Why Do Technical Indicators Fail?
When we talk about technical analysis, the question of technical indicators arises. Why do some technical indicators fail? The problem is not that they fail. The problem is that they only fail for some traders. While at the same time they work for some traders. What then is the reason for their failure? This is a topic of much discussion in the trading community.
Many trading forums have started threads on this topic. Also, there are thousands of posts talking about this particular topic. But here today, we will explain everything to you in simple language. We will let you know why technical indicators are not working for you.
So let's start with the basic definition of technical indicators and how they work. We will also let you know why new traders always have doubts about using technical indicators. And after all that, we will give you 10 reasons why technical indicators fail.
What Is A Technical Indicator?
A technical indicator is simply a set pattern of signals used by traders as a prediction or trend in technical analysis. So if you are a trader doing technical analysis on an asset, you will find that technical indicators are used to find out what the trend will be in the upcoming time frame.
Various historical statistics and past price action are used to create a pattern of signals. Technical indicators come in different types.
Why Traders Have Doubt About Indicators?
Most of the time, new traders have doubts about technical indicators. There can be several reasons for this and the most common reason is indicator failure. When a trader uses a technical indicator, he/she simply wants to succeed.
But whenever they don't have success in hand, they think that the technical indicators are not working for them. But there can be many reasons for the failure of technical indicators. It is necessary to find out the real reason so that you can make improvements to make technical indicators useful.
10 Reasons Why Technical Indicators Fail
So here are the top 10 reasons why technical indicators are not working for you. Undoubtedly, there can be more reasons that can be found on the internet. But we have done our best to give all possible reasons.
Maybe one of these reasons doesn't relate to your trading history, but you can find reasons that apply to you. So if you take a look at these reasons, you will know where the problem lies.
#1. Lag In Signals
Signal delay is the first common reason for technical indicator failure. There are several types of signals used in technical indicators and sometimes you get delayed signals.
These signals are shown to you in the charts with a delayed display time. So, they are not displayed at the time they occur. This delay tempts you to make wrong decisions and your trading action puts you in a loss.
#2. Pre-Confirmation In Signals
Pre-confirmation signals are also known as leading signals. These signals do the exact opposite to delay signals. As with delay signals, you get delayed signals.
Here, with pre-confirmation signals, you get signals before they are confirmed. Therefore, these signals are also not accurate and sometimes the market sentiment or trend goes exactly in the opposite of these signals.
#3. Battle Between Oversold & Overbought Value
The basic fundamental that technical analysis or technical indicators use is the profit ratio between the oversold value and the overbought value of an asset.
So it's kind of a battle between the oversold and overbought value of an asset. And no one can predict which side will win and why. So it's sometimes unpredictable even with technical indicators to say.
#4. Different Results
Sometimes two different technical indicators give different results after analysis. This confuses traders. They are not able to make accurate or precise decisions because of these differences in results.
Therefore, using multiple technical indicators sometimes shows us a completely wrong way in live trading. Some experienced traders prefer to use a single indicator. This is because different results can cause your technical indicators to fail.
#5. Intervention Of Human Psychology
The whole process of technical analysis revolves around human psychology. Psychology plays a significant role in any market. Whether it is the forex trading market or the stock trading market, psychology drives the market. But with the intervention of human psychology, there are more chances of risk, opposite trends, reverse reactions, etc.
#6. Unusual Historical Data
Technical indicators use historical data related to an asset from a specific time period. Then this data is correlated and compared with the current time frame to get an idea about the movement of that asset.
But sometimes the historical data is not that useful in the current time due to dramatic changes in market sentiment and other circumstances. So that's also a big reason for the failure of technical indicators.
#7. Myths Make Them Fail
Myths also destroy the profits of many traders. Whenever you believe in a myth instead of looking for the reality, you will face problems. There are many myths about trading indicators among small traders. These myths also play a big role in making your technical indicator fail. So the next time you choose a technical indicator, first of all stop believing in myths.
#8. Makes Things More Complicated
Sometimes it is very easy to see what is going on in the market. But still, traders use technical indicators to take a look at things. It makes simple things more complicated. We can also call it the overuse of technical indicators.
Whenever you feel that there is no reason to use a technical indicator, just leave it aside. Because technical analysis and technical indicators can make things more complicated for you in the market. And more complications will lead you towards obscurity and failure.
#9. Choosing the Wrong Indicator
If you have chosen a wrong indicator for your technical analysis, then it is obvious that it will fail. Choosing the right technical indicator is also necessary when performing technical analysis.
Your indicator might be the perfect indicator for the market and the asset you have chosen. So, before you use a technical indicator, make sure you know its compatibility with your assets and the markets.
#10. Relying Completely On Softwares
Some traders believe that they will buy software to perform technical analysis and automate the entire process. If automation would be the key to success, why are there so many market experts working out there?
So relying completely on software is not a good thing. You need to analyze, compare and figure things out yourself. Stop looking for trading automation, technical analysis software and trading bots all the time.
Summary - Why Do Technical Indicators Fail?
There are several reasons why technical indicators fail. But we can't say that technical indicators are not useful. They are useful and many successful traders use them for profits.
But if you use a technical indicator in the wrong way, then it may not work for you. So, you need to find out the actual reason why a technical indicator is not working for you. After that, you will be able to use a technical indicator in the best way.
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