Breaking with Tradition – Why I Don’t Use Technical Analysis: Part 1

Breaking with Tradition – Why I Don’t Use Technical Analysis: Part 1

At its core, TA is a means of using our brain’s amazing ability to recognize patterns, but with that comes a price.

There are two concepts that come from the school of Gestalt psychology that I believe are applicable to trading. They are reification and multi-stability.

Reification is the brain’s ability to add into a perceived pattern something that is not explicitly there. Figure 1.2 shows us a number of examples where the black shapes imply an object that is not drawn. Our brain is extremely good at filling in such spatial information.

The implied shapes in Figure 1.2 are not there; they are constructs of our minds. The cones and their spacing imply a sphere but the cones themselves are the only things there. Our brains are extremely good at perceiving shapes and patterns, distinguishing the coloration of a bird’s feathers or a deer’s coat from the background of the trees and leaves of a forest.

Reification Graphic

Figure 1.2 Reification (Demonstration in Perception A: Standard Kanizsa Triangle. B: Peter Tse’s Volumetric Worm. C: Idesawa’s Spiky Sphere. D: Peter Tse’s Sea Monster.)
Source: Lehar, S. (2003). The World in Your Head, Lawrence Erlbaum, Mahwah, NJ. p. 52, Fig. 3.3 (public domain)

Traditional TA is built on this ability to find patterns and shapes within a price and time chart. Our minds want to distill the chaos of the chart down and organize it into something it can understand.

The problem is that the patterns themselves are indicative of nothing. They are just patterns that we have come to recognize and don’t necessarily have any significance. In trying to assert that they mean something, we create for ourselves a kind of spatial confirmation bias.

Our brains are trained to look for outliers. It has been shown that a person takes no notice of his habitual surroundings until he perceives a change in it. For example, if you were working at your desk, got up to grab a cup of coffee, and came back to find your mouse was on the left of your keyboard as opposed to the right that would raise an alarm. Immediately, you would begin to try and figure out how or why that happened and it would bother you. I know if I came back to that, I would be suspicious that someone had rummaged through my desk or played a practical joke on me. It would unnerve me for a long time to come, and that space would never feel as comfortable or secure as it did.

This is why a person will get angry when someone cleans up their room without their consent, straightening up their mess. Their mess was cataloged.

Think about how many variations you’ve seen on the joke about the man who can’t find any of his tools after the wife has cleaned up his garage. This is the brain not wanting to relearn and remap that space. Moreover, it will take a long time to adjust to that disruption of routine. The brain is lazy and only wants to incorporate new information into the matrix of existing information, as opposed to constantly starting over again.

Technical Analysis Tip

It makes sense that we would operate that way. Otherwise we would have no ability to discern the important from the trivial, the danger from the routine.