For a long time, I have been vocal about my skepticism regarding technical analysis. I’ve even gone as far as calling it “garbage” in previous discussions. There is an old industry saying that the only people who truly get rich off technical analysis are the ones selling the courses.

However, there is a reason why technical analysis can—and does—work. It isn’t because of “magic” lines or secret formulas; it works because it provides a framework for the two most important pillars of trading: momentum and discipline.

1. Don’t Fight the Tape

The fundamental reason any strategy works is that it prevents you from “fighting the tape.”

For example, lets take the 200-day moving average, a staple of technical analysis. If your rule is to only buy assets breaking above that average, you are, by definition, trading with the market’s momentum. You aren’t guessing; you are buying an up market and going with what the tape is saying.

2. Rigorous Risk Management

Technical analysis provides a physical “exit level” for your trades. Whether you use support lines or other indicators, they give you a clear signal to get out when a trade isn’t working.

  • Cutting Losses: If a market breaks below a support line, it forces you to get out of the trade and manage your risk.

  • Discipline: The specific indicator matters less than the fact that you have the discipline to follow it.

  • Uniform Returns: Interestingly, the returns of technical trend-followers and “genius” global macro traders often look very similar because both groups use a similar discipline: buying what goes their way and exiting what goes against them.

“I don’t care if you flip a coin and say something’s going up or down. Don’t put on any trade until the market’s agreeing with you.”

3. Additional Alpha

While “pure” technical analysts claim they only look at the chart, adding an additional step that is not commonly used will improve your strategy and success rate.

Consider the difference in why a market is behaving the way it does and how it reacts to news. For example, trading break outs:

  • Breakouts on Super Positive News: These often attract “chasers” or “weak money.” We saw this with Palantir; the earnings were great, but the stock failed because of the chasers who eventually freaked out and sold.

  • Breakouts on No News or bad news: I would much rather buy a breakout that happens on no news or bad news. It doesn’t attract the same “chasing” money, making the chances of a continued trend much greater.

Final Thoughts

Technical analysis isn’t a crystal ball, but it is a highly effective tool for trading with the tape risk management and trend identification. If it helps you stay disciplined and keeps you from fighting the market, it will help your trading.