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

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

Even if you come at TA with a tabula rasa, not having read a single book or website that goes over the triangle, or the head and shoulders, or the wedge, when you figure them out for yourself, you will find that they are not particularly good at producing consistent outcomes. Rather, you will find that they are at best only guides to future behavior but without the ability to quantify how accurate they are or the extent to which the price can move if the pattern completes.

The first time that a stock fails to perform the way the pattern said it was supposed to, you will begin distrusting it. You will begin looking for confirmatory signals from some other source to help you guide your decision, when, in reality, the time may have passed for you to properly make that decision to your benefit. In other words, your opportunity to buy or sell passed you by while you sat around thinking about what to do.

The more this process repeats itself, the more these patterns, which have no tangible predictive value because markets are probabilistic, will take on more multistable properties.

Multistability is the process by which our brains cannot distinguish between two interpretations of spatial data. The pattern is equally valid when looked at from two different perspectives; this leads to confusion.The work of M.C. Escher, the brilliant Dutch graphic artist, is rife with multistable images. Figure 1.3 has an excellent example of multistability.

In TA, the pattern itself becomes the focus, not the decision of how to trade off of it. Because your brain can no longer distinguish between the multiple interpretations, it begins to see them all as important.

Everything becomes an outlier.

And, as we already alluded to, outliers are what you should be using to make your decisions.

Penrose Triangle Graphic

Figure 1.3   Multistability (Penrose Triangle)

If you allow yourself to become trapped in an Escher-like maze of false perceptions, you train your brain into a state of hyper-confusion, constantly seeing everything as important. Now, as opposed to knowing that the toilet in your bathroom is in the far corner on the right, you walk into your bathroom convinced that you have to confirm its location. Meanwhile you miss the fact that there is water gushing out of the pipe feeding it, not realizing that until your feet get wet.

It is possible to train yourself into a state of complete paralysis as everything is important and you are trapped furiously trying to catalog it all in real time, which is impossible.

This is why I feel very strongly about simplicity. By not bogging your brain down with too much, it remains free to recognize and absorb information, discern outliers, and recognize and act on them without vacillating between two or more conclusions.