employing the exact same indicators and tools look at the exact same chart on the exact same time frame is more than likely going to have two different conclusions!

One of the very common psychological reasons behind this phenomena which makes technical analysis so difficult is what I call "Hope versus Reality".

The Effect of Hope vs Reality

Yes, no matter what indicators or tools anyone use when performing technical analysis, what they see on the screen is going to be subject to severe distortion due to "Hope vs Reality" mindset. This is especially so if the analyst has actual money on the line on the particular stock. When such a person perform technical analysis, instead of the reality of what the chart itself is showing, the person starts to look for what he or she HOPES to see on the chart instead!

The person then starts to draw all kinds of lines from trend lines to fibonacci etc and the more lines he or she draws on the screen, the more the chart seems to show exactly what he or she wants it to show! The more indicators that the person add to the same chart, the more his or her wish seems to come true only to be eventually dashed by the brutal reality of what the stock REALLY does eventually.

Sounds familiar?


The problem with technical analysis is that there are literally thousands of tools and indicators out there and every one of them tells a different story about the only 2 pieces of publicly available information coming from the market; Price and Volume.

When you don't know how each one of these fits with each other, you end up in a situation where basically everything is going to tell a different story about the stock and therefore, everyone is free to manifest whatever they like on the screen by fitting lines exactly the way they like in order to point towards the direction they are HOPING that the stock is going. In fact, that conclusion could even change every few hours!

So, the problem really is, many technical analysts start with a HOPE in their mind and then find ways to fit the charts to their hopes rather than start with a learning and inquisitive mind to learn exactly what story a stock chart is really trying to tell us.

Margaret Weis said "Hope is the Denial of Reality". Even though it sounds like a condemnation of dreams and ideals, it is such a statement of truth when it comes to technical analysis. Just like clouds in the sky capable of taking the form of pretty much anything the person watching hopes to see, lines on a stock chart is capable of taking on pretty much any form based on what the technical analyst HOPES to see. A turning point within a stong bear market? A rebound from your stop loss point? A dead cat bounce or a reversal?

Indeed, having no pre-existing hope and prejudice going into technical analysis is a very hard thing to do. This is especially so when you have your own money on the line. This is why in many hedge fund companies the Analysts are often not the people doing the actual trading and are legally forbidden to have their money invested in the stocks they are researching without prior disclosure. Unfortunately, for the everyday non-professional individual trader, this is always going to be a problem because most often than not, it is exactly because they have their own money on the line or that they intend to have their money invested that they are performing technical analysis in the first place.

As such, hope vs reality prejudice is not an easy thing to overcome for the non-professional individual trader, which is why it continues to be such a difficult thing to do. The only way really is to be aware that this can be the case everytime you open up a stock chart, be deeply aware of your own emotions and hopes and biases, or pretty much limit your technical analysis to only a small set of proven tools and indicators.

Explore another very common psychological reason which makes technical analysis so difficult: Significance Matters.