Disadvantages of technical analysis

In this part of the series, we’ll discuss the disadvantages of technical analysis. This is useful for trading strategy.

Technical indicators’ mixed signals

In some cases, one of the technical indicators will show a buy signal and another indicator will show a sell signal. This causes confusion in trading decisions. This is one of the disadvantages of technical analysis. So, some traders use a combination of technical indicators, patterns, volume, and moving averages to determine the entry and exit point.

Accuracy

Technical analysis is used to forecast stocks. All of the technical indicators give possible entry and exit points. The forecasting accuracy isn’t 100%. For example, when a possible entry or exit point for a stock is suggested, it doesn’t guarantee a successful trade. Stock may decrease after the entry. Stock can also rise after the exit.

Biased opinion

One technical analyst’s opinion may contradict another analyst’s opinion for the same stock. The technical methods that are used to analyze stocks can vary from one analyst to another.

What are the disadvantages of technical analysis?

The above chart shows entry and exit points for Intel’s (INTC) stock.

The chart shows two trading strategies. The strategies are by two different technical analysts. The stock is trading in the range. So, an analyst suggested entry 1 and exit 1 points anticipating range-bound stock price movement. Another analyst, anticipating breakdown, suggested entry 2 and exit 2 points. This is one of the disadvantages of technical analysis.

Applying technical analysis concepts

The technical analysis concepts can be applied to stocks like Cabot Oil & Gas (COG), Concho Resources (CXO), EOG Resources Inc. (EOG), and Laredo Petroleum (LPI). Some of these companies are part of the S&P Oil & Gas Exploration & Production ETF (XLE).

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