Thread by @RobotDefi

"TA doesn't work on memecoins" or "TA doesn't work on alts" or "TA doesn't work on $BTC" etc.

I see so many people talking about how #TA doesn't work.
All that does is tells me they don't really know what TA (technical analysis) is.
So here's a 🧵 on it.

🧵/1

What is TA (technical analysis)?

Before we get into what it IS, let's talk about what it's NOT.

It's not magic tea leaves that predict the future. A lot of people have this misconception that the purpose of TA is to predict the future, but this isn't quite true.

🧵/2

TA is more of a forecasting tool.

Forecasting assigns probabilities to potential outcomes.

"wait...isn't that predicting the future?"

no...not quite.

🧵/3

There is an element of "prediction" to it, but it is always in the context of what is possible, and how probable that possibility is.

All price action can go in three directions: up, down, or sideways. Previous PA is a decent indicator of probabilities for future PA

🧵/4

Another common fallacy that non-TA traders commit is believing when a technical trader makes a high probability call, & it doesn't happen, then they were "wrong"

This isn't how probabilities work. If something had 80% chance of happening, there was still 20% it wouldn't

🧵/5

So if TA isn't a crystal ball, what is it?

It is merely a real-time illustration of the battle between buyers and sellers. It simply shows how they're struggling to gain control.

🧵/6

When buyers are winning, price goes up.

When sellers are winning, price goes down.

In sideways markets, it means either buyers and sellers are undecided on the value or equilibrium has occurred.

🧵/7

"Ok, well all that does is show us what's happening right now! That's not helpful."

It's not?

See, fundamental traders trade on news. They hear whispers or rumors or wait until the big announcement.

That's very reactive.

🧵/8

The charts, however, capture sentiment in real-time.
That means, any insiders in the know ahead of the news...their actions are reflected in the candlesticks.

Reactions to foreign news? You'll see it in the candlesticks before needing a translator.

🧵/9

"But ONE big event can move the whole market and TA can't see that coming."

You're right (usually). That's called a black swan event, and your fundamental analysis couldn't see it coming either.

🧵/10

"But ONE whale can decide to dump on a whim and no TA analysis can foresee that either."

Here's the thing. It's unrealistic to assume things in the market happen in isolation. One huge whale can make a random decision, sure...but that'd be more like a black swan.

🧵/11

Most of the time, drastic movement of huge funds is either made in coordination (which others hear about beforehand and make trades....visible in the candlesticks) or in reaction to....you guessed it....the candlesticks.

🧵/12

"But previous price action does not indicate future price action."

Again, you are correct. However you probably saw where I sort of said that it does a few tweets back. I said "previous price action is a decent indicator of probabilities of future price action"

🧵/13

All price action is, is market sentiment. Market sentiment can shift, sure, but it can also move in obvious directions.

We also have the benefit of hundreds of years of financial market data, as well as a better understanding of human psychology.

🧵/14

So, candlestick formations are merely illustrations of high probability trading set-ups enacted countless times over history by humans, who operate in somewhat predictable ways when trading financial assets.

🧵/15

All this means is that the probability of the next outcome being a certain price action is higher than the probability of it being a different outcome.

So...how do you trade on that?

🧵/16

In short term intervals.

Like all forecasting, TA cannot be used to "predict" outcomes in the far future (unless you are a superforecaster with rare abilities).

But it can be pretty reliable for short term movements.

🧵/17

While technical traders were taking short term long positions in $LUNA, and the rest of the world was screaming that their TA wouldn't do anything for them and $LUNA was dying, these short-term traders were scalping profits on regular pullbacks.

🧵/18

TA can also be pretty good at pointing out days-long longer term swings. These are trends. Trend lines and trend reversal signs are all shown in the charts.

🧵/19

So all TA really is is a tool for timing entries and exits into the market. Using candlestick patterns and other indicators of mapped past behavior, technical traders can increase the probability that their short term trades will be profitable.

🧵/20

There's no magic to it.

But it most certainly isn't useless. It gives you more data than you had with just the news. And data is important for making informed decisions.

🧵/21

I hope you found this helpful in understanding what technical analysis is and the common ways it is used.

Thank you for coming to my TED Talk. If you want more of my crazy rants, be sure to follow and turn on notifications.

🧵/finis

You can read the unrolled version of this thread here: typefully.com/RobotDefi/zhKi…

@BarryFried1 we may have commented back and forth on this before. 😁